A business model is a broad outline of the operations and procedures necessary for your business ideas to be successfully translated into revenues. It draws on a wide range of business subjects including marketing, operations, finance, strategy, entrepreneurship, and economics. A good business model consists of six basic components, namely:

· Market segment – identifying the target customers;

· Value proposition – describing the problem of the clientele, the product solution, and the product value from the customer’s perspective;

· Position in value network – which involves the identification of competitors and network effects that can be used to bring more value to the customers;

· Competitive strategy – developing a competitive advantage;

· Revenue generation and margins – including the target profit margins and cost structure; and

· Value chain structure – involving the company’s position and actions in the value chain.

A number of business models have been developed over the years. Here are three examples of business models:

1. Freemium Business Model

The freemium business model catches the attention of users by offering basic services free of charge, then charging a premium for special, advanced or full features. Thus the term freemium since it unites the two features of the business model, which are “free” and “premium.” The term “freemium” may be fresh sounding but the business model concept has actually existed before as Netscape was founded on such idea, as well as several thriving software industries that have been using a model like this. Fred Wilson first expressed the name on his blog in 2006. Wilson, a venture capitalist, is a managing partner at Flatiron Partners, a Venture Capital firm headquartered in New York, helping companies mold the future of technology. In his blog, Wilson described the business model and he asked readers to help name it. The term “freemium” was suggested by Jarid Lukin of Alacra, an e-commerce executive. Wilson adopted it for the business model and since then, the Freemium Business Model has stuck in the minds of people.

Offering your product or service for free is more than just a publicity stunt. It is in fact an effective way for you to draw further paying customers than by charging fees for everything. By giving away the basic product or service, you allow users to learn about your merchandise as well as give them the chance to adopt the service and embrace other premium features that you can offer. People love getting products or services for free, and giving them away at no cost can help you build a customer base effectively and rapidly through referral networks, organic search marketing, word of mouth and other means possible. You can then charge your customers for premium services that they would want to avail of, such as enhanced versions and other special features. This model also poses an advantage to the company as it allows them to test and validate their service.

Companies that have successfully employed this business model include

· Skype – provides basic voice service within the network for free but charges for its premium service that allows its clients to connect to phone systems outside its network;

· Newsgator – offers a free web reader, but charges clients if they want to synch with outlook and their mobile phones; and

· Webroot – provides free spyware scan, but charges for its optional, full-protection service.

2. Subscription Business Model

The subscription business model allows the product or service provider to charge a fee for access to a particular product or service. Newspapers and periodicals broke new ground for the subscription business model, which is now being employed by several companies and websites. The subscription business model proves to be effective since a subscription sells periodic use or access to a service or product rather than selling it on a one-time basis. Subscription renewal may be done quarterly, semi-annually, or annually and it can be activated automatically, so the charge for a new period is automatically deducted from a pre-authorized charge to a credit card or checking account. Subscription models are generally driven by four key areas that should be focused on, to wit:

· Monthly average revenue per user (ARPU), which is a measure of the revenue generated per user or unit by analyzing the company’s revenue production and growth at the per unit level, helping determine which products generate more revenue or otherwise;

· Cost per acquisition, wherein payment is based exclusively on qualifying actions including sales or registrations;

· Churn rate, which refers to the number of users who discontinue their use of a service divided by the average number of total users for a given period of time; and

· Free cash flow or EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation and Amortization, that refers to the estimate measure of a company’s operating cash flow minus capital expenditures based on data from the company’s income statement.

A multitude of companies in several fields have successfully employed this model including cell phone companies such as AT&&, Sprint, and Verizon and Internet providers such as Earthlink and WildBlue.

3. Online Auction Business Model

The online action business model involves one party that sells the product or service and another party that bids to buy the merchandise. In this type of model, the users bid for products and services over the Internet. Its main advantage is the transparent formation of the product’s price, which reflects on the actual offer and/or demands. Difficulties in physical auctioning include verifying its validity as well as being physically present in auction houses. These can be lessened through the use of technology and by converting these difficulties into assets in the online auctioning, wherein sellers and buyers meet up and close the deal virtually. This model has substantial advantages. For one, it has no time constraints, nor does it have some geographical constraints. It is open to several sellers as well as a multitude of bidders, thus allowing the network to expand. It also creates a highly loyal customer segment.

Companies that have successfully employed this model include eBay, Overstock.com, WeBidz, and Amazon.