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6 Types of Business Models

6 Types of Business Models

There are the six types of business models broadly that I have assessed. I’m no MBA, so if some of you guys went to a school and say well, they taught us 26 different models instead of 6. I’ve tried to compress all of those different models into six or seven types. I actually started with seven, but at the end, I said, okay, 6 is probably better because, in seven, two of them will be similar. So I will quickly go through all of these and talk to you about the pros and cons of these business models.

The 6 business models are:

  • Manufacturing
  • Distribution
  • Retail
  • Services
  • Aggregators
  • Market Creators

Manufacturing

Manufacturing is when you input some money, build a little factory or a little store that makes items. You’re in the making business and then sell it to the customers. Even telecom companies are in there because some of the dynamics of telecom companies are very similar to manufacturing. So, I punched them in; I didn’t keep a separate section for Telecom.

Input Capital

Input Capital for a manufacturing company is very high. So you got money running in order to get machinery, manpower, and land for the location and approvals to do manufacturing. Some people say, well, I had a couple of clients who went through the whole coaching program over three weekends. They say, I want to do manufacturing, but I want to do it on a small scale. We asked how you wanted to do it. They say I want to make cloth bags for the likes of Dmart. That’s great, but why would you do that? They say that plastic bags are going out, and they charge for plastic bags. We want to supply them with low-cost cloth bags, so they don’t charge the customer. Their store charge 10-15 rupees for providing a cloth bag. They said we could make it in our home. But that won’t really work out because if you have employees, like four or five people coming into your home and stitching cloth bags, you’ll never be able to provide it to the Dmart at a cheap enough cost. You will never be able to provide it at 5 rupees a piece. The second thing is, why would Dmart do business with you? There are hundreds of people who can provide that. It’s not rocket science.

Operational Expense

Operational expense is high because you will never be able to provide a big grocery store with a small home operation. So you have to mechanize, or basically, you can automate the whole thing at some point. You have to get machines. You have to get raw material in bulk by the tons. You need trucks. You don’t need the whole complexity that comes with a manufacturing operation. At least in India, these things don’t work very simply. You need to know people in big retail companies that you can take care of and ensure that your contract remains because there’s a lot of competition. And India is the low-cost market for many things globally, especially services. So, if you’re trying to go low-cost in a low-cost market, you will kill yourself. You may be in the business, but you won’t be very big.

There’s a lot of people who are making small things, and they depend on Amazon to market for them. Those people get killed very fast; that’s a race to the bottom because your only source of revenue is Amazon, and different people will try getting on. Everybody is trying to price beat each other, and this basically is a spiral race to the bottom.

So, broadly, if you’re in manufacturing, you have to go big-ticket; otherwise, you will get killed. So, the operational expenses are high because you got a deal with lots of labor and land, etc. So, you got all those expenses.

Dependencies

How many different external factors does your business depend on? What all could go wrong outside your business that could affect your business. Dependencies are very high. So, first of all, you got labor. There are lots of labor unions, and you have to deal with all those people, and it’s very unpredictable.

The second thing is politics. If you are in big-ticket manufacturing, politics could change many things for you. That whole situation happened in West Bengal where suddenly the government said, we’re not going to allow Tata to make a factory over here. Then Tata had to go all the way down to the Gujrat and make the factory over there. So, a lot of local politics will affect you.

The third is trade. A lot of national/international trade is going to affect you. So again, coming back to the Tata example, when international trade was favorable, Tata went ahead and bought the Jaguar Land Rover company and added it to their bottom line companies. It was doing good because Indiga was selling. Suddenly people got off Indiga; the whole Uber market stabilized in India. That was the major source of car sales for Tata Motors, for example, and then suddenly the whole thing flatlined, and now they’re running losses. So TATA motors had a great run from 2011 to 2017. And after that, they’ve been running consistent losses. So, dependencies are very high.

Scalability

The scalability of this business is relatively low to medium. It’s very high in the initial stages when you’re setting up the machines, and the machines can belt out. You can keep the machine running for two or three different shifts of the scale. Scalability is very high initially. But once you hit that maximum peak capacity, there is no scalability.

You want to do a business with medium or high scalability because you don’t want to flatline; you want to keep increasing. Now, of course, you can keep adding factories, but every single additional factory is going to take so much input capital. So scalability is low to medium.

Profit

The profitability of most manufacturing companies is 15-20 percent.

Distribution

Input Capital

You have trucks on the road, and you’re either distributing, collecting/forwarding agent or a stockist, or a wholesaler. You collect on behalf of a company and distribute to various sellers or retailers. Hence, the input capital is high because you get all those trucks, which cost a lot.

Operational Expense

The operational expenses are also high because vehicle maintenance is not cheap. Vehicles keep breaking down, and they require servicing. In India, especially, you have issues with drivers who steal fuel, etc. You have to watch out for that.

Dependency

Dependency is very high because you’re doing business in the field. So, field variables come in. You have trucks going out, and suddenly in a different state, they say, well, you don’t have the right permits, etc. You have to pay 10,000 rupees. Otherwise, we won’t let your trucks through. You got all those items. What if an accident happens? There’s going to be a huge problem. You’re going to rush in the middle of the night all the way over Karnataka to take care of it. So, field variables are high.

It’s a labor-based business. So again, you have all the issues that come with blue-collar labor, dealing with drunk drivers, etc. Then you have trade dependencies. Furthermore, if trade situations between two states or between two countries fall off, the new businesses are impacted.

Scalability

The scalability is high because of the same input capital cost. You can keep adding trucks and keep adding volume to your business. So, scalability is high.

Profit

Profit is 15-30 percent. You can do it at a big-ticket level which is, the DHL blue dot level or small ticket level, small two or three tempos and operate only in your local area where you can have people who belong to the same area and work for you and you have a small business, but you can be a supplier to things like the DHL or a big manufacturing company. So scalability is high. Profit is 15 to 30%. Dependencies are also high.

Retail

This includes the restaurants as well. So some of the variables we’ll talk about apply to the restaurant than hospitality. So this is footfall-based because you have large retail stores or even grocery stores. You have your food junction. You have your big bazaars. You have the Dmart, and then you have a restaurant. All of these are footfall-based businesses. So, I’m just counting restaurants and entertainment places here.

Input Capital

Input capital is obviously very high because you need to have space in a prime ticket area if you want your retail business to succeed. You want a successful restaurant; it needs to be in a Prime Ticket area, not in the back of the boonies, because you’ll have less footfall, and then the prices will also go down. So you need to be in a high ticket area. So, the input capital is high because you need the lease or the rent or whatever it is.

Operational Expense

The operational expenses are very high because you have people working at the place with commercial power or commercial refrigeration. Even if you have a retail store, you have lots of labor working there. If you go to a Dmart, they are like 50 employees in every Dmart. So, operational expenses are very high, and then you have a little bit of your own logistics, etc. So you have very high operation expenses.

Dependency

Dependencies are not very high, but they are high. Again, field variables come in; whether your stock is coming or not, stock going or not, the stock is rotting. Then your labor. Again, blue-collar labor is involved a lot. And then you have economic variables. For example, many people don’t go to restaurants in a down season. So you lose money. Restaurants have very few up seasons during the year. Too much of summer, people don’t come in to eat. Too much rain, people don’t come in to eat. Non-festival times, people don’t come in to eat. Middle or end of the month, people don’t come into it because they don’t have savings to spend on it, etc.

Even for retail stores, economy items people. If you have slightly high-end retail stores, like food Junction, people don’t come in if the economy is not doing well. So, big-ticket retail is getting hit the big time with takeout stores and Amazon food. So big-ticket retails are getting hit today. It’s not a good time for big-ticket retail. Again, Dmart stock has gone higher because of coronavirus. DMart is the only one that’s supplying. But broadly, things are not good for retail in India for the last five years.

Scalability

Scalability is high because, again, you can add more stock. It immediately improves your output levels, and then you can simply install better software that you have self-checkout. You can actually increase the traffic that processes through the checkout system. So scalability is pretty high.

They also have a cap for that. Cap comes in a while away. The cap can come in pretty fast with the restaurant because you have people sitting down at the table. The average time to eat a meal is one hour 25 minutes. You cannot really increase that time because people don’t come in to have dinner at 5:00 in the evening, and they don’t come in to have dinner after 11:00. So you’ve got that little time window where people come in to eat. You cannot really scale it up. If you want to increase the pace, then again, input capital just goes high. So scalability is high in the case of a retail store but low in the case of a restaurant.

Profit

Profit 15-45 percent. Retail stores make a profit of about 15% and restaurants about 45%. Any food business makes about 45%. Big-ticket retail is trying to increase their profit margins because it is trying to have these big stores where they can cut their costs using economies of scale. So they are trying to increase their profit margin. Broadly profit margin of retail is 15-20 percent max.

Services

Input Capital

You set up a services business where you’re providing professional services. The input capital is low because all you need is yourself who sells, and then you need one guy when you get a client contract, a guy to service that contract. So you got businesses like call centers, IT companies, B2B marketing, all of these business models come in services.

Operational Expense

Operational expenses are broadly moderate to high. Once you start expanding, you have a big office with 20-50 employees, and you go to a nice IT Park. So operational expense starts at pretty low. You have salaries and a little bit of office space, but it will go towards the high side over time. So I would call it moderate, but when you start scaling, it can go high.

Dependencies

Dependencies are medium. All you need to do is basically hire and train. Dependencies are higher in foreign countries but lower in India because India is loaded with human capital. So all you need to do is to recruit and train. Human capital is relatively cheap if you want. So if you are in a high ticket area, like maybe Gurgaon, then obviously manpower cost is high. But in most low-tier cities, you’ll find the exact similar talent at low prices.

Scalability

Scalability is also moderate. It is virtually unlimited. But when you start expanding, you realize keeping your team together and managing them so that everybody belting out the same quality of service is not that easy. So that’s why the scalability of the services business is moderate. If you look at developed countries, all of these services are getting automated more and more today. In fact, Amazon is one big prime example. They’ve actually doubled the wage rate for their workers, but they have so many things happening via robots and algorithms. Now, they’re saying we will deliver through drones. For the amount of volume that Amazon delivers, the manpower of their employee is significantly less. So, once automation happens, then scalability will become very high. But right now, only Amazon has achieved it and nobody else. So scalability is moderate.

Profit

Profitability is 15-35 percent.

Aggregators

Input Capital

Aggregators are people like Uber, Airbnb, etc. Input capital is low to moderate because all you need to have is an algorithm. Then you need to personally go out on the field and sign up those hotels or drivers, etc.

Operational Expense

Operational expenses are also moderate. I would call it low, but it’s moderate. Because then, in the case of Uber, what they did in India as they went out and tried to get a lot of people who did not have cars of their own, they tried to motivate them to buy cars of their own. And then they had to arrange with banks for the finance etc. It was a big disaster because the banks paid the money, Uber arranged for the finance, and the model flatlined. So, the people bought those cars to become Uber drivers. They’re actually losing money and unable to pay BMI. So anyway, operational expenses are low to moderate.

Dependencies

Dependencies are medium, which means they also depend only on recruitment and training, so dependencies are basically medium. I would say low, but then you have a case like drivers getting drunk and creating all kinds of issues. So you have some liability over here. So dependencies are medium.

Scalability

Scalability is very high. You could sign up for anything. Uber has gone to become a global company in the last six years. So, the scalability is very high.

Profit

Profit is literally like 3%. Uber doesn’t make any money. They actually lose money. Hola cabs, Airbnb lost money when Airbnb went public. It is a zero profit company. So I’ve set 0-10 percent. But I haven’t seen anyone’s balance sheet more than 3% in the last two years. I may be wrong, but I recently checked some facts, and they are not high-profit companies. In fact, all of them are losing money right now because the thing is, they don’t own their services, they’re just a connector, and they have a point where customers will not pay high for a hotel room. They expect a discount because they go through a clear trip or Airbnb. They expect a high level of service because they go through Ubers. So you must keep your prices under control and pay the guy who is delivering the service very well. Otherwise, they’re not going to work for you.

Many Uber drivers will happily shut off their devices and go with you all day. You say I’m with you all day; just shut off the device. I’ll pay you whatever; let’s have our own rate-setting, and they’ll happily do that. Drivers are getting offended because they get stuck in traffic etc. They don’t get paid very well. So, they want to shut their device and go private. So Uber never makes any money. It’s always a zero-profit company.

Market Creators

Market creators are the last mile that goes to the customer. Market creators are the ones who take concepts, products, and services to the customer. So you have high-ticket furniture design, home improvement, home design, high-end architects, insurance agents selling life insurance or health insurance, financial advisors, affiliate marketers, multi-level marketers, digital media agencies, sales and marketing consultants, all of these are the ones that are able to put that high ticket product in the hand of the customer on a commission.

Input Capital

Input capital is very low.

Operational Expense

Their operational expenses are also low because they will have less than 15 people working in any agency.

Dependencies

Dependencies are low because their only dependencies are advertising costs. How much do I have to pay the newspaper to run my ad? How much do I have to pay somebody to run my flyers? How much do I have to pay, probably local politicians, to put up my banners all over the Housing Society or something? How much do I have to pay Facebook for my ad? So, their only dependency is advertising cost. And as long as they can keep their advertising cost under control and their conversions into sales high, their dependencies will remain low. However, in many cases, they’re dependent only on Facebook. If Facebook’s ad price per keyword starts going up, they could actually lose money.

Scalability

Scalability is very high because it’s an advertising-based business. So once you get a hold of your market, you can potentially scale very high. So you have financial advisors who once gain the trust of their local market. They work on references, and their insurance cheques keep coming in because the people who are friends and relatives of a person who had a good experience with you will highly recommend you saying, I got the health insurance from this guy, I had a problem, I went to the hospital. This guy helped me out. He was always there for me, and then everybody else will go and buy their health insurance from you. So, scalability is pretty high if you know what you’re doing, if you’re smart, and you’re providing good service.

Profit

Profitability is extremely high; 50-70 percent.

Those are pretty much the six business models. Which one of these do you like the best? Which one of these do you think would suit you at some point in time?

Individual professionals like doctors, lawyers, etc., would probably fall under market creator because if you start as a private practice, you have to be there. You have to spend several years to gain the confidence of the local market. Once you gain the trust, you have your own brand name, and the business comes to you so that they would fall in the market creator’s category.

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