4 Substainable Business Models to Consider for Small Businesses

Anderson Ozakpo
4 Tested and Proven Business Models to Consider for Small Businesses, Freemium, Premium, Collaborative consumption, subscription

Successfully running a new business requires a lot of efforts, patience, and perseverance. Yet, there is no guarantee of a ‘perfect’ way that will make you succeed. Nevertheless, if you develop a strong business strategy before you launch, with a keen focus on the best approach to revenue generation, you will place yourself at a vantage point to withstand the overwhelming challenges.

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Collaborative Consumption Business Model

In an on-demand economy, collaborative consumption thrives on convenience, speed, and simplicity. One of the greatest drivers for such an economy is a high Internet and smartphone penetration. The Collaborative Consumption business model otherwise referred to as the Sharing Economy Model, allows small businesses to leverage new technology while utilizing existing infrastructures. In one phrase, businesses that run on the Collaborative Consumption Business Model create a marketplace for “supply and demand”. This model is highly cost-effective for businesses as in most cases freelance labor is used.

The benefit of this model is that your business does not need to manufacture any products, you only create platforms that allows your customers to share their own products. One of the very early challenges of this business model is ‘building trust’. This business model seems to be working for Airbnb, a home-sharing service business that allows users to rent out their home to other users/customers as an alternative to hotel services. With a quarter billion in revenue, Airbnb was recently valued at $10 billion.

Some other examples of businesses using this model are Uber and Gokada.

Freemium Business Model

Freemium is coined from ‘Free’ and ‘Premium’. This business model is used by businesses to provide basic services to consumers for free on the premise to attract more attention and eventually convert free users to premium users by offering a premium version with more value. This business model is used by most online software startups and businesses. Businesses seek to use this model to attract as many consumers on board in especially in the phase of product development and at the same time, harnessing targeted consumers for up-selling. MTN once used a bit of this approach when they offered ‘free night calls’. I bet a lot of users who started using MTN because of free night calls have now been converted to premium customers.

For you to succeed using this model, you must find a break-even conversion rate of paid users that covers the costs of your free users. Your break-even conversion rate should give you a clear perspective on how much percentage of your paid users will cover the cost of all users—free and paid, that will also leave you with extra cash. If you can hit or exceed your break-even conversion rate, you will succeed else failure is imminent.

Some other examples of businesses using this model are LinkedIn and Evernote.

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Premium Business Model

The Premium Business Model aims at setting prices higher than their competitors because they offer a unique value proposition. For customers to perceive such products or services as being worth the high price, a business running on this model must work hard to create a premium value perception. Businesses as such create a niche by finding customers whose survival depends on the value proposition that no other business can provide.

This business model works for high demand products in pharmaceuticals and a few luxury goods. This is what Alexion Pharmaceuticals does, an American pharmaceutical company best known for its development of Soliris, a drug used to treat the rare disorders atypical hemolytic uremic syndrome and paroxysmal nocturnal hemoglobinuria. Alexion Pharmaceuticals stock price is currently at US$131.91 with annual revenue of 3.03 billion USD (2017).

Some other examples of businesses using this model for their luxury products are Apple and Mercedes Benz.

Subscription Business Model

The Subscription Business Model enables businesses to set flat rates for products or services which must be paid for before a customer gets the benefits of the offer. Businesses that run on the subscription model allows the users to pay once and enjoy the same service for a given period without reordering. On the other hand, this model allows businesses to be able to predict revenues through recurring sales—providing more predictability to cash flow. This business model provides an optimal balance of value to both the business and the consumer.

This business model works well for Netflix, for a small monthly (subscription) fee, consumers gain access to Netflix’s streaming video services. In summary, the Subscription Business Model offers users a valuable product or service in return for a low-price recurring payment plan to access or receive the value proposition. It is usually advisable to choose this business model if your business has the opportunity for recurring sales to the same customers, specifically over a short period of time, this would be a great choice! However, you have to know that when your consumers become comfortable with your rates, it is very difficult to increase rates.

Some other examples of businesses using this model are News/Media companies, most online software businesses.

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Choosing a business model for your products and services is at the core of any successful business, because no matter how great an idea is or how unique your value proposition is, if your offering does not translate into revenue that is worthy enough for future investment and business sustenance, then the business won’t thrive.

There are many other business models that lead ultimately to revenue generations—tested and proven, and as a founder, it is your sole responsibility to figure out which one works best with your business and the four models discussed are a great place to start if you don’t have one already. Please note that you should first look at examples of other businesses that use a given business model and what they are doing to succeed before choosing the same model for your business.

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