A business model is essentially a plan for earning a profit. Companies with a solid profit model gain a competitive edge in the marketplace,
and business owners should thoroughly understand where their profit is going to come from when starting a new business. Analyzing real-world business model examples can help you to gain a deeper understanding of the art and science of profitability.
Companies using the brokerage profit model create and maintain marketplaces for buyers and sellers in niche industries. By offering a marketplace, a company can collect a percentage of all transactions taking place within its platform, allowing it to realize exponentially increasing profit margins as more buyers and sellers enter the market.
Ebay is a prime example of a company utilizing the brokerage profit model. Ebay provides an online marketplace for individuals and businesses to buy and sell almost any physical product. All Ebay has to do, after advertising its way to world fame, is to maintain its platform and watch the cash roll in.
Profit Multiplier Model
The profit multiplier model seeks to create as many alternate streams of income from a company’s main line of business as possible to increase the earnings power of its core competencies.
Consider Boeing, for example. Boeing’s main line of business is to manufacture and sell airplanes. However, it generates significantly more income by selling airplane components to other manufacturers around the world, in addition to the wide range of components and specialized products it sells to the U.S. Government. Boeing also leverages its experience in the market to offer its own financing service to customers, and the company offers a business development service for commercial satellite companies.
Installed Base Profit
The installed base profit model requires companies to invest a considerable amount of money in up-front development costs. Companies using the installed base model often sell products at a loss in the early stages of a product’s life, but profit margins skyrocket after covering the up-front costs due to small per-unit costs.
Consider the video game developer 2K Sports. 2K Sports invests hundreds of thousands of dollars to develop and market a new game. However, each game that it sells technically only costs as much as a disc, a small booklet, and packaging. 2K may sell a new game at a loss for a number of weeks, but after up-front development costs are covered the company realizes the full benefit of selling a product at $50 when the direct costs are less than $1 per unit.
The multi-component profit model relies on creating a product with a low-profit main component that requires customers to continually purchase a high-profit accessory.
Schick serves as an ideal business model example of multi-component profit. Schick sells razors for men and women at low margins. However, customers must continually buy high-profit blades to use the product. Even if Schick were to take a loss on razor assemblies, the profit from blades would more than make up for it.
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