What Is a Business Model?
A business model is a conceptual structure that supports the business’s sustainability and explains how it operates and how it intends to achieve its targets.
It’s an explanation of how you deliver value to your customers at a reasonable cost.
Business models refer to all of the activities you do in a company, and with partners, to create your products or services and how you implement them into marketing.
A business model provides a plan for a company’s monetization strategies. It focuses on defining the audience, effective selling proposition, brand positioning, delivery methods, and distribution channels to create a profit-creating formula.
A company’s value proposition forms the core of its business model. It includes everything that it offers its customers in a particular market or segment. This includes the company’s product and service packages and how the company differentiates it from its competitors. Therefore, a value proposition consists of all the tangible and intangible benefits a company provides to its customers.
Business models shape all aspects of a company’s development and growth. Therefore, they may change over time to adapt to new marketplace opportunities and distribution channels.
Selling a product to a customer means that the product solves a customer’s problem. The customer needs to request the product or service you are selling, and your product has to respond to a need. But ensuring your product is tailored to the needs of the market is only part of building a successful business.
The business model also describes the partnership opportunities you will establish with businesses. For example, an advertising business might include a printing company in its business model, where it can direct print jobs as needed.
“What is your business model?” When searching for the answer to the question, answering the following questions will give you clues about your company’s business model.
Who is your company’s target audience?
What problem are you solving for your target audience?
How does your company create value?
How does your company reach people?
How do you define and differentiate your value proposition?
How do you earn income?
How is the cost structure of your company?
How is the profit margin of your company?
How Does Business Models Work?
At its core, your business model is a description of how your business is making money. It’s a description of how you add value to your customers at an affordable cost. The term business model has been widely used with the advent of the personal computer and spreadsheet.
These tools allow entrepreneurs to experiment, test, and model well different methods to structure their costs and income streams. Spreadsheets enable entrepreneurs to make quick, hypothetical changes to business models and immediately see how change can affect businesses now and in the future. In the simplest forms, business models are divided into three parts.
A business model is a high-level plan designed to operate a business profitably in a particular market. The key component of the business model is the value proposition. The business model system requires the description of the products or services offered by a company, the reasons why customers prefer this product/service, and the characteristics that distinguish the product/service from its competitors.
Everything needed to sell a product; marketing, distribution, service provision, and sale processing. How and how much the customer pays: pricing strategy, payment methods, payment timing, etc.
As you can see, a business model is to discover how much you cost and how much you can charge for your product or service. In addition to requiring extensive work, the business model is also an error-prone system.
The most common mistake in the process of creating a business model is to ignore the costs until the day when the business will make a profit. For this process, it will not be sufficient to consider only the product promotion costs. A business must be able to survive until its income exceeds its costs, till, it makes a profit.
New business models can improve and enhance any of these three components. Maybe you can reduce costs during design and production, or you can find more effective marketing and sales methods. Or you can find an innovative way for customers to pay.
But you don’t have to find a new business model to have an effective strategy. You can take an existing business model and present it to different customers. An example would be the restaurant industry, which mostly operates in a standard business model. However, they focus their strategies by targeting different types of customers.
Essential Components of the Business Models
What is done to create a business model? The main business model components you’ll want to keep in mind are:
An impressive value proposition; How do you want your employees to think about your brand? A feature that makes your product attractive to your customers.
- Target market: A specific group of consumers who will be interested in your product.
- Competitive advantages: A unique features of a product or service that cannot be easily copied by competitors.
- A unique brand positioning; What are you offering that makes your employees want more?
- 10x goal setting: Can you overwhelm a 10x better product or service?
- Cost structure: A list of fixed and variable expenses that your business needs to operate and how they affect pricing.
- Key metrics: ways your company measure success.
- Resources: Your company’s physical, financial and intellectual assets.
- Customer segments: Who is your customer? (People who want to pay for your product or service)
- Distribution channels: How do you deliver your product or service to customers?
- Profit Formula: Is the business financially sustainable? The amount of your income that exceeds your operating costs.
- A business model; It is a real-world representation of a company. Business modelling can be a useful tool for entrepreneurs to design a toolbox to gain insight into competitors, better understand your organization, and grow your business.
- A business model component tells you that a business model has nine essential components: Key partners, Key activities, Value proposition, Customer relations, Customer segment, Key source, Distribution channel, Cost structure, Revenue stream
Sample Business Models
With many types of business models, companies may implement several models simultaneously to maximize profits.
As we mentioned, you don’t have to invent a business model to start a business. The vast majority of companies use existing business models and improve them to find a competitive advantage. Typical business models include:
The advertising business model has been around for a long time and has become more sophisticated as the world moves from print to the Internet. The model’s fundamentals revolve around creating content that people want to read or watch and then display ads to the reader or viewer.
In this model, you have to satisfy two customer groups. Readers or viewers and advertisers. The reader may or may not be paying you. An advertising business model is sometimes combined with a source model to get your content from users for free, rather than paying creators to improve your content.
An advertising business model is sometimes combined with a crowdsourcing model where you get your content for free from users instead of paying content creators to develop content.
Example: New York Times, YouTube
The affiliate business model is about the advertising business model. However, there are some differences. The most common online affiliate model uses links embedded in content rather than easily identifiable visual ads.
Brokerage businesses connect buyers and sellers and help facilitate a transaction. They charge a fee for each transaction to either the buyer or the seller and sometimes both.
For example: if you run a book review website, in your reviews, you can include links to book sale sites that allow people to buy the book you are reviewing. For example, Amazon will pay you a small commission for every book sale you mention to them.
Brokers connect buyers and sellers and help facilitate a transaction. A fee is applied to the buyer, seller, or both for each transaction. One of the most common brokerage houses is real estate agencies.
Example: RE / Max
4) Concierge (Customization)
Some businesses take existing products or services and add a specific element to the transaction that makes each sale unique to a particular customer.
For example, think of custom travel agents who book trips and experiences for wealthy clients. You can also find customization happening at a larger scale with products like Nike’s custom sneakers.
Example: Nike’s custom sneakers
Private travel agencies that organize excursions for high-income group customers
If you can bring together many people to add content to your site, you are crowdsourcing. Crowdsourced business models are often matched with advertising models to generate revenue.
Crowdsourcing is a system where consumers give the details of a service offered to the consumer. With a kind of voting system, the manufacturer opens the pattern of his product, the menu of his restaurant, and his electronic device’s design to the consumer. The product with the most votes starts to be produced.
Companies trying to solve difficult problems often post their questions openly to try and solve them. Successful solutions are rewarded, and the company grows its business. The key to a successful crowdsourcing business is to provide the right rewards to grab the crowd’s attention while also allowing you to build a suitable business.
Instead of using traditional intermediary distribution channels, companies engage directly with customers, for example, through the Internet. Decentralization finds the opportunity to reduce costs by eliminating intermediaries in the supply chain, selling directly to consumers.
Disintermediation is when you sidestep everyone in the supply chain and sell directly to consumers, allowing you to potentially lower costs to your customers and have a direct relationship them as well.
Instead of selling the whole product, you can only sell part of this product with a fractional business model. One of the best examples of this business model; time (timeshare) where a group of people owns only a part of a vacation home and allows them to use it for a specific week each year
The franchise, which is more common in restaurants, is seen in every sector from cleaning works to personnel agencies. In the franchise business model, you sell a branding, support service, and business recipe for someone else to start a successful business. Franchising is common in the restaurant industry, but you’ll also find it in all sorts of service industries from cleaning businesses to staffing agencies.
With a freemium business model, you pay part of your product or service for free and Premium features or services. This model allows unlimited use of basic features and only charges customers who want access to more advanced functionality.
With a freemium business model, you’re giving away part of your product or service for free and charging for premium features or services.
The rental gives the customer the right to use the product for a short time, and when the contract ends, the customer must return the product. Leasing is widely used for high-priced items where customers cannot make a full purchase but will lease the product for a while.
Leasing is most commonly used for high-priced products where customers may not afford a full purchase but could instead afford to rent the product for a while.
Example: Car rental companies
11) Low Touch
With a low-touch business model, companies offer fewer services and lower their prices. The best example of such a business model is IKEA. Customers can buy additional services or do something themselves to reduce costs. The low-touch business model means that customers need to either purchase additional services or do some things themselves in order to keep costs down.
Markets allow the customer to buy the goods from the manufacturer and the seller to display the products. This model is used for both products and services. The business model in the marketplace is that the fees to the buyer or seller for a successful transaction, additional services to help the seller advertise their products, and insurances to generate income from various sources such as insurance for customers’ convenience.
Marketplaces allow sellers to list items for sale and provide customers with easy tools for connecting to sellers.
13) Pay As You Go
Instead of purchasing a certain amount, such as electricity or cell phone minutes, customers are charged for actual usage at the end of the billing period. The pay-as-you-go model is most common in home appliances.
Example: Utility companies
The razor business model is named after the product that invented the model. This product’s high margin is to sell a durable product below cost to increase the sales volume of a single-use component. With these fellow razor companies, in the long run, assuming you will continue to buy large amounts of blades, they practically drop the razor handle.
The goal is to connect a customer to a system and make many ongoing purchases over time. The goal is to tie a customer into a system, ensuring that there are many additional, continuous purchases over time. Flipping the razor blade model around, you can offer a high-margin product and promote sales of a low-margin companion product.
15) Reverse Razor
When you surround the razor model, you can offer a high-margin product and increase a low-margin item’s sales. In this model, customers often choose to participate in a product ecosystem. Unlike the razor model, the first purchase is the big sale where a customer gets most of his money. Plugins exist for customers to continue using the initially expensive product.
Example: Apple’s iPod and iTunes.
16) Reverse Auction
This model reverses auctions and sellers offer the lowest prices to buyers. Buyers then have the right to choose the lowest price available to them. A reverse auction business model turns auctions upside down and has sellers present their lowest prices to buyers.
Subscription business models continue to spread every day. In this business model, a subscription fee is charged for consumers to access a service. Subscription business models are becoming more and more common. In this business model, consumers get charged a subscription fee to get access to a service. This model, which started with magazine and newspaper subscriptions before, spread to software and online services and emerged in the service sector.
How to Evaluate the Business Model?
Successful businesses adopt business models that will allow them to meet their customer needs at a competitive price and at a sustainable cost. Over time, they update their business models to adapt to changing processes and meet market demands.
Comparing the gross profit of an enterprise with competitors or the total sector profits will also give an idea about the efficiency of the enterprise’s business model. However, focusing solely on gross profit can be misleading. It would help if you also observed the cash flow or net income of the business. Anyway, when you subtract operating expenses from the gross profit, you arrive at a business’s real profit.
The key components of the business model are pricing and cost. A business can raise its prices or buy its stock at a much lower cost. In both cases, the gross profit of the business will increase.
In summary, gross profit is also an essential component of the business model evaluation process. Because a high gross profit indicates that you have a solid business plan, and out of control businesses may be experiencing this problem due to managerial errors, which can be easily fixed. Therefore, it is essential to make the business model and gross profit evaluations for businesses’ future.
Components Of A Business Model
An ideal business model usually conveys four basic key points:
Customers – Whom the business serves to
Offerings – What the business provides
Infrastructure – How it provides the offering
Financials – How the business makes money and what are the costs involved
What is the Business Model Canvas?
In the early 2000s, Alexander Osterwalder invented the business model canvas to help businesses develop and analyze potential business frameworks. Preparing a business model canvas is where everything is on one page, which allows a person to save time and effort.
What Is The Business Model Canvas Used For?
It is used to illustrate and evaluate all aspects of an idea quickly. The business model canvas refers to the common language used to define, visualize, assess and change/update business models as needed.
It helps you determine the steps you will take in the process of making sense of your business or measuring the usefulness of your business idea or turning your idea into a concrete business.
It reveals customer decisions/preferences that affect the use of your systems/products/services. That is, it shows the reasoning behind the scenes of a business being able to create value, deliver that value to its customers, and maintain its value proposition at all times.
It enables your employees / Investors/people around you to have a clear idea of what this business you plan to establish or operate will look like.
A typical business model canvas should include the following headings:
- Customer segment/segment (Which customer segment generates the most revenue?)
- Value suggestions (What is the value of solving the customer’s problem or meeting their needs / What are the products or services you offer / What do you do for your customer?)
- Channels (How do you communicate with your customer / What kind of communication, distribution and sales channel is the value proposition delivered to the customer?)
- Customer relations (What level of relationship do you have with your customers or how do you maintain this relationship?)
- Key / Essential activities (What are the things you do every day to bring your business model to life?)
- Key / Core resources (The amount of information, workforce, tools, or money you need to run your business makes up your resources.)
- Key / Key partnerships (Who are your business partners – not your suppliers – that you think you cannot do business without?)
- Cost structure (Based on your business activities and resources, which are the expense items that make up your highest operating cost?)
- Sources of income (What are your primary sources of income / What is your income model / Is there a service you offer for free?)