Business Model

4 Effective Business Models That Built Billion-Dollar Companies

From software that's free to virtual goods that cost real money, all the new models have their uses.
4 Effective Business Models That Built Billion-Dollar Companies
Image credit: Asawin Klabma | EyeEm | Getty Images
Guest Writer
Founder of Cray Visibility
7 min read
Opinions expressed by Entrepreneur contributors are their own.

It takes more than a mere initial idea to build a successful business. To start with, you’ll need a roadmap of where you’re headed and how to get there. Since businesses thrive on profit, one of the crucial questions you must ask yourself at the outset is how to grow your user base to build revenue. Both of these issues are covered under the umbrella term “business model.”

While a lot of business models exist, four of them are worth studying in the context of today's marketplace.

1. The on-demand model.

This model has been receiving a lot of attention because more and more startups are adopting it. As its name implies, the on-demand model pitches its tent on the real-time provision of goods and services. That is, all you’re required to do as a consumer is to place an order for a good or service, using your gadget, and await its delivery. Dead simple.

But why is this model even a thing? Many people argue that its increasing popularity is tied to the fact that it fits right into the hectic lifestyle that we are all now used to: a life where, thanks to technology, we expect instant gratification. In fact, technology is considered to be its single major propeller, as technology serves as a fillip to its core pre-conditions, which include cost-effectiveness and speed.

Related: How Our Brains Trick Us Into Choosing Instant Gratification Over Long-term Goals

Better for you, the on-demand model is not just convenient to consumers but also to businesses. It’s especially suitable for platform businesses that utilize already established infrastructure to solve a problem.

Uber, for example, doesn’t own a car. Without its present model whereby independent drivers sign up for the service and are then added to a database of Uber drivers, Uber would need to purchase its own cars while also trying to build and maintain its core product. This would be costly and ultimately lead to scaling issues. Think about what it would cost to not only purchase vehicles but also to maintain them, while running about 3000 micro services that make up its product -- all this while also trying to grow on a global scale. Painfully difficult, if you ask me.

Semil Shah explained a common usage of the on-demand model: “Every week, a new service seems to launch that aggregates and organizes freelance labor (those with excess time) to help those who have money but not time.” In other words, these services aren’t grooming their own freelancers but are simply attracting both employers and freelancers to mutual ground. There, employers get to select and outsource jobs to desired freelancers, on demand. No hassles. That’s the beauty of it.

2. The freemium model.

The freemium model is mostly adopted by tech products when they group features into basic and advanced products. The purpose of this model is to promote the basic features for free, where anyone and everyone would be able to use them, but grant only premium users access to the advanced ones. Becoming a premium user usually comes in the form of an account upgrade, as seen in the case of LinkedIn.

A venture capitalist, Fred Wilson, aptly described the models as: “Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc. then offer premium-priced, value-added services or an enhanced version of your service to your customer base.”

Dropbox, Evernote and MailChimp are a few of the many companies that have been able to successfully leverage this model.

Related: Can the 'Freemium' Model Work For You? Here's How to Know.

What makes freemium interesting is nothing other than psychology. Allowing users to access high-quality features for free will most likely lead to the rapid acquisition of mindshare. Soon, some of the users who find the product indispensable will pay for more advanced features. Moreover, people naturally attribute low-quality to free things and will consider an upgrade as the best way to improve quality.

Using freemium, it’s usual to expect to convert only a fraction of your users. In his book, Free, Chris Anderson explains that this model works on a 5 percent rule – that is, 5 percent of paying customers support the remaining 95 percent of free users. Some companies however record better conversions. MailChimp, for example, reported a 150 percent boost in paying customers and 650 percent increase in profit, within a year of adopting this model. In LinkedIn’s case, a little less than 20 percent of users pay for premium services but the company earned nearly $1 billion revenue in 2017.

Freemium also thrives due to the network effect. Phil Libin, CEO of Evernote, characterized it: “The easiest way to get one million people paying is to get one billion people using.”

3. Shopping annuity.

The so-called shopping annuity is a not-so-talked-about business model, but one that’s presently gaining some ground. The idea behind this model is simply to enable customers to earn from their own current spending. Consumers actually earn money when purchasing everyday items, such as paper towels, toilet paper, toothpaste, razors and so on. It can be a very compelling model that fits well into the ecommerce space.

A good example of a business that’s pioneering the shopping annuity is Market America, through its ecommerce site, shop.com. Founder and CEO of Market America and shop.com, JR Ridinger, is seeing significant success with this business model in nine countries, including the U.S. In a recent interview, Ridinger said, "The shopping annuity -- converting everyday spending into earning -- is the foundation of our business model and is like rocket fuel for our UnFranchise business, overall. Let’s face it, Uber is essentially the largest taxi service in the world, and they don’t own a single taxi/car. We look at the retail landscape in a similar way, and realize there’s an equally powerful opportunity for us as a global ecommerce powerhouse. People don’t just shop for luxury items, they shop for the things they use everyday. By making those purchases the cornerstone of a shopping annuity, we feel this concept will revolutionize the retail industry as well as our economy. It took 25 years for the technology to catch up to our original vision of interconnected shoppers who wield their collective buying power and convert spending into earning.”

Related: 5 Rules for Staying Ahead in the Ecommerce Race

The shopping annuity business model might just revolutionize the way ecommerce works. You might want to look into it.

4. The virtual goods model.

If you’ve ever played a game or used an app in which you were required to make in-app purchases for an intangible product, then you’ve experienced the virtual goods model. This model creates revenue by giving users the sense that they are gaining real value from purchasing a virtual good.

For example, since many people enjoy Candy Crush, its developers leveraged this to monetize the game by enabling users to buy stuff that would get players up and running quickly after losing a stage. The same thing goes for action games where buying weapons and abilities makes the experience way more fun.

If you’re going to create a widely appealing app or game, then this model is one that you’ll want to consider, as people will want to purchase virtual goods that make their experience with a fascinating product more fun.

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Can the 'Freemium' Model Work For You? Here's How to Know.