In the most simple terms, a company's business model is the method it uses to make money. There are four types of business models: creators, distributors, landlords and brokers. A creator manufactures goods to be sold. A distributor sells or distributes goods. A landlord charges a fee for use of his goods. A broker stands in the middle and for a fee introduces consumers (buyers) to companies (sellers) that will supply their needs.
Business models always involve the exchange of money for assets. There are four asset classes: financial, physical, intangible, and human. Banks deal in financial assets by maintaining fee-based accounts where customers may deposit money and by lending that money for a fee. Retail stores deal in physical assets such as clothing, which they sell to customers. Lawyers and accountants deal in intangible assets such as interpretation of the law and advice on tax accounting. Human assets are manual labor for pay and the act of supplying employees, for a fee, as an employment agency.
When an entrepreneur starts a company, the first decision is what type of business to start. Once the industry of interest is identified, for example the medical industry, the entrepreneur must then figure out how to make money in that industry. If she does not have medical training but wants to help people get well, she must decide what asset she will offer in exchange for money. It may be her knowledge of nutrition. The next step in creating the business model is for her to determine the process, using her knowledge asset, of exchanging that intangible asset for money. She could open a health food restaurant (creator), open a health food store (distributor), open a retreat where people come to learn to live healthfully (landlord), or she could become a nutritional counselor and point people to goods and services, making a commission from the establishments she recommends (broker).
The most common business model involves selling an asset to a customer who wants to buy it (distributor). An MIT study found that the most lucrative business model was not the most common. The model that was most successful was the landlord model in which the customer does not buy the asset but pays to use it. One reason for this may be that, during recessions, people do not have the money to spend to own the asset, so they will rent use of the asset without committing much money.
The type of business model chosen can make the difference between success and failure for an entrepreneur starting a company. The choice of business model governs whether the company will need to finance inventory of raw materials (creator), inventory of finished goods (distributor), or finance the purchase of an asset to lease or rent out to users (landlord). These business models can require considerable up-front capital expenditure. The broker business model runs on selling someone else's asset to a third party buyer, so there is not much need to finance inventory but there is a cost of acquiring buyers and sellers, such as marketing expense.
Of the four types of business models and the four types of assets listed, there are 16 combinations of possible business models. The creator model solves a need problem. The distributor model provides customer satisfaction. The landlord model manages a need problem and the broker model solves the problem of bringing sellers and buyers together. What gives the company a character is the type of asset being exchanged for money.
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