After coming up with a business idea, do you proceed to do a business plan? No. First, you need to develop a solid business model. Founders of new companies should not skip this process nor do it half-heartedly. As shown by one research, a poor business model contributed to 26% of startup failures.
Planning is an integral process of starting a new business. Yes, it is a tedious process. Even so, it is a necessary process. And the best way to conceptualize is by creating a business model.
Table of Contents
What Is a Business Model?
Before continuing, it is best to differentiate a business model from a business plan:
- Business Model. This document serves as a framework for how a company plans to create, deliver, and capture value.
- Business Plan. Based on the framework outlined in a business model, a company can develop a business plan. This document details the strategies and projections of financial performances.
Business models, in essence, describe how companies intend to generate revenues. It is a visual representation of how they will target customers and market products. This framework helps companies understand, design, and put their assumptions to the test.
There are many different types of business models. Regardless, they all serve one purpose. Allow a systematic way to deliver value to customers while capturing value in return.
A business model, in general, addresses these four questions:
- What are your products or services?
- How do you intend to market those products or services?
- What resources do you need, and how much will it cost?
- How will you make a profit?
Understand that there is no one way to operate a business. In other words, founders should be flexible in choosing a business model. Consider too the ever-changing business climate. Founders and CEOs, in this regard, should always be ready to adapt.
At any rate, it is a standard practice to test different business models. One reason is to find the most suitable model that works best for the company.
During fundraising campaigns, expect investors to go through a business model. For sure, they would scrutinize all details. And why not? It is their money on the line, should they decide to invest.
Example of a Business Model
Netflix uses a subscription business model. As everyone knows, customers pay a recurring monthly or yearly fee. In exchange, they can watch TV shows and movies.
So, how does Netflix answer the four questions outlined earlier?
- What are your products or services? Netflix is an online streaming video provider.
- How do you intend to market those products or services? Netflix uses plenty of digital marketing channels. Apart from running its website, the company also advertises on many platforms. Netflix also uses social media to engage with customers and promote its services.
- What resources do you need, and how much will it cost? Netflix, for sure, needs significant capital to operate. Among its expenses are the cost of infrastructure and content for streaming.
- How will you make a profit? Netflix has more than a few revenue streams. But the one in which they intend to make the most money is through subscriptions.
Looking at the example of Netflix, it is easy to see an overview of the business model. But once you get down to developing a model, it is much more complex than that.
One of the most popular business model templates consists of nine building blocks.
What Is a Business Model Canvas?
How do you create a business model? The easiest way is to use a Business Model Canvas (BMC).
In 2005, Alexander Osterwalder created a business model template. Since then, most people have used his template to develop their business models.
Although business models vary, they all have the same components. In Osterwalder’s version, there are nine of them.
What Are the Building Blocks of a Business Model Canvas?
The business model canvas consists of three main parts.
On the left side, the elements focus on the internal aspects of the business. On the right side, the main focus is external, on the customers. These two sections meet in the middle, where an exchange of value between the business and the customers occurs.
1. Customer Segments
Customer segments are the most critical aspects of a business. They comprise revenue and non-revenue generating individuals or organizations. As such, it is reasonable to create a business model prioritizing the customers.
Some companies may have only one customer segment, while others have two or more. At any rate, startups can group customers to serve their needs better.
Related Article: Customer Segments on the Business Model Canvas
2. Value Propositions
Value propositions are the basis of business models. It is a declaration meant to deliver these messages to intended customer segments:
- What the brand stands for and offers
- How the company operates its business
- Why customers should buy their products or use their services
A value proposition should either add more value or solve problems better than competing products. In other words, these are the products or services that companies provide.
Related Article: Value Propositions on the Business Model Canvas
Channels describe the interfaces companies use to interact with customer segments. These include distribution, sales, and communications.
Importance of channels:
- Raising awareness of products and services among the different customer segments
- Help customers check and understand the value proposition
- Let customers avail products or services
- Deliver value proposition to the customers
- Provide after-sales support
Deciding on which channel to use to reach the customer segments is crucial to delivering value proposition.
Related Article: Channels on the Business Model Canvas
4. Customer Relationships
Customer relationship is not merely about the typical interactions between a company and its customers. It goes deeper than that. In fact, there are many types of customer relationships, and any business model may integrate more than one.
Related Article: Customer Relationships on the Business Model Canvas
5. Revenue Streams
The revenue stream block identifies the ways a startup may generate sales. In essence, there are two primary types:
- Transaction-based revenue
- Recurring revenue
The purpose of creating and delivering value propositions is to generate revenue. No doubt, most investors consider this an important deciding factor for investing. A viable business model must show how much each customer segment would pay. It is then possible to customize revenue streams using it as a basis.
Related Article: Revenue Streams on the Business Model Canvas
6. Key Resources
Businesses need assets to create value propositions. These key resources are physical objects and financial and intellectual properties.
Aside from creating value propositions, key resources also serve other functions. They help companies reach marketplaces, keep positive relationships with customers, and generate revenues.
Related Article: Key Resources on the Business Model Canvas
7. Key Activities
If one thing ties all the business model blocks together, it is key activities. This element describes the processes needed by startups to operate.
In essence, key activities help create and enhance value propositions by:
- Reaching customer segments
- Maintaining customer relationships
- Generating revenues
Keep in mind that key processes do not have to be in-house. In some cases, it may be more beneficial to use key partners. Startups, for example, may choose to build a platform for an online business. But it might be better to use established e-commerce platforms that already have a large customer base.
Related Article: Key Activities on the Business Model Canvas
8. Key Partnerships
For many companies, forming partnerships with commercial entities is critical to success. It may even be necessary to create a value proposition in some cases.
Generally, there are four types of partnerships:
- Strategic alliances between non-competitors
- Strategic alliances with competitors (coopetition)
- Joint ventures to develop new products or form a new business
- Buyer-supplier relationship to ensure reliable sources of supplies and raw materials
Related Article: Key Partnerships on the Business Model Canvas
9. Cost Structure
According to some studies, 9 out of 10 startups fail within the first three years. The primary reason is that they could not account for the costs of value creation. Mostly, they depleted their funds before putting up a product or generating revenue.
Related Article: Cost Structure on the Business Model Canvas
What Are Some of the Common Traditional Business Models
To date, there are well over 70 different types of business models. But the most common ones are as follows.
1. Manufacturer Model
Manufacturing is one of the most traditional business models. In essence, these companies turn raw materials into finished goods. Although they may sell products to end-users, only some do. Most manufacturers distribute their products through distributors and retailers.
2. Distribution Model
Distributors buy their products from manufacturers. In turn, they distribute the products to retailers or have their retail outlets.
For manufacturers, having distributors mean a lower profit margin. But at the same time, they also do not have to invest in a more extensive distribution network and logistics.
3. Retailer Model
Retailers are the last link in a supply chain. They buy products from manufacturers, importers, and other traders. And then sell the products to customers for profit.
Most retailers focus on a niche. But the larger chains, including department stores, offer many categories of related products.
4. Franchise Model
Franchising is a prevalent business model, one that is familiar to many consumers. A franchise, in a nutshell, is an established business model – and duplicated by a franchisee.
Franchisers will help their franchisees by offering training and guidance. They would also take care of marketing the brand and its products or services. Besides an initial fee, they earn from a percentage of the profits.
What Is the Right Business Model for You?
With all the different business models, choosing one that suits your needs may not be very clear. There is a way to narrow down the choices. And that is by going through these questions:
- How will your value proposition benefit customers?
- How do you intend to generate income?
- Who are your customer segments?
- What startup costs will you incur?
- Which of the expenses are fixed, and which are the variable costs?
- Do you need to seek capital from investors?
As you go through these questions, you better understand your business. As a result, you are better prepared to start filling in the details of each building block.
For reference, you can look at the business models of your competitors. While at it, find their weaknesses, which you can turn to your advantage. But mostly, what is you want to do is to create enough distinctions that set you apart.