Kinds of Business Models

The first step for any entrepreneur when creating a business is to determine which model will be used to produce a profit. A business model guides every product rollout, advertising campaign and investment made by a company. Investors and entrepreneurs must choose business models that are conducive to long-term profitability and sustainable growth. Every business owner should know the basic types of business models before spending the first dollar on research and development.

Merchant Model

The business model most familiar to the average consumer is the merchant model. This business model allows a company to earn money by acting as a middleman for products (as a retailer) or offering products directly to consumers from their manufacturers (as a wholesaler). Under the retail merchant model, the business earns money by applying a retail markup to each item's actual cost. Wholesalers like Costco and Sam's Club create revenue by selling in bulk sizes and requiring annual memberships for shoppers.

Subscription Model

The subscription model has been used by magazines and book publishers since the 19th century. A business using a subscription model covers its costs and produces a profit by requiring a regular payment in exchange for its products. Magazines like the Atlantic Monthly, Us Weekly and the Sporting News offer variable rates for weekly, monthly and annual subscriptions to create access at multiple price points. This model has been used effectively by movie rental company Netflix, which allows users to join, cancel their memberships and receive and return DVDs easily under monthly subscription plans.

Community Model

Facebook, Twitter and other social networking websites use the community model to stay afloat financially. This business model creates a community of consumers bound together by a common purpose or viewpoint. The originators of the community business model were public TV and radio stations that solicited donations and underwriting to sustain their operations. Social networking websites have altered this model to create revenues from banner advertisements, premium application fees and sales of branded merchandise.

Brokerage Model

The brokerage model requires a business to act as a commercial intermediary between buyers and sellers of a certain product. Real estate firms like Re/Max and Coldwell Banker specialize in brokering deals between buyers and sellers of properties around the United States. Another form of brokerage is seen at auction houses like Sotheby's, which facilitate open and silent auctions of valuables from sellers around the world. This model is sustainable through transaction fees, brokerage commissions and other charges applied to successful transactions.

Information Intermediary Model

The information intermediary model is used largely by market research firms like Nielsen Media Research and CoStar Group. Businesses using this model gather information on consumer preferences and market trends in exchange for consulting fees. This business model requires the intermediary to be flexible in terms of the market samples it provides and the technology used to access information for its clients. For example, digital video recording has forced information intermediaries to meet client needs by observing both recorded and live program viewing.

Resources

• Business Week's "Three Steps to a Sound Business Plan"
• Investopedia overview of business models