When you started building your online business, did you realize what your business model is like?
Did you spend time thinking what is the impact it has on the way you run your business?
Because, make no mistake, your online business model has a big impact. Thus the decision should not be made haphazardly.
Basically all online business models can be fit in to 4 categories.
None of them is better than the other. They are just not alike and thus have different requirements to work well.
So, let’s take a look at those categories.
The 4 types of online business models
The online business model depends on 2 things:
- Are products being sold or not, and
- Have you created those products or not
Huh?
Let me explain.
These things have a huge impact on the way your business is run. The ownership of the products states your place in the value chain, i.e. do you own the final stop or are you the one who directs visitors to the destination. This has an impact on the distribution of money.
And the existence of products has a similar role – if no products are being sold, then it is either a service business or not a business at all. This determines the use of time.
Kind of.
I admit that the model is simplified, but surprisingly(?) potent.
As an ex-business school student and with a tendency to get a virtual boner when I see a great matrix, I have drawn one here too with my hairy little hands (they are really not that hairy).
I have chosen the names of each category in a way that it has a clear link to traditional business where goods are being sold.
Now, let’s take a look at each of these types in more detail.
Manufacturing business model
In manufacturing business model, you are the one who creates the products and sell them. This is your main source of income, but it doesn’t prevent you from also promoting other people’s products.
Since you are the manufacturer (or creator if you will) of the products, you are the one who controls the price, promotion messages (salespage) and the availability of the product.
Basically, you are the king.
Obviously, such a role comes with responsibility.
If people don’t like or want your product, you are the one who is not making any money. You also need to set up the customer service and handle client relationships. On top of these things, you may need to form relationships with other people who promote the product (affiliates).
However, product creation is not the only way this online business model exists. Another good example is site flipping, where you either build the site yourself and then sell it to others. In this case the site is the product.
Another version of flipping is when you buy a site that someone else has created, develop it further and then sell it again or keep it for yourself (based on the monetization method, then it could be publishing. More about that later).
Also paid, subscription based membership sites belong to this category.
In case you need a famous example of this kind of business, think no further than Copyblogger.
A brief summary of manufacturing business model:
- You are in total control
- Income potential is high
- You have the responsibility of your customers
- Product with no demand –> no sales –> no money
Service business model
Okay, then let’s talk about the service business model.
In this case, your primary source of income comes from trading time to money. Great examples of this business model are (website) designers, programmers, copywriters, coaches and consultants.
The good thing about this business model is, that you can start earning money right now since you don’t have to codify your knowledge in to a sellable asset. This of course assumes that you have something valuable to offer to your clients in exchange for their sweet, sweet money.
As with manufacturing model, you are in control of your time and rates. Which is nice.
But, of course there is a but. This model relies heavily on your own effort (i.e. if you are not working, you are not making any money) and ability to package and sell your services to customers.
Also, you’d need to be able to attract those customers somehow, which can be easier said than done. In general, the service business model relies a lot on referrals and/or website traffic. Fail to get those and you will fail to sell your services.
Service model in a nutshell:
- You are in control
- Quickest way to start earning money for most people
- Need to have deep enough expertise in the subject matter
- Have to offer services others are willing to pay for and be able to attract those people
Store business model
This is probably the most common online business model at the moment.
You are sporting a store business model if you are primarily selling other people’s products as an affiliate.
Typical examples are of course affiliate sites (review sites etc), blogs and e-commerce sites where you are selling other peoples products.
As you know, the great thing about this business model is that you just need to get traffic and send it to the right place. If they buy, you will get your cut and your responsibility of that sale ends there.
Of course, in many cases value creation is required in order to get people do what you want them to do (i.e. check out the product you recommend).
Another positive thing about store model is that you don’t need to spend time and effort doing market research to deeply understand the target customers (even though that of course helps immensely) or to actually create the product and all the stuff that goes along with it.
However, with the store model you are never in full control of your own business – the products you promote might be taken offline or become redundant. Also, in case you are promoting something with your own name and brand, a bad recommendation can ruin your reputation which can be very hard to mend.
Also with this model you need to be very good at getting traffic to your website, often through SEO or other means. For example in manufacturer model you don’t necessarily need that skill-set as your affiliates can handle that part.
It is time for another summary:
- Doesn’t require time to create a product or support it
- Often easy to get started and find products to promote (or switch promotable products)
- Need to be very good at getting website traffic in order to make meaningful income
- You are not in full control of your income streams (unless you diversify a lot)
Publishing business model
And finally, there is the publishing model.
Typically publishing revolves around (a huge amount of) content creation which attracts an audience. That website traffic is then monetized by selling advertising space.
In this online business model you are not creating or promoting products or that activity forms a very low percentage of your total income.
For example many niche websites that rely on adsense income fits this category perfectly. As do news sites, celebrity gossip stuff and others of that ilk. Also most of free community sites, such as forums and social networks (like Facebook and Twitter) belong to this category.
Again, for this model to work properly, you need to be able to get more or less consistent stream of people coming to your site. If you rely on search engine traffic and Google drops your site it is not really good for your business.
The good thing about this model is that you are basically just responsible for creating content and getting it in front of people. No need to worry about product creation or selling your time, but there might be some effort needed to contact potential advertisers and sell the ad space to them.
Summary of the publishing model:
- No need to sell directly to anyone (if you are uncomfortable with that)
- Focus on content and value creation
- Need to be able to build a valuable community or attract new eyeballs on a constant basis
- All income depends on the amount of traffic and/or the value of the community
What does this mean to you?
Please notice that in the above descriptions I didn’t want to be extremely specific with the types of websites. For example a webapp can belong to all of the above categories, depending on how it is monetized. Also a simple “squeeze page -> email list -> promotion” type of website can promote at least 3 of the above (maybe publishing is a bit difficult).
So, generally speaking, the type of website does NOT determine the type of business model. Also, whether you are selling information products, software or physical products does not really matter.
Yes, I know. I am a genius.
But as you could see from the descriptions and examples that your online business model has a huge impact on the way the business. Different types require different skill-sets.
The biggest 3 areas of impact are the following:
- Traffic
- Control
- Use of time
Let’s tackle these one by one.
If you are using the manufacturing or service model, you can rely on affiliates and other people sending traffic to your way. Heck, you can even use paid advertising.
That is not really viable option in most cases if you are using a publishing model. The store model can be either way depending how the site is setup.
Your business model also affects the way you use your time. The store model requires potentially the least amount of personal attention while service model needs probably the most. So depending on your business model, your activities are also different.
In manufacturing model, a significant amount of your time will go on planning future products, improving the current ones, improving the sales process as well as customer acquisition and service. Compare that to the store model where you need to pick good products to promote and then get people to see those products.
For me, the biggest thing to consider is however the matter of control.
I would never, ever build my business around only a certain product unless that would be my own. I am sure you wouldn’t do that either. If you are doing that, try to diversify as soon as possible.
Another thing that I wouldn’t base my whole business around is to just supplement something else. A great example of this is Market Samurai.
They are basically running the manufacturing business model, but since they are relying on Google and other services to provide the data for them, they are not really in control. They are constantly playing catch-up and not really in control of their business. (They can’t provide rank tracker anymore, some time ago they had to change the provider of backlink data etc. Not great for customer experience)
Final thoughts on online business models
It is valuable to know what kind of business model are you running, especially if you have never really thought about it. Knowing the business model helps you focus on the right things – if you are running a manufacturing model but most of your time is NOT spent on improving your product or bringing more people to your sales funnel.. then reality check is in order.
Of course, you are not limited to only one business model in general even if you are more or less so per site.
Sure, you can use several of these models. That is what Pat Flynn is doing. His niche sites are running the publishing model, SmartPassiveIncome is clearly using a store model while his iPhone apps and LeedExam-site lands in the manufacturing online business model. For him the combination seems to work wonders.
You can’t really say what is the best online business model, because all of them work. It is also possible to build a sustainable business around each of them.
What matters though is the execution.
Poor execution will most likely bring poor results. Great execution is more likely to be successful.
So, choose a suitable business model and then execute it as well as you can. I know I am trying to do exactly that.
Okay, I’ll shut up now. Your turn.
I know this was a long ass article. Hopefully you found it useful.
Please leave a comment and answer these two short questions:
- What kind of business are you running?
- Did you consciously choose that kind of business model?
And feel free to share :)