A business model describes the value an organisation offers to its customers. It illustrates the capabilities and resources required to create, market and deliver this value, and to generate profitable, sustainable revenue streams.
An important misconception to point out is that despite the product being an essential part of the business, it does not encompass all of the business. There is always a tension between the business model and the product, as they constantly influence and rely on each other.
The framework commonly used to communicate a company’s business model is Alexander Osterwalder’s Business Model Canvas:
The Business Model Canvas is a convenient visual framework for outlining your business model. It is a poster format chart that enables nine elements of a business model to be captured and discussed by a group of people working together. They are:
(1) Customer segments: The different groups your product is aimed at.
(2) Value propositions: What you offer to a customer in a given segment, and the customer needs you to satisfy.
(3) Channels: How you plan on reaching your various customer segments, and which group you would like to target most.
(4) Customer relationships: You need to plan on maintaining customer relations effectively.
(5) Revenue streams: What are your customers paying for? How much? How would they prefer to pay?
(6) Key resources: What resources are essential to deliver your value propositions through the channels and maintain our customer relationships?
(7) Key activities: What are the most important things you must do to make your business work?
(8) Key partnerships: Who are our key partners and why? What key resources do they provide and what key activities do they carry out? What is in it for them? What relationship should we have?
(9) Cost structure: What costs are implied by our business model? Which are largest? What is fixed and what is variable? What drives them?
The tension between business and product can be broken down in to a number of questions:
What are the costs?
What is the ROI?
Does this business model fit the brand?
What is the market size?
Who is my audience?
What need does the product have to fulfil?
Who are the competitors?
How will the business model succeed against them?
Are people willing to pay for this product?
Does this technology currently exist?
How does the product stand out?
How long would it take to develop this product?
What value does the customer see in the product?
What resources do we need in order to develop this product?
How do we prioritise other products in our pipeline?
How will this impact existing products in your company?
Thinking about your value proposition: what value do you deliver to customers?
To begin answering these questions you will need to consider the value proposition. It is the central piece that answers how you plan to bind the supply side with the demand side.
Defining your value proposition leads into the discussion about who your target customer is and what characterises the ideal customer. Specifically, you should have a clear understanding of your target customer, and why they would want to use and purchase your product.
At this point you would also need to consider how your product stands out from the competition. Does your product differ on price point? Or does it offer your customers something they can’t get from anywhere else? List your core capabilities and what the product brings to the table when you create your offering. These include skills, patents, assets and expertise that make your company unique.
Furthermore, you need to decide what type of relationship you would like to have with each customer segment. Does your offering lend itself to a more transactional, one-off relationship, or will it be an ongoing relationship that should be organised with some sort of subscription or ongoing contract? Is repeat buying important for your success? Also consider what kind of relationship your customer would like to have with your company and your product.
How are you going to reach your customers? Keep in mind that your offering, in combination with the relationship you would like to have with your target customer, has strong implications for your choice of distribution channel. The trade-off you have to make is basically about balancing the complexity of your solution with the complexity of your marketing.
Developing your business model: how do you deliver value?
There are many types of business models you could choose to generate revenue. There are traditional business models such as the direct sales model, subscription business model, franchising, and many more. Today there are a growing number of non-traditional business models for you to choose from too. They include ad-supported, freemium, bricks and clicks, to name a few.
To help you understand the different type of business models, the following is an explanation to the business models mentioned:
Direct sales model: Direct selling is marketing and selling products to consumers directly, away from a fixed retail location. Sales are typically made through party plans, one-to-one demonstrations, and other personal contact arrangements. A textbook definition is: ‘The direct personal presentation, demonstration, and sale of products and services to consumers, usually in their homes or at their jobs’.
Subscription business model: Subscription business model is where a customer must pay a subscription price to have access to the product/service. The model was pioneered by magazines and newspapers, but is now used by many businesses and websites. Rather than selling products individually, a subscription sells periodic (monthly or yearly or seasonal) use or access to a product or service.
Franchising: Franchising is the practice of using another firm’s successful business model. For the franchisor, the franchise is an alternative to building ‘chain stores’ to distribute goods and avoid investment and liability over a chain. The franchisor’s success is the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.
Ad-supported: A business model that relies on income from advertising. Payments on advertising can come several ways: agreed payments for a period of time, a week or a month. Advertising payment can come as pay per click or an affiliate model.
Freemium: Business model that works by offering basic Web services, or a basic downloadable digital product, for free, while charging a premium for advanced or special features.
Bricks and clicks business model: Business model by which a company integrates both offline (bricks) and online (clicks) presences. One example of the bricks and clicks model is when a chain of stores allows the user to order products online, but lets them pick up their order at a local store.
Identifying the right business model is a critical but sometimes difficult step for many startups. To assist you in deciding which business model is best suited for your company, describe how all the product components work together to serve your customers. Explain the most important activities and processes needed to implement your business model, including critical tasks and timelines, the people and skills required, and your organisation’s core processes.
You should also assess your competitor’s business models. Appraising models in a stand-alone fashion is not a full assessment, you need to gather enough evidence to get a complete picture of the market your business is entering. Good business models create virtuous cycles that, over time, result in competitive advantage.