A term you will likely hear in business a lot is “Business Model”. What is a business model? Simply put, a business model is the structure of the actual business. The key to having a good business model is to be detailed. How will your product get in the hands of your customers? Where will you get the supplies to make your product? How will you ensure that your product is always available? These are important questions to think about when reviewing your business model.
There are 4 main types of businesses: Manufacturing, Wholesaling, Retailing, and Servicing. Manufacturing businesses take raw materials, and create goods to sell to consumers or other businesses. A wholesaling business purchases large amounts of goods, typically from manufacturers, to sell at a lower quantity to other businesses or consumers. Retailing businesses buy goods from wholesalers, and sell primarily to customers. When buying goods, buying in bulk will typically be cheaper per unit, but will be more expensive overall. This is why manufactures don’t sell directly to consumers, as consumers don’t need large quantities of a single good. The last type of business is a service business. Service businesses provide services to customers, rather than selling them products.
A distribution chain is a chain that a single type of product follows through businesses. Knowing where your business sits in the chain is an important part of your business model. Depending on where you are in the chain, the same goods will be priced differently, and you will need to sell a different amount of goods. For example, manufacturers sell large amounts of product to wholesalers for a very low price per unit. Then the wholesalers sell to retailers for a marked up price. Finally, retailers sell to customers with the price marked up again. Some manufacturers bypass the chain, and sell directly to the consumers. Knowing a good markup price can be difficult, as you need to markup the goods enough to make a profit, but not enough to make customers/businesses not want to buy your product. Knowing how to set up your business model is extremely important, and a good understanding of business types and distribution chains can be helpful.