What are the 3 Main Types of Business Models?

Wanting to start your own business?

When you look to establish your own business, you will most likely research into the different types of business models.

There are many different businesses around, but they can largely be grouped into 3 different categories based on how the business is formed and operated – Traditional business, Franchise model and Direct Selling model. The business can be operated through retail locations, in person meetings and/or online.

Let us take a closer look at each of these models. 

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Model 1) Traditional business

Traditional business is largely referring to business that you start from scratch yourself (this category also includes a business that your family members have started and passed onto you).

For example, starting up your own shoes/hand bags business, opening up your own restaurant, having your own accounting firm or law practice.

In this business model, you get to call all the shots and have control over most aspects of your business. You develop the products or services, control the sourcing, fulfilment process, branding, marketing, IT, human resources, book keeping, accounting and customer service of the business.

Many traditional businesses involve having a retail store front.  Although, it is getting more and more common to also have an online presence for traditional businesses.

Model 2) Franchise

Under a franchise business model, business owners purchase another organization’s business strategy. Instead of creating a new product or service and the distribution chain to deliver that product or service to the customers, the franchisee purchases an ownership stake in a business model that has already been successfully developed and branded.

The company offering its products or services, its business processes and its brand is known as the Franchisor, and it benefits from a reduction in capital output used to build new locations. Franchise owners earn a portion of the revenue generated by their locations, the the Franchisor collects licensing fees in addition to a percentage of sales revenue from the franchisee. Popular companies that depend on the franchise business model for growth include McDonalds, Kentucky Fried Chicken, Subway, 7- 11 convenient stores and UPS Stores.

Model 3) Direct Sales (or Network Marketing)

Under a Direct Sales (or often known as Network Marketing) business model, sales of products or services generate revenue through a network of salespeople or independent representatives who sell directly to customers. Typically, no fixed retail location exists under a direct sales business model. Instead, individual representatives are connected with a parent company and given the tools and training to become individual entrepreneurs. In other words, the individual entrepreneurs are working for themselves, but not by themselves. Often, they can run their business through a laptop and an internet connection from anywhere in the World.

Direct selling or network marketing is the marketing and selling of products or services directly to the end consumers from the parent company through the power of relationships. It is the most basic form of word-of-mouth referral marketing.

Direct selling can take place through presentations or demonstrations of the product or service in a one-on-one setting, during a hosted party at a prospect’s home, a larger scale business presentation at an office or presentations online. Business owners in direct sales earn a portion of their sales, while the company provides the product or service receives the remaining revenue. Companies such as WorldVentures, Amway, Avon, and Mary Kay are some successful examples of direct sales brands that have been around for 10 years or more or even decades.

 

Comparing the 3 Business Models

There are pros and cons for each type of business models. Below, I will provide the overview of each.

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Model 1) Traditional Business

Pros –
(1) Business owner controls and oversees all aspects of the business.

(2) Business owner gets to keep the net profits from the business.

Cons –
(1) Starting and running the business can be particularly overwhelming, especially for a 1st time entrepreneur. The business owner has many business aspects to consider and take care of including product/service development, sourcing, distribution channel, fulfillment, marketing, business development, branding, IT, customer service, human resources, book keeping just to name a few.

(2) If the business involves a retail space, the startup cost can be quite high and there will be ongoing monthly rental and utility expenses with very limited flexibility on operating schedule and location.

(3) May involve employee salary as monthly expenses
.

(4) About 80-90% of all new start-up traditional businesses do not survive their first 5 years.

 

Model 2) Franchise

Pros –
(1) The Franchisor takes care of the branding, product/service development, sourcing, nationwide marketing (if it is a national brand) and provides training and support to the Franchisee, making it easier for the Franchisee to operate the business as compared to Traditional business.

(2) With the branding, support, and infrastructure provided, Franchise model generally has a higher success rate than the Traditional business.

Cons –
(1) Large upfront franchising fees (can go as high as US$100,000 or even US$1+ million depending on the franchise brand).

(2) Leasing office/retail space which adds to monthly overheads.

(3) Hiring, training and managing of employees.

(4) Stock-pilling and storing of inventory
.

(5) Locked into retail business hours – limited flexibility on schedule.

(6) With a retail location, business revenue is largely coming from the local area (instead of from all around the World) – limited flexibility on location.

(7) Takes time to qualify as a Franchiser and obtain all the necessary trainings before getting started.

(8) Less control over the business as compared to Traditional business model – main business directions can be largely driven by the Franchisor.

Model 3) Direct Sales

Pros –
(1) Small initial distributor fee – typically no more than a few hundred US dollars to get started.

(2) Easy and quick start up – a new business can typically be registered and started within the same day.

(3) Less hassles compared to Traditional business – Parent company provides all branding, product/service development, sourcing, distribution channel, fulfillment, IT and customer service. Independent entrepreneurs take care of the marketing/selling of the products/services.

(4) Flexibility of working from home or anywhere in the World.

(5) Flexible schedule – can work spare time, part-time or full-time.

(6) Little or no inventory – parent company often delivers products directly to customers.

(7) Low overheads – typically has no employee’s salary and retail/office rental overheads
.

(8) Depending on which countries the Direct Selling brand is operating, the independent entrepreneur has the flexibility to expand their business locally as well as globally.

(9) The upline leaders of the independent entrepreneur often act as mentors to support and groom the independent entrepreneurs.

(10) A great Direct Selling or Network Marketing parent company provides excellent training programs to support the growth of their independent entrepreneurs.

Cons –
(1) Less control over the business as compared to Traditional business model, therefore, it is important to select a company that matches your vision and has a track record of success (no risky start-up!) and with products you are passionate with – Independent entrepreneurs have flexibility in their day-to-day business strategies and operations.

As you can see, there are many advantages to start and operate a business through the Direct Selling or Network Marketing business model especially from a lifestyle perspective.  I am a supporter of this Business Model.

To learn more about what experts are stating as the ‘Business of the 21st Century’, take a look at this article.

Lifestyle Entrepreneur

I hope this article has added value to you. If you have enjoyed it, please ‘like’ it or ‘share’ it so more people can benefit. Thank you!

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With lots of love,
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About Millie Leung

Millie Leung teaches people how to Escape the Rat Race, Work Anywhere and Live a Life They Truly Love. Click HERE to get her FREE eBook 'Lifestyle Entrepreneur' (US$27 value).