retail-business-model

Retail Business Model In A Nutshell

A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

Introducing the Retail Business Model

coffee-shop-business-model
The coffee shop follows a retail business model where the store is competing locally. The coffee shop has direct access to customers, who are usually local people from the neighborhood, opposite the wholesale business model. Therefore, the coffee shop must follow a localized strategy to build relationships with the local community.

As a classic example of a retail business model, think of the local coffee shop or restaurant. The coffee shop owner buys a set of products in bulk by wholesalers (coffee beans, foods, drinks, etc.) thus paying these products at a low price and it sells them back in its store with a high markup.

For instance, as a trivial example, the coffee shop might buy a coffee bag at $100, and with that make 100 coffees, which it will sell at $3 each, thus turning the $100 into $300. That all seem simple, yet there are a few things to take into account when it comes to retail business models.

In fact, while the retail business model runs with higher margins than wholesale, there are a few critical differences. And a few things to take into account:

  • Local and direct access to customers: the retailer distribution is mostly local. Therefore, just like in the case of the coffee shop, the retailer can build a strong tie with the local community, so that it can enjoy repeat customers who help the local shop bottom line.
  • Higher margins: the local shop enjoys higher margins, given the fact it can sell directly to customers. Therefore, transform a simple product (perhaps a bag of coffee) into a product served to customers and therefore with an incredible markup.
  • Distribution risks: while the local shop might enjoy high gross margins, in reality, its net margins might be pretty tight (that’s because the local shop needs to pay for expenses like a rental in a central area, personnel costs, and so on) which makes it hard for it to survive in the long run. Therefore, the retailer does take on its shoulders the distribution risks, associated with the costs of running the overall business and making sure that a continuous stream of customers and repeat customers feed the business.
  • Local competition: in some cases, local competition can also be very strong. Take the case of the ice cream shop, which is a retailer that enjoys very tight margins, as you might find in the same neighborhood many others selling the same product, thus leading to saturation of the local market and a price competition which erodes the bottom line. The same applies to local shops like gas stations, where margins on the main product (the oil) are extremely low. And instead, the real money will be made by selling ancillary products, at much higher margins (like candies, drinks, snacks, and so on).
  • Wholesale prices fluctuations: since the retailer usually does not control the supply chain it might also be exposed to price fluctuations which it can’t control. Take the case of the increased price of coffee beans for coffee shops, which can’t be easily translated into the final product (the cup of coffee) as this would disappoint local customers, thus threatening the survival of the business.

Vertical integration

horizontal-vs-vertical-integration
Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.

To have more control over prices and on the overall supply chain, retailers might expand upward. Take the case of a coffee shop that buys coffee plants, and the machinery to make that coffee. While much more expensive to control the supply chain, this might give more stability to the retail business in the long term.

While direct to consumer wasn’t much common decades ago. With the rise of the Internet and the access of millions of consumers, many companies, in various industries have converted to this model. One example is Tesla which by opening local showrooms across large cities (similar to the Apple store) can sell directly its cars to consumers. Therefore, enjoying higher margins (as it doesn’t have to pay middlemen and car dealers) and access to customer feedback.

tesla-business-model
Tesla is vertically integrated. Therefore, the company runs and operates the Tesla’s plants where cars are manufactured and the Gigafactory which produces the battery packs and stationary storage systems for its electric vehicles, which are sold via direct channels like the Tesla online store and the Tesla physical stores.

How can retail business models survive and thrive long-term?

As we saw the retail business model has the advantage of having direct access to local consumers, therefore, it can build a strong tie with the local community to build a profitable business. Yet, we also saw that the local retailer also carries the distribution risks and that local competition can also be fierce.

In addition, since the retailer does not control the supply chain, it might be subsect to prices swings for the raw products, which it can’t pass to local consumers so easily as this would lead to a loss of its customer base.

How do deal with these?

  • Strong local community: a retailer should focus in understanding the local community, as primary focus. In fact, by building ties with the neighborhood, it can develop a product, offering tied with that. This is a long-lasting advantage.
  • Hard to copy product and experience: while many retail shops sell products that can be easily copied. It can also offer an experience around the product, which is hard to copy. As an example, the same coffee shop, can become the second home for many of the neighborhood, which go there to work, hang out and organize local events.
  • Go upstream and innovate the product: the retailer can also over time try to control more steps of the supply chain upward, so to have more control over prices swings. Pherhaps thinking of an ice cream shop, instead of selling the same ice cream, it can open its own lab, to make its own ice cream, and experiment with new tastes.

Connected Business Model Types

Asymmetric Business Models

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchant Business Model

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Marketplace Business Models

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

Wholesale Business Model

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

B2B2C

b2b2c-business-model
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

Crowdsourcing Business Model

crowdsourcing
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.

Open-Core Business Model

open-core
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Open Source vs. Freemium

open-source-business-model
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.

Freemium Business Model

freemium-business-model
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Franchising Business Model

franchained-business-model
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.

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