There are six generic types of businesses:
You sell an intangible service product. This is the most common business type with around two-thirds of all NZ businesses classified as services businesses (one-third are goods).
- Easy to setup.
- Flexibility to shift direction quickly.
- Scope creep with work performed.
- Hard to scale (which is why services businesses need to focus on productisation to be more like goods).
- Usually low barriers to entry which makes it easy for competitors to imitate.
- Often heavily reliant on the expert knowledge of the owner as the primary service provider.
- Revenue is usually tied to the number of billable hours worked by staff.
- Harder to exit (therefore it’s important to be extracting wealth along the way).
You sell a tangible goods product.
- The opposite of every con shown in the services box above.
- Easier to scale than services businesses.
- As such, usually attracts a higher exit sale multiplier.
- Can be harder to setup.
- Can be harder to shift direction.
- Cash flow challenges with cash tied up in stock.
- Inventory and demand management.
- Supply chain management.
- Quality issues.
You create a digital space where producers and consumers are able to connect with each other seamlessly e.g. Uber, Airbnb, Xero.
- No physical stock.
- Can be scaled very quickly across geographic boundaries.
- Easier to exit and can attract very high multipliers e.g Instagram.
• Very expensive to build.
• Takes a lot of skill, time, investment and luck.
• Can be low margins, and very hard to make a profit.
• Quality/consistency is harder to control.
You grant the rights, tools, processes, and branding to deliver your business in a specific territory.
• Once the initial hard work has been done e.g. the franchising manual and legal contracts, it is fast to scale.
• Avoids the usual costs of scaling as the franchisee funds this.
• Finding high calibre franchisees.
• Franchisee demands and expectations,
• especially around profitability and ROI.
• Maintaining consistency.
• Customer complaints volume and handling.
You grant the rights to another business to use your IP in their business.
• Easy to scale if you have chosen a power player who will push the product(s).
• Avoids operational stresses and costs.
• Margin sacrifice.
• Reliant on licence partner to push volumes.
• Licensee builds the value of their own brand using your IP.
You leverage financial or physical assets to generate wealth.
• A proven model over centuries e.g. property rent, loan interest, insurance, leasing.
• Requires a large capital base or large debt to play.
• Can be high risk.
Technically, software products are services, but they have all the benefits of goods and without most of the cons of either services or goods. As we mentioned earlier, this is why software companies are one of the most attractive business types when they get it right. They can scale quickly with great margins and cash flow.