A retail business model explains how a retailer creates value for its customers and captures value from markets. In retail, a business model would dictate the product and/or services offered by the retailer, the pricing policy it adopts. There are many different types of retail establishments and the industry as a whole has seen the boundaries that separated the wide range of retail businesses become much blurred. Understand the main business models adopted by the retail sector. Understand the different means that players in the retail industry use to reach the end consumer.
A retail business, like any other type of business, can be owned by different types of entities. It can be sole proprietorship, partnership, corporation, cooperative organization, joint venture, or other types of legally permitted formats. The majority of retail businesses in India are sole proprietorships and partnerships due to their nature. Each company has its own way of organizing the very many activities involved in the delivery of its product or service to the final consumer. In retail parlance, it would be called the format adopted by the retailer to reach their end consumer.
Retail businesses can be independently owned or operated or part of a chain. Chains may all be owned by a single company, and individual stores may be independently owned small business franchises. There are many different types of retail establishments and, as noted above, the industry as a whole has seen significant blurring of what has long separated the wide range of businesses operating under the umbrella of retail.
Seven Key Business Models in Retail
A retail business model explains how a retailer creates value for its customers and captures value from markets. Below are the main types of business models that exist in the retail industry:
1. Independent Retailer:
Independent retailers are the entrepreneurs who have built their business from the ground up. They can take the help of various agencies in the process like consultants, builders, or other contractors, but the decision-making power still rests with the independent retailer, who is also the owner of the retail business. The independent retailer generally operates a point of sale and offers personalized service, at a convenient location and establishes close contact with the customer.
About 90% of all retail businesses are independently owned and operated, including hair salons, dry cleaners, furniture stores, bookstores, gas agencies, and convenience stores. This is because entering the retail business is easy and requires little investment and little technical knowledge. This obviously results in a high degree of competition. Many independent retailers fail due to ease of entry, poor management skills and insufficient resources.
2. Existing retail business:
This categorization includes retailers who have taken over an existing business by investing in it. They become owners of an existing business and use that base to build on it. The main benefits are the goodwill and reputation that comes with the business. This reduces entry-level risk as the business has already been established by the previous owner.
3. Retail chain:
This business model involves joint ownership of multiple units where purchasing and decision-making are centralized. It can be defined as “a group of two or more stores whose activities are determined and coordinated by a single management group”. Stores that are part of a chain often rely on specialization, standardization and elaborate control systems. Retail chains are able to serve a large, dispersed target market and maintain a brand name for their chain. Retail chains have the opportunity to take advantage of “economies of scale” in the buying and selling of goods. They can maintain their prices, thus increasing their margins, or they can reduce their prices and attract a greater volume of sales. Examples of retail chains in India are Shoppers stop; Westside and IOC, convenience stores at some gas stations.
4. Retail Deductible:
A franchise is a store that has the right to use a certain business name, product, and business model. Franchising is using another company’s successful business model. The word “franchise” is of Anglo-French origin – from franc – meaning free, and is used both as a noun and as a (transitive) verb. For the franchisor, franchising is an alternative to building “chain stores” to distribute goods that avoids the investment and liability of a chain. The success of the franchisor depends on the success of the franchisees. It is said that the franchisee is more incentivized than a direct employee because he has a direct stake in the business.
The franchisee receives marketing, support and training from the franchisor to lay the groundwork, use trusted business strategies and drive scale growth in buying and selling. It is a contractual arrangement between a “franchisor” and a “franchisee” which allows the latter to carry on some form of activity under an established name and according to a specific set of rules.
The franchise agreement gives the franchisor wide latitude in controlling the operations of small retailers, in exchange for fees, royalties and a share of the profits, the franchisor offers assistance and very often supplies as well. Classic examples of franchising are McDonald’s, Subway, PizzaHut and Nirulas.
A retail cooperative is an association of independent retailers who have combined their financial resources and expertise to effectively control their wholesale business needs. They share purchasing, storage, business facilities, advertising planning, and other functions. Individual retailers retain their independence but agree on broad common policies. “Amul” is a typical example of a cooperative in India.
The dealership is a cross between a franchise and an independent retailer. A licensee is an authorized seller who has the right to sell a particular brand of products and generally does not have to pay any fees to the licensor. When establishing a dealership, the dealer usually does not receive any support.
It is a unique business model that involves not only selling a product, but also recruiting other sellers to sell the same product. In this way, the sales of the product completely depend on the people in the network. Multi-level marketing (MLM) is a marketing strategy in which the sales force is compensated not only for the sales they generate personally but also for the sales of other salespeople they recruit. This recruited sales force is referred to as the participant’s “downline” and can provide multiple levels of compensation. Other terms used for MLM include pyramid selling, network marketing, and referral marketing. More often than not, sellers are expected to sell products directly to consumers through relationship referrals and word of mouth marketing.