[Editor's Note: This may not be the website that Nathan refers to in the video, but here is a webpage that gives brief descriptions of over 50 different business models.]
Nathan Brown: This video is for participants on the Barefoot Co-op and Community Business Development Training, and it's just a little video about business models.
Okay, so there are general types of business models that are used by business advisors, and by people assessing business plans, like lenders. Basically, if you can give a name to the business model of a co-op or community business you're working with, it can help other people to understand. What this really means probably is knocking round pegs into square holes because actually, in truth, there are as many business models as there are businesses, because every business adopts their business model slightly in response to either a member desire, a member need or the trading conditions, the geographical area they serve, the trade sector they're in. Which is why smack bang in the middle of this slide, we've got this this link to a web page that sort of says, here's the top 50 business models being used in 2022. You'll get to see that link when you're in the training. It's just an example to demonstrate that there are so many different business models. So the important thing for you is probably less about what you call it and more about working through how it works for that individual co-op. However, it's useful to understand this stuff.
So, top left-hand corner: B B C C. What's that all about? Broadly, businesses will either be a business-to-business model - in which case as a business, they are selling to other businesses - or they'll be a business-to-consumer model, typically retail. That's the easy to understand, right? You have individual human beings who are customers, so C is Consumer, B is business.
However, as well as the business providing to businesses, and businesses providing to consumers, with the advent of user involvement in services, particularly in the platforms, sometimes it's actually a consumer-to-business or consumer-consumer transaction. So the business model may be some sort of peer sharing process, where it's actually consumers working together.
Traditionally, business models were viewed as pipelines. Broadly, you have a bunch of customers, you funnel them into the pipeline, you carry out your business process, sell them stuff, they disappear out the other end and you make some profit, to simplify it most. Now, we've seen the rise of platforms. These are networked business models where sometimes the business itself doesn't even handle the process of creating the value. What it does, is it connects up the different parts of the network with each other, and they create the value, and it takes a top slice just for the process of introducing them. That's probably the simplest way I could try and describe the platform.
There's a growth in platform co-ops because people have realized that it's not particularly fair that the users and drivers of a taxi service are both contributing to to the vast wealth of investors from Silicon Valley. They're saying, "What are they doing to the process? They're not driving the car, they're not catching the ride. They don't even organize the ride. They're literally just promoting the introduction process. They're promoting that bit of technology which groups people together. So there's been a rise in the idea of platform co-ops whereby the owners and the beneficiaries of the profits from the platform are actually the users of the platform; mainly providers of services, or users of services or both.
So that's about pipes and platforms. The freemium model is something which has cropped up - particularly in the world of software - where where you give a free version of a service, and then people pay for the enhanced version, which has got all the extra bells and whistles. So if any of you have ever used a Zoom account, the free Zoom account gives you 40 minutes or something and then just cuts off. If you want to access something longer than that, and if you want to be able to do recordings, then you need to pay for the service. So there's an example of the freemium business model, which is basically: we give you something for free, we know you're going to like it so much you're going to end up paying for the proper, all-bells-and-whistles, all-singing-dancing version.
Up in the top right hand corner producers, aggregators, distributors, wholesalers, retailers. So, if you think about the process - this is particularly for products rather than services - if you think about the process of producing something - let's say it's a jar of jam - you've got somebody makes the jar of jam. Now, if you're the producer, that's your role, you make the jam. And you may pass that jam on to somebody in your locality who aggregates all the jams from all the different producers in one area - and they may well actually put branding and labeling on it.
These are then handed on to a distributor, and the distributor's job is to get really large consignments of this product out to wholesalers, and the wholesalers distribute smaller pallet sizes. So it might be in the individual, I don't know, 12, 24 jars of jam, rather than truckloads. They get in smaller amounts, but still bulk to retailers. And then retailers are your shops, your market stalls or whatever, and they sell to the actual consumer.
So if you're working with a co-op that's doing production, you might want to look at where they are in this process. Sometimes producers start off as producer and retailer, and then they realize - as they as they expand, as they grow scale - the work involved in retail actually is probably too time intensive, too labor intensive and they want to get out of doing the retail. So they perhaps move into wholesaling, and they wholesale direct to retailers. But then over time, if they scale up again, they might reduce even further.
For some businesses, they may start off as retailers and notice that they're actually selling a lot of a particular product and say, "well, hang on a minute, we're buying in soup, right? We're selling lots and lots of soup all the time, and we're paying for this soup that someone else is producing. Could we become the producer as well?" And the reason they would do that is because at each of these stages there's a markup.
Now, normally things are simplified. It's quite rare that you get the aggregators involved, but it tends to be sort of like, producer, wholesaler, retailer. And you've got the producer price, and then they put on their markup. So let's say they got 50% markup on that. So your initial prices is 1, it's 1.50 by the time it gets to the wholesaler. The wholesaler puts another 50% on, so it goes from 1.50 to 2.25. So the product is now to 2.25 a unit, which is the price the retailer gets it for. And the retailer may sell it for £3. So, in this process you've got the retailer is getting £0.75, the wholesaler is getting £0.75 and the producer's only getting £0.50.
And you see each stage actually adds value. So, one reason why you might want to see what we call vertical integration - which is where we squeeze all these different stages of processes into one provider, or one business - is because you get to keep more of that markup. But for some businesses, that's a bad idea. If it's high volume, then you might say, "You know what, we will stick to producing. We might possibly get into distribution and wholesaling, but we can't handle the retail."
For others, if it's smaller scale volume, then it might be a case of actually being the producer and the retailer works really well, but it's on a case-by-case basis. You have to look at the circumstances and weigh them up. So do some analysis, look at the numbers, work out what it will cost to actually carry out all of these stages. Or equally, if you were to stop carrying out one of these stages, what would that mean in terms of improved productivity and reduced overheads, but also what would it mean in terms of dropped turnover?
Lastly, just wanted to mention franchising. This is when you've got a business and you say, basically, "you can buy this business, you can set it up in your home town, you can run this business, you get all the branding, you get the manuals of how to run the business, you get the secret sauce, you get the ingredients, whatever it is that it takes to run this business." So franchising is broadly like buying a business out of a box.
So what's interesting is the idea of social franchising, which could be applicable to community businesses and co-ops, which is basically where we say, "hey, our business model is actually - we started off running this great co-op, but actually we've realized what we want to do is we want to set up lots of them. And in the process of being a franchisor, what we do is we make money by providing services, providing training, providing goods, providing products to the franchise holders." The preferred option normally is when you've got a successful co-op, instead of saying, "hey, let's set up a franchise." It tends to be more 'strawberry patch development' of, "let's send out a sucker, it becomes its own entity, it runs in its own right, and we don't control it." So social franchising tends to be a bit rarer in the world of co-op and community business.
And that's a real overview of general types of business model. As I say, giving it a name can be helpful, but sometimes it feels like you're knocking a square peg into a round hole. Hope this has been useful.
This transcript has been lightly edited for readability.