Business models aren't complicated
Mrs Latte owns a coffee shop. She sells coffee beans as well as the normal cappuccinos, lattes and some speciality coffee. Mr Espresso is a delivery truck driver who delivers packages on behalf of his clients. If we had to say how they make money, we might be inclined to say “Well, Mrs Latte sells coffee and Mr Espresso delivers goods”. Under the hood, they are using business/engagement models to make money. If we can understand the underlying systems better, we can leverage it for our own businesses!
Josh Kaufman calls these the “form of value” – it’s the underlying “engagement model” that helps you to make money. I am basing my article on his knowledge and understanding, and how that applies in South Africa.
I don’t want a massive theoretical post that won’t help anyone, so note that there will be many examples.
The magic slot machine
Some time ago, when the internet was still more conservative, a friend of mine bought this online course for lots of money. The one (and only) valuable part was the concept of the magic slot machine. It works like this:
Let’s say you had R10 that you put into a slot machine and it popped out R20. The question is not how much money you made, it is rather how many R10 notes you have to pop into the machine.
This is a good principle of business – you need that slot machine, that system that you know will work.
Creating value and making money
When someone tells me “I will add value with my offer” or “this will be mutually beneficial”, I crave to pour hot tea all over them. Having said that, I do like the idea of making someone’s life better.
Making money should be about that – leaving a customer better off than when you found him. If you don’t, you will lose that customer and he will probably tell lots of people not to use your business.
How companies make money
When people talk about engagement models, they refer to how you make money. There are different models, but, as Josh Kaufman explains, there are a few basic ones. These include products and services, subscriptions, resale, loans and capital and are explained below with good examples.
Products and services
Imagine someone at a market that creates pasta and sells it. They prepare everything and then people come and buy it. The principle with selling products is that your expenses should not exceed your selling price, or it will not be profitable.
Services do not have a physical product. If you’re offering consulting, coaching or project management – you’re offering a service to your customers. With services, you generally sell your time – you work x number of hours and get R x.
If you’re as old as I am, you would remember the internet cafes when the internet was novel and new. The owners bought hardware and sold the use of the PCs with internet per hour. This is a shared resource model where something is bought and leased out to more than one person.
Remember: The more durable the product, the more money you can make!
Many online entrepreneurs punt the idea of subscriptions and membership sites using WordPress and (for example) BuddyPress. The idea is simple – users pay a monthly fee and they get value every month. This might be in the form of exclusive content (videos, articles, audio clips) or even monthly physical products such as recipes, monthly veggie boxes or a pet care kit.
Another subscription model that works quite well is the software as a service model (Saas). The user can use your software, as long as they pay a monthly fee.
Make sure that more value is added monthly!
The issue with products is that you need to have stock – and keeping inventory is expensive. Warehousing, stock on hand, stock management etc. can eat into your profits. This is why many people become resellers of other people’s products (like Takealot.com).
I find many IT companies become resellers of certain software that people might find useful, and take a commission if they make the sale.
When you resell, the responsibility for support, delivery and other operational matters tend to fall on the supplier, not on you.
Hardware can be challenging. Printers break, run out of ink and laptops become outdated quickly. For this reason, companies have started opting for renting equipment, rather than owning it.
Whether you’re renting a property, car, laptop or cellphone – there could be opportunities hidden in your field of expertise.
Agencies are all around us. People often link buyers and sellers and get claim back their commission from the seller.
Examples of these include originators, financial advisors that sell products and real estate agencies.
When investing your capital, the aim is to make more money.
There are many options – both regulated and unregulated – for investing money. You might want to consider investing in a small business or startup. There are many people that have profitable businesses that have cash flow issues that stop them from growing.
If you’re a bit more risk-averse, you could look at investing your capital in a listed company (or ETF, if diversification is preferred).
The best example of audience aggregation is content creators and influencers. When an individual or business creates a following and has access to an audience, it can sell access to the audience through sponsored content and brand endorsements. Note that this doesn’t mean you’re selling personal details, but rather curated, procured access to followers, users or customers.
Big corporates tend to do this well, such as social media platforms/search engines selling advertising and insurance companies upselling you on other products and credit bureaux reselling your information for telemarketers.
I wanted to add a section to mention other options as well – for those with bigger budgets or connections in the industry of choice:
- Loans: The big banks make money by lending money to people and charging interest. A way to do this in property might be a sales lease agreement where the tenant pays the money back monthly. In the end, the tenant becomes the property owner.
- Option: EasyEquities recently did a deal with DCX/EC10, where if their market share reached a certain percentage, then they would have the option to buy a 51% stake. Other examples include share options and deposits on rental property (before you decide to move in)
- Insurance: Taking on the risk if something goes wrong can work when you’re insuring lots of people. This is a probability game and needs some serious calculations to make it worth your while.
Combining forms of value
None of these systems are mutually exclusive. Many companies use more than one of these engagement/form of value models to create value for their customers.
For example, an IT company offering software development services can offer products to boost sales, such as infrastructure hardware (products and resale). They can also sign a service level agreement (subscription).
With this in mind, consider the models used by your company and what you can do to make more money.
Don’t overcomplicate your business and engagement models. Keep them simple and add more when you’re adding more value to your customers.
As part of the product/market fit process, you can explore which payment method your customers will accept – it’s not always a straightforward product buying spree!
Frugal Local runs his own company (Effectify). He does software development and helps small businesses and startups with digital solutions. He enjoys writing articles and simplifying complex things – such as the article you’re reading!