Business Models

Customer solutions model:

This is a model where a company invests time with a client to fully understand their
needs and designs a custom solution to address their situation. Due to the nature of
the model, the company must sacrifice short term revenue for long term profit.

Example: IBM uses this model to make money not by selling IBM products, but by
selling its expertise to improve its customers’ operations. This is a consulting model.

It can be used in virtually any business or industry. Potential examples include:

marketing, design, insurance, entertainment, technology systems.

Profit pyramid model:

The pyramid profit model attempts to capture multiple markets with multiple
brands. In this business model, companies sell lower- and middle-quality goods and
services at cost or at a loss, and then sell premium goods in the same category at a
significant margin, covering the losses incurred by the other brands.

Example: General Motors offer a full line of automobiles in order to close out any
niches where a competitor might find a position. The key is to get customers to buy
in at the low-priced, low-margin entry point (Saturn’s basic sedans) and move them
up to high-priced, high-margin products (SUVs and pickup trucks) where the
company makes its money.

Multi-component system/installed base model:

Companies offer a base product at cost or at a loss, and then sell complementary,
necessary products at high margins. Two classic examples of multi-component
profit include razor blades and computer printers.

Example: Gillette invented this classic model to sell razors at break-even pricing in
order to make money on higher-margin razor blades. HP does the same with
printers and printer cartridges. The product is thus a system, not just one product,
with one component providing most of the profits.
Advertising model:

Similar to the multi-component system/installed base model, this model offers its
basic product free in order to make money on advertising.

Example: Originating in the newspaper industry, this model is used heavily in

commercial radio and television. Internet-based firms, such as Google, offer free
services to users in order to expose them to the advertising that pays the bills.

Switchboard model:

In this model a firm acts as an intermediary to connect multiple sellers to multiple

buyers. Financial planners organize a wide range of products for sale to multiple
customers with different needs.

Example: This model has been successfully used by eBay and Amazon.com.

Time model:

This model is based around new products and innovation and the businesses that
bring them to market. This allows a company to gain a majority of market share
before their competitors can introduce a similar product. A company must be able to
drive innovation.

Example: Product R&D and speed are the keys to success in the time model. Being
the first to market with a new innovation allows a pioneer like Sony to earn high
margins. Once others enter the market with process R&D and lower margins, it’s
time to move on.
Efficiency model:

In this model a company waits until a product becomes standardized and then
enters the market with a low-priced, low-margin product that appeals to the mass
market.

Example: This model is used by Wal-Mart, Dell, and Southwest Airlines.

Blockbuster model:

This model is when a company invests large amounts of resources into research and
development of new innovations or projects, fully accepting that some may not
succeed. This model could be summed up as the “go big of go home” model.

Example: In some industries, such as pharmaceuticals and motion picture studios,

profitability is driven by a few key products. The focus is on high investment in a
few products with high potential payoffs—especially if they can be protected by
patents.

Profit multiplier model:

A company leverages a specific or unique skill/asset and puts it into use in as many
different ways as possible. Thus, instead of making money in just one way with the
original skill/asset, they are able to leverage it in many different ways, expanding to
other fields and multiply their profit many times over.
This model is appropriate in various industries, but a company will only be
successful when they have very large brand equity. This means that a company can
put their name on various different products and they know it will successful

Example: Walt Disney invented this concept by using cartoon characters to develop
high-margin theme parks, merchandise, and licensing opportunities.

Entrepreneurial model:

In this model, a company offers specialized products/services to market niches that

are too small to be worthwhile to large competitors but have the potential to grow
quickly.

Example: This model has often been used by small high-tech firms that develop
innovative prototypes in order to sell off the companies (without ever selling a
product) to Microsoft or DuPont.
De Facto industry standard model:

In this model, a company offers products free or at a very low price in order to
saturate the market and become the industry standard. Once users are locked in, the
company offers higher-margin products using this standard.

Example: Microsoft packaged Internet Explorer free with its Windows software in
order to take market share from Netscape’s Web browser.22