A business model describes how a company makes money by delivering value to customers. It explains the core logic and strategic choices for how a business is structured. Key elements of a business model include describing the customer, the problem being solved, and how the business will create and capture value for stakeholders. There are many different types of business models such as advertising, affiliate marketing, brokerage, crowdsourcing, and franchising that structure costs and revenues in various ways. Developing an effective business model is essential for any new venture or strategic change within an existing company.
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Business Model
A business model describes how a company makes money by delivering value to customers. It explains the core logic and strategic choices for how a business is structured. Key elements of a business model include describing the customer, the problem being solved, and how the business will create and capture value for stakeholders. There are many different types of business models such as advertising, affiliate marketing, brokerage, crowdsourcing, and franchising that structure costs and revenues in various ways. Developing an effective business model is essential for any new venture or strategic change within an existing company.
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BUSINESS MODEL
• At its core, business model is a description of how your business makes
money. It’s an explanation of how one deliver value to your customers at an appropriate cost. • According to Joan Magretta in “Why Business Models Matter,” the term business model came into wide use with the advent of the personal computer and the spreadsheet. • These tools let entrepreneurs experiment, test, and, well, model different ways that they could structure their costs and revenue streams. Spreadsheets let entrepreneurs make quick, hypothetical changes to their business model and immediately see how the change might impact their business now and in the future. • A business model is a framework for how a company will create value. Ultimately, it distills the potential of a business down to its essence. It answers fundamental questions about the problem you are going to solve, how you will solve it, and the growth opportunity within a given market. • Creating a business model is essential, whether you are starting a new venture, expanding into a new market, or changing your go-to-market strategy. You can use a business model to capture fundamental assumptions and decisions about the opportunity in one place, setting the direction for success. • A business model is a conceptual structure that supports the viability of the business and explains how it operates, makes money, and how it intends to achieve its goals. • All the business processes and policies that a company adopts and follows are part of the business model. According to management guru Peter Drucker:
A business model is supposed to answer who your
customer is, what value you can create/add for the customer and how you can do that at reasonable costs.
Thus, a business model is a description of how a
company creates, delivers, and captures value for itself as well as the customer. • In their simplest forms, business models can be broken into three parts:
• Everything it takes to make something: design, raw materials,
manufacturing, labor, and so on. • Everything it takes to sell that thing: marketing, distribution, delivering a service, and processing the sale. • How and what the customer pays: pricing strategy, payment methods, payment timing, and so on. • A business model is simply an exploration of what costs and expenses you have and how much you can charge for your product or service. • A successful business model just needs to collect more money from customers than it costs to make the product. This is your profit— simple as that. • New business models can refine and improve any of these three components. Maybe you can lower costs during design and manufacturing. Or, perhaps you can find more effective methods of marketing and sales. Or, maybe you can figure out an innovative way for customers to pay. Business Model Canvas Business Model Types • 1. Advertising • The advertising business model has been around a long time and has become more sophisticated as the world has transitioned from print to online. The fundamentals of the model revolve around creating content that people want to read or watch and then displaying advertising to your readers or viewers. • In an advertising business model, you have to satisfy two customer groups: your readers or viewers, and your advertisers. Your readers may or may not be paying you, but your advertisers certainly are.
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. • Examples: CBS, The New York Times, YouTube • 2. Affiliate • The affiliate business model is related to the advertising business model but has some specific differences. Most frequently found online, the affiliate model uses links embedded in content instead of visual advertisements that are easily identifiable. • For example, if you run a book review website, you could embed affiliate links to Amazon within your reviews that allow people to buy the book you are reviewing. Amazon will pay you a small commission for every sale that you refer to them. • Examples: TheWireCutter.com, TopTenReviews.com • 3. Brokerage • 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. • One of the most common brokerage businesses is a real estate agency, but there are many other types of brokerages such as freight brokers and brokers who help construction companies find buyers for dirt that they excavate from new foundations. • Examples: ReMax, RoadRunner Transportation Systems • 4. Concierge/customization • Some businesses take existing products or services and add a custom element to the transaction that makes every sale unique for the given 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. • Examples: NIKEiD, Journy • 5. Crowdsourcing • If you can bring together a large number of people to contribute content to your site, then you’re crowdsourcing. Crowdsourcing business models are most frequently paired with advertising models to generate revenue, but there are many other iterations of the model. Threadless, for example, lets designers submit t-shirt designs and gives the designers a percentage of sales. • Companies that are trying to solve difficult problems often publish their problems openly for anyone to try and solve. Successful solutions get rewards and the company can then grow their business. The key to a successful crowdsourcing business is providing the right rewards to entice the “crowd” while also enabling you to build a viable business. • Examples: Threadless, YouTube, P&G Connect and Develop, Cuusoo • 6. Disintermediation • If you want to make and sell something in stores, you typically work through a series of middlemen to get your product from the factory to the store shelf. • 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. • Examples: Casper, Dell • 7 Fractionalization • Instead of selling an entire product, you can sell just part of that product with a fractionalization business model. • One of the best examples of this business model is timeshares, where a group of people owns only a portion of a vacation home, enabling them to use it for a certain number of weeks every year. • Examples: Disney Vacation Club, NetJets • 8. Franchise • 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. • In a franchise business model, you are selling the recipe for starting and running a successful business to someone else. You’re often also selling access to a national brand and support services that help the new franchise owner get up and running. In effect, you’re selling access to a successful business model that you’ve developed. • Examples: Ace Hardware, McDonald’s, Allstate • 9. Freemium • With a freemium business model, you’re giving away part of your product or service for free and charging for premium features or services. • Freemium isn’t the same as a free trial where customers only get access to a product or service for a limited period of time. Instead, freemium models allow for unlimited use of basic features for free and only charge customers who want access to more advanced functionality. For more on the freemium model (and other pricing models popular with SaaS businesses). • Examples: MailChimp, Evernote, LinkedIn • 10. Leasing • Leasing might seem similar to fractionalization, but they are actually very different. In fractionalization, you are selling perpetual access to part of something. Leasing, on the other hand, is like renting. At the end of a lease agreement, a customer needs to return the product that they were renting from you. • Leasing is most commonly used for high-priced products where customers may not be able to afford a full purchase but could instead afford to rent the product for a while. • Examples: Cars, DirectCapital • 11. Low-touch • With a low-touch business model, companies lower their prices by providing fewer services. Some of the best examples of this type of business model are budget airlines and furniture sellers like IKEA. In both of these cases, 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. • Examples: IKEA, Ryan Air • 12. Marketplace • Marketplaces allow sellers to list items for sale and provide customers with easy tools for connecting to sellers. • The marketplace business model can generate revenue from a variety of sources including fees to the buyer or the seller for a successful transaction, additional services for helping advertise seller’s products, and insurance so buyers have peace of mind. The marketplace model has been used for both products and services. • Examples: eBay, Airbnb • 13. Pay-as-you-go • Instead of pre-purchasing a certain amount of something, such as electricity or cell phone minutes, customers get charged for actual usage at the end of a billing period. The pay-as-you-go model is most common in home utilities, but it has been applied to things like printer ink. • Examples: Water companies, HP Instant Ink, Pipe Gas • 14. Razor blade • The razor blade business model is named after the product that essentially invented the model: sell a durable product below cost to increase volume sales of a high-margin, disposable component of that product. • This is why razor blade companies practically give away the razor handle, assuming that you’ll continue to buy a large volume of blades over the long term. The goal is to tie a customer into a system, ensuring that there are many additional, ongoing purchases over time. • Examples: Gillette, Inkjet printers, Xbox, Amazon’s Kindle • 15. Reverse razor blade • Flipping the razor blade model around, you can offer a high-margin product and promote sales of a low-margin companion product. • Similar to the razor blade model, customers are often choosing to join an ecosystem of products. But, unlike the razor blade model, the initial purchase is the big sale where a company makes most of its money. The add-ons are just there to keep customers using the initially expensive product. • Examples: Apple’s iPod & iTunes, and now MacBooks & Pages, Numbers, and Keynote • 16. Reverse auction • A reverse auction business model turns auctions upside down and has sellers present their lowest prices to buyers. Buyers then have the option to choose the lowest price presented to them. • You can see reverse auctions in action when contractors bid to do work on a construction project. You also see reverse auctions anytime you shop for a mortgage or other type of loan. • Examples: Priceline.com, LendingTree • 17. Subscription • 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. • While magazine and newspaper subscriptions have been around for a long time, the model has now spread to software and online services and is even showing up in service industries. • Examples: Netflix, Salesforce, Comcast • 18 Manufacturer • A manufacturer makes finished products from raw materials. It may sell directly to the customers or sell it to a middleman i.e another business that sells it finally to the customer. Examples – Ford, 3M, General Electric. • 19 Distributor • A distributor buys products from manufacturers and resells them to the retailers or the public. Examples – Auto Dealerships. • 20 Retailer • A retailer sells directly to the public after purchasing the products from a distributor or wholesaler. Examples – Amazon, Tesco. • Why is a business model important? • You need a clear path to build something meaningful. The process of building a business model establishes a plan for how you will realize your vision. It lays out the strategy behind a new undertaking or investment and provides a framework for tracking progress. • Creating a business model requires deep thought and analysis. Company and product builders must think from the outside in, focusing on market needs and what matters most to customers. Once built, sharing your business model across the organization encourages alignment. This keeps everyone accountable for what they are working on and why, as well as guiding investments of time and resources. • The business model acts as the blueprint of the business and a roadmap for its success (or failure). It is the only documentation that makes clear – • The business concept – the market opportunity the business capitalizes on. • The target market the business caters to. • The problems the business intends to solve. • The solution the business offers and how it creates customer value. • How the business gets its customers. • The operating model the business follows. • How the business makes money and what are the costs incurred to get the same. • Moreover, the business model gives a reason for the customers to choose the offering over others in the market. People chose Facebook because it helped them connect and chat with other people around the world (operating model) and it didn’t even charge for it (revenue model). Netflix’s business model was preferred over others as it provided value in the form of consistent on-demand content instead of the usual TV streaming business model. • How do companies use business models? • Companies across every industry and at all stages of maturity use business models. Some rely on lengthy processes and build complicated models, while others move quickly to articulate the basics. Having the discipline to work through this planning tool forces internal alignment. • For established enterprises, a business model is often a living framework that is reviewed and adapted every year based on changes with customers, employees, and the market. For companies launching new products or entering new markets, a business model can help get them off to the right start and ensure that early product and marketing decisions are tied back to the strategy. • What are the components of a business model? • A business model should answer important questions about your business and set out a strong vision for the business. The key components of a business model should include relating to your target customers, the market, organization strengths and challenges, essential elements of the product, and how it will be sold. Establishing this foundation guides the next planning tool — your product roadmap. list of essential components included in a business model: Component Definition Vision High-level introduction to the company and business model Key objectives Definition of the top-level goals and how they will be measured Customer targets and Description of the different types of customers to be targeted challenges and their pain points Solution How the product will solve those pain points Value The key characteristics that differentiate the product offering Pricing A view into what the solution will cost and how it will be sold Messaging Explanation of why the offering will serve a customer’s pain points Go-to-market Channels that will be used to reach and sell to customers Investment required Costs required to make the solution successful Growth opportunity Identified ways the business will grow • THANK YOU
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