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Business models in strategic management
Business models in strategic management

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2.1 The product business model

This is probably the most common form of business model: selling products or services to clients, intended as final customers but also other businesses.

The rationale behind this business model is that the producer, or the seller, offers a product or service on the market. The value chain requires just a limited interaction after the purchase. The customer benefits of the value of the product are after its purchase: for instance, a customer will use shampoo after they have purchased it from the supermarket.

The following animation represents this model.

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Animation 1 Product business model
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Animation 1 features a box on the left-hand side labelled ‘Firm’. There is also a box on the right-hand side labelled ‘Customer’. There is a single headed arrow running between the base of the box labelled ‘Firm’ (from left-to-right) and the box labelled ‘Customer’ – this arrow is labelled ‘Product or service’. There is also a single headed arrow running between the top of the box labelled ‘Customer’ and the box labelled ‘Firm’ (from right-to-left) – this arrow is labelled ‘Payment’. There is also an icon symbolising a cup of tea at the tip of the lower arrow where it interfaces with the ‘Customer’ box.

Animation 1 Product business model
Interactive feature not available in single page view (see it in standard view).

Business models of this type need to:

  • identify who customers are;
  • understand how to create demand for their products/services;
  • decide how to capture value: this includes the definition of the unit price and some discounts for quantity.

It could also include the introduction of more articulated mechanisms such as freemium. A combination of the words ‘free’ and ‘premium’, a freemium is defined as:

a type of business model that involves offering customers both complementary and extra-cost services. A company provides simple and basic services for free for the user to try; it also offers more advanced services or additional features at a premium.

(Segal, 2019)

An example of freemium is Skype. The software can be downloaded at no cost and its basic service is free to use. For example, there is no charge for calling from a computer to another computer. However, in addition to these basic services available for free, Skype offers some premium services customers need to pay for. These services include computer-to-computer calls involving large numbers of users and computer-to-phone calls.