Carly Ries
Joe thought he had a clear idea of what "business model" meant. But he likes to check his ideas against others before he goes blabbing it to the world… and what he found was really surprising.
Even with reliable sources of business information like Harvard Business Review, he found a hodgepodge of mixed concepts all being called a "business model". These were concepts that were not "either/or," so picking a business model could mean picking two, three, or even four of these concepts.
If you don't know it by now, Joe is a self-proclaimed geek and proud of it. He decided to dig in and break these into categories and build a system for applying them to any business.
This categorization is his own work… and it's definitely not perfect. You may disagree with him or have ideas to extend this further. And if you find someone that's done this before, please point it out and let us know. Plagiarism - even unintentional - is not our thing. We just want to get better at helping solopreneurs. Go to the Solopreneur Success Cycle section of the LifeStarr community and drop a comment or email joe@lifestarr.com and tell us what you think.
What you'll learn in this episode
- Why business models are important
- A walkthrough of various business models to consider for your business
- Examples of companies that fall under each category
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Full Episode Transcript
Joe Rando (00:00):
If I'm bungee jumping, it's all well and good to have someone pumping you up to leap off the cliff, but I really want someone who knows how the bungee cord works and make sure it's going to stop me before I hit the ground. I'm that guy.
Intro (00:11):
Bigger doesn't always mean better. Welcome to the One-Person Business podcast where people who are flying solo and business come for specific tips and advice to find success as a company of one. Here are your hosts, Joe Rando and Carly Ries.
Carly Ries (00:30):
Welcome to the One-Person Business podcast. I'm one of your hosts Carly Ries.
Joe Rando (00:34):
And I'm Joe Rando.
Carly Ries (00:36):
Today we are continuing the process of deep diving into various topics around the Solopreneur Success Cycle. We'll be doing this for many aspects and phases. Our goal is to help you go from start to finish and from deciding to create a one person business to growing to perhaps even selling it. As a reminder, the Solopreneur Success Cycle consists of three phases of building a one person business. Get started, do and adjust.
Joe Rando (00:59):
Those three phases are then made up of eight steps in total. There's define goals and success where you start. While you're doing this, then you have to envision your business. You need to plan. You need to set up your business, then you need to execute. And after you execute for a while, then you need to refine and reimagine your business and then make decisions about what you're actually going to do and then adjust the business. That's the eight steps. And after you adjust again, you're back to execute and you keep looping through this and getting better and better and better. Some people say that's complicated, but complicated things become simple when you break them into small steps and that's what we're doing here. Plus, nothing is as complicated as running a poorly thought out business. This process can be fun and interesting.
(01:43):
That one never is. This material isn't necessarily inspiring, but if I'm bungee jumping, it's all well and good to have someone pumping you up to leap off the cliff. But I really want someone who knows how the bungee cord works and make sure it's going to stop me before I hit the ground. I'm that guy. So today we're continuing our focus on the planning step of the Solopreneur Success Cycle and specifically we're going to talk about business models. I thought I had a clear idea on what a business model meant, but I'd like to check my ideas against other people before I go blabbing it to the world. What I found really surprised me. Even with reliable sources of business information like Harvard Business Review, I found a hodgepodge of mixed concepts all being called business models. These were concepts that were not so much either or.
(02:31):
So picking a business model can mean picking two, three, or even four of these concepts. If you don't know it by now, I'm a geek and I'm very proud of it. I tend to dig in and break things into categories and build a system for applying them to the business. So I decided to do that here. So this categorization is my own work and it's definitely not perfect. You might disagree with me or have ideas to extend it further. And if you find someone that's done this before, please point it out. Plagiarism, even unintentionable, is definitely not my thing. So please let us know. We just want to get better at helping solopreneurs. Go to the Solopreneur Success Cycle section of the Lifestarr community and drop a comment or email me at joe@lifestarr.com and tell me what you think. Basically I found four dimensions and you're going to need at least three of them to have a true business model. The last one is optional. The first business model category that I identified, I called a Production/Sourcing model. This is how you're going to produce or acquire the product you're selling. Product can mean anything from a physical product. It can mean your time, it can mean a service of some type or data and information. The second I'm calling the Market Model, and that defines how your product will be sold.
Carly Ries (03:48):
And just to clarify real quick, this is distinct from marketing. It's more about who you sell it to and how
Joe Rando (03:54):
We'll get into detail on that in a minute and give some real world examples as well. The third dimension, and this is another one that you need, is the Pricing/Payment model. And that's how you get paid and for what
Carly Ries (04:09):
I feel like that's one people really should pay attention to.
Joe Rando (04:11):
Absolutely. The last one I call optional and that one I call the Enticement model. It relates to something that you do to entice the sale that's beyond the scope of the product itself. We're going to dig into these in a minute, but first let's just kind of think about why is this stuff important? Why do you need a business model? Why do you want to think about this? The answer is it's really a concept for how you will run your business. If you do it right, you make your offering more attractive to your target customers and it may even help you to stand out in a crowd. Another thing is that the right business model can help you optimize your cash flow. Cash is to a business like blood is to your body. Blood carries oxygen and nutrients to the parts of your body that need it, and cash brings the resources to the parts of your business that need them.
(04:59):
If you don't have enough cash, your business will die even if it's growing. But the other thing that's good about a business model is that it tells you what you don't do. And that's really important. When you say no to things, that is the key to staying focused on what you're doing. Going in too many directions will usually hurt your business and a business model can be a compass for what to say no to. Now let's get into the specifics and we're going to start with that Production/Sourcing model. It is where does your product come from? You need to start here because until you know what you're selling and where it comes from, there's not much you can say about the rest of your business model. As we look at this, the first concept is this creator, manufacturer sourcing model. That is where you actually produce the product.
(05:43):
Again, it may be a physical product or it could be labor, an app or some kind of content, but the point here is that you are the producer. Some examples of that are companies like Samsung but also a freelance developer or somebody that produces a newsletter. You are producing the actual product. That's the first one. The next one is what I call brokerage. You don't make the product at all. Instead you bring together buyers and sellers. That's something like a real estate broker obviously, but also Airbnb. That's what they do. They don't have properties, they just bring people together. The next one is the user community model. This is where people come together either in person or online.
Carly Ries (06:25):
Those are things kind of like social media, Facebook, LinkedIn, but we also are fans of the smart passive income community that Pat Flynn puts on. That's another great example of this model.
Joe Rando (06:36):
Absolutely. Next we have something called the crowdsourcing model. This is where the masses produce the product for the business usually for free. Sounds crazy. Well, how about TikTok, YouTube? And though it's not truly a business Wikipedia. They don't produce any content, they don't produce any product, they just give a place where people can do it for them. The last version that I've come up with here in terms of digging around the intranet is called the product to service model. Here you turn what is typically a product into a service. The best example of that I think is Zipcar. You used to buy a car and now you get a car when you need it and only when you need it. Great example of this product to service model. These are the ways that I've identified that you could actually produce the product that you sell. Then we move on to the market model. This is about where you sell your stuff into whom. I see four options here and then maybe you could think of others. The first one is the retailer model. This is the most obvious here. You acquire a product from someone else, usually a distributor or a manufacturer, and you sell it to the end user.
Carly Ries (07:46):
Kind of like going to one of my favorite stores, Target or another solopreneur online retailer or something like that.
Joe Rando (07:54):
Absolutely. These are retailer models and it's a really popular way for solopreneurs to run their business. I've tried to put these in order from most practical for solopreneurs to least, but maybe I did it, maybe I didn't. The next one is called the technical term I found was the disintermediation model. I prefer to call it D to C, direct to consumer. This is where the company that makes the product sells it directly to the end user. This is a common choice for a lot of solopreneurs. I mean companies like Dell do this, they manufacture it and I buy it straight from Dell, but also app makers. A lot of people make apps and sell them straight to the end user on the app store or the Google Play Store. So this direct to consumer market model is a great way for solopreneurs to run their business.
(08:45):
Next is what's called, these are less common, but the distribution model. This is where you buy from a manufacturer and sell to a retailer or perhaps a contractor. There are companies like Price Master and ABC supply company. Also Sysco does that for restaurants. They buy it from the food manufacturers and sell it to the restaurants. I'd love to find some examples of solopreneurs doing this. So if you know of one, please send it along, be really interesting. The last one in this is market model category is the franchise model. You develop a concept and some services around it and people pay you a franchise fee to use the name and the services.
Carly Ries (09:23):
I think the one that we always think about are just fast food restaurants. That's at least where my mind goes. But there are also some executive communities and things like that that can fall under the franchise model. So think outside the box when it comes to fast food. That's not the only industry that does it.
Joe Rando (09:39):
This is something that I don't think is that common with solopreneurs, but honestly really could be if you did it right. Now we're going to move on to the third and last required category of your business model. That is the Pricing/Payment model. This is about how much money you get and when. This aspect of your business model is very important. It can have a big effect on profitability and cashflow. The most common pricing payment model is the purchase model. The customer buys something from you and pay you for it roughly at the time of purchase. Sometimes short-term credit is extended and payments occur some period of days or weeks after the purchase. Although with the government and some large companies, this can run into months. So watch this carefully as you may need that cash to pay expenses. And there's of course third party long-term financing that doesn't negatively affect your cashflow because the lender pays you almost immediately and then the customer pays the lender or the financer.
(10:35):
So we don't really count that as being against the purchase model. Some examples here are obviously things like car purchases, retail stores, online retail, some software, you just buy it, pay for it, it's yours. The next one is the subscription model. This involves a recurring payment scheme. The customer pays monthly or annually for some product or service. There may or may not be a long-term commitment. I want to note here that I love this model for the one person business, especially if there's a long-term commitment. It gives you breathing room as you grow because the revenues keep coming after the sale.
Carly Ries (11:07):
Absolutely, some of the ones you can think of with this are Netflix, which I think everybody is exposed to these days. Office 365, there are apps and software, even newspapers and magazines. And of course Amazon is another big one that people subscribe to currently.
Joe Rando (11:22):
They always ask me if I want to subscribe to some vitamin, I never do it, but it's a good idea. The next model in terms of your pricing payment is pay as you go. That's where the customer pays only for what they use. I haven't seen a lot of this in one person businesses, but I think it's an interesting model and they may have applications for some solopreneurs. Examples are your utilities, your electric bill, your gas bill, but also companies like Zipcar. So Zipcar is a pay as you go. You might pay kind of a fee to belong, but you pay for the use of the car. If you're not using the car much, you're paying less. If you use it a lot, you're paying more. An interesting business model in terms of getting paid. Another is the auction model.
(12:08):
The auction model where people bid for the product and the high bidder gets the deal. We've got companies like eBay and online and Sotheby's as an auction house that this is their business model. Not sure about solopreneurs in this one, haven't seen it, but that doesn't mean they're not out there. Then there's the reverse auction model. The idea here is that the buyer puts in a request for a product or service and the supplier bids the price that they'll take to provide it, the low bidder wins. But let me say that unless you have some kind of competitive advantage to deliver the product more cheaply, I hate this model from the perspective of the solopreneur. Competing on price is the worst. Some examples of this are Upwork and I'm sure there are others out there. Then there's the leasing model. This is where the supplier allows the customer to use the product for some period of time in return for a usually monthly payment. At the end of the lease, the product goes back to the supplier or the customer may purchase it at a pre-agreed price or market price depending on the terms of the lease.
Carly Ries (13:08):
As you can guess, car leases are an example. Equipment leases and things like that.
Joe Rando (13:14):
The razor blade model involves selling a high margin item at a discount in order to sell a lot of low margin product in the future. A great example of that is Gillette, not surprisingly given the name, but also printer ink. The printer is kind of a potentially high margin item that usually is surprisingly affordable for what it does. And then you pay for ink for the rest of the things life. So this is the razor blade model. Then we also have the reverse razor blade model. That involves selling a low margin product at a discount in order to sell a lot of high margin products in the future.
Carly Ries (13:46):
One that I personally use a lot that reflects this is Amazon Kindle.
Joe Rando (13:51):
Yeah, definitely. The last one of the pricing models is the fractionalization model. That involves selling pieces of an asset usually by breaking it into time increments of some type. This can drastically increase the sale price of an asset, but I've got to be honest, people have started getting wise to it and it's not usually a great value. Examples are net shares and timeshares and given that people are starting to pay money to get out of timeshares, I think the writing's on the wall for the fractionalization model, but maybe somebody out there can be clever and come up with something. The last category of the business model is what I call the Enticement model. This one is optional. You don't have to do this, but I think it's interesting to look at and it can be an opportunity because it can provide a powerful advantage if used in the right place, the right way.
(14:41):
Here's my take on the enticement models. The first is the freemium model and it's well known to most of us. There's a free version of the product, often a web or a mobile app, but a better one awaits at a price. This can be a one-time price or a subscription model. This is a great way to get people to try a product though it can be difficult for solopreneurs to support the infrastructure for free users early on. One example of this that we like to talk about a lot on this show is HubSpot. They have some really great free tools, but if you really want to go get the HubSpot power, you're going to pay. Next is the bundling model is where two or more products are packaged together and sold for less, usually much less than they would cost individually. My favorite example of this is Adobe Creative Suite because it's just unbelievable how affordable getting everything is versus buying one piece at a time. Although the HubSpot CRM suite was also a close runner up for that because as we've pointed out in one of the last episodes, the cost of the CRM suite is the same as the cost of the marketing hub alone for the starter version.
Carly Ries (15:44):
I'll link to that episode just so people can see that
Joe Rando (15:48):
Crazy discounts. If you can make money doing it, it's a great way to really incent people because they go, wow, what a deal. So that's an enticement model that you might be able to use depending on your business. Another is pay in advance. You purchase something and pay now at a discount, but don't get the product until later. The best example of this I think is paying for hotel room now with no right to cancel and getting a significantly cheaper price. Hotels.com does that, but Amazon kind of does this too. You pay Amazon, you get some stuff later. There are examples in a lot of places about this getting a discount for paying in advance. Good for solopreneurs too because if you get that money upfront, wait to deliver. That can be a really good way to manage working capital.
(16:31):
The last one that I identified was the one for one model. This is very awesome. The idea here is that the customer buys something and you donate the same item to a charity or cause of some sort. This could just get your attention. It's just a great way to help. The best examples I could find are Bombas, the sock people and Warby Parker. That's something to really think about. If you can afford to do it, you can really get some attention and some of these charities can help spread the word about what you're doing. I know that was a lot. You're probably listening to this in the car and didn't write it down, but guess what? We have a fun tool that I built in Excel lets you play with the different business model configurations. So give it a try. There's a link in the show notes. I had a lot of fun randomly choosing options from each of the four categories and then try to imagine what that business would look like. Some of the results were absurdly funny, but some were actually really interesting.
Carly Ries (17:23):
Just really quick, Joe, I know you said we'll put a link in there. We'll also put a PDF version in there as well. That's easier for people for the show notes.
Joe Rando (17:29):
Some people might not have Excel or don't use it, but the PDF won't actually let you select things, but you can look at it and write in your answers. Just to wrap up here, your business model is something you may want to review and potentially modify in future iterations of the Solopreneur Success Cycle. The really important thing is to think it through, try it and see how it works for you. If it works, great. If not, you can try something else based on this structure.
Carly Ries (17:58):
Yeah, I have to say instead of back and forth between us, today there was a lot of you just talking about it, but I think it was so impactful. I know at least for me, I learned a ton. Even though you are aware of these business models, you forget the different times you can apply to solopreneurship. So I personally found it very, very helpful. Listeners, hopefully you felt the same. Don't forget to listen to more episodes and subscribe. You can visit lifestarr.com/podcast or you can find us anywhere you listen to your shows. We'll see you next time.
Closing (18:33):
You may be going solo in business, but that doesn't mean you're alone. In fact, millions of people are in your shoes running a one person business and figuring it out as they go. So why not connect with them and learn from each other's successes and failures. At Lifestarr, we're creating a one person business community where you can go to meet and get advice from other solopreneurs. Be sure to join in on the conversation at community.lifestarr.com
