Business Model

A business model describes how a company

creates, delivers, and captures value. It
outlines how a business operates, generates
revenue, and sustains itself in the market.

💡 Example:
•Amazon: Uses an e-commerce business
model where it sells products directly and also
allows third-party sellers to list items on its
platform. It also generates revenue from

• Amazon Web Services (AWS) and

subscriptions (Amazon Prime).

•Netflix: Uses a subscription-based business

model, where users pay a monthly fee for
unlimited access to movies and TV shows.
 Importance of a Business Model to
Entrepreneurs
1. Provides a Clear Revenue Strategy - Helps entrepreneurs understand how
they
will make money.

•Example: Spotify’s freemium model offers free music with ads and a paid
subscription for ad-free access.

2. Guides Business Operations - Defines key activities, target customers, and

value
propositions.

•Example: McDonald’s franchise model ensures standardized operations

worldwide.
 Importance of a Business Model to
Entrepreneurs
3. Attracts Investors and Funding - A strong business model shows profitability
potential, making it easier to get funding.

•Example: Uber attracted investors by showcasing its ride-sharing platform

model, disrupting traditional taxi services.

4. Helps in Competitive Advantage - Differentiates the business from

competitors.

•Example: Tesla’s direct-to-customer sales model bypasses traditional

dealerships, reducing costs and improving customer experience.
5. Ensures Scalability and Growth - A well-designed business model allows
expansion.

•Example: Airbnb started as a small room-rental business but scaled globally

using a peer-to-peer marketplace model.
 Phases in Developing a Business Model

Developing a successful business model involves several key phases

that help entrepreneurs define their target market, operational

processes, resources, value proposition, partnerships, and strategies for

long-term success.
1. Identifying the Specific Audience
Before building a business, it’s essential to define who your customers are.
Understanding your target audience ensures that your products or services solve
their needs effectively.

💡 Example:
•Nike: Targets athletes and fitness enthusiasts by offering high-performance
footwear and apparel.

•Netflix: Targets entertainment lovers with personalized movie and TV show

recommendations.

How to Identify Your Audience:

✔ Conduct market research
✔ Define demographics (age, location, income)
✔ Analyze customer pain points
2. Establishing Business Processes
Once the target audience is defined, the next step is to establish the core
business processes that will help in delivering value efficiently.

💡 Example:

•McDonald’s: Uses a standardized food preparation process to maintain

quality across all franchises.

•Amazon: Implements automated warehouse management and fast

delivery logistics to improve efficiency.

Key Business Processes Include:

✔ Production & operations
✔ Marketing & sales strategies
✔ Customer service management
3. Recording Business Resources
Every business needs key resources to function, whether it's physical assets,
human capital, technology, or financial investments.

💡 Example:

•Tesla: Key resources include manufacturing plants, patents on battery

technology, and software engineers.

•Google: Depends on data centers, AI-driven algorithms, and talented

engineers.

Key Resources to Consider:

✔ Physical resources (factories, offices, equipment)
✔ Intellectual property (patents, brand name)
✔ Human resources (employees, specialists)
4. Developing a Strong Value Proposition
A value proposition explains why customers should choose your business over
competitors. It should be unique, clear, and impactful.

💡 Example:

•Apple: Provides premium, user-friendly, and innovative technology that

integrates across devices.

•Zoom: Offers high-quality, easy-to-use video conferencing for businesses

and individuals.

How to Build a Strong Value Proposition:

✔ Identify what makes your product unique
✔ Solve a specific customer problem
✔ Ensure your value is difficult to replicate
5. Determining Key Business Partners
Partnerships help businesses grow by leveraging shared resources, expertise,
or networks.

💡 Example:

•Starbucks & PepsiCo: Pepsi helps distribute Starbucks’ bottled coffee globally.

•Uber & Spotify: Allows Uber passengers to listen to personalized playlists during
rides.

Key Business Partnerships May Include:

✔ Suppliers and manufacturers
✔ Marketing & distribution partners
✔ Technology & service providers
6. Creating Demand for Today’s Generation Strategy
With evolving consumer behaviors, businesses need to adapt and create
demand by understanding what appeals to modern customers.

💡 Example:

•TikTok: Utilized short-form videos, AI recommendations, and influencer

marketing to drive massive engagement.

•Tesla: Created demand by emphasizing eco-friendly electric vehicles with

high performance and cutting-edge technology.

Modern Demand Creation Strategies:

✔ Digital marketing & social media campaigns
✔ Personalized recommendations using AI
✔ Subscription-based models (e.g., Netflix, Spotify)
7. Being Open to Innovations
A business model should be flexible and adaptable to industry trends and
new technologies. Continuous innovation keeps a business competitive.

💡 Example:

•Amazon: Expanded from selling books online to a cloud computing giant

(AWS) and AI-powered services.

•Domino’s Pizza: Invested in AI-powered order tracking and drone

delivery innovations.

Ways to Stay Innovative:

✔ Invest in research & development
✔ Monitor industry trends
✔ Experiment with new business models
 THE BUSINESS MODEL

According to Don Deebelak in his article “Developing a Great Business Model” on

the Entrepreneur Web site, the entrepreneur must adapt to the dynamics of

traffic lights in developing the business model. These are three “green lights”

or positive signals that can help entrepreneurs develop ideal business

models and eventually succeed. On the other end, there are three “red

lights” or negative signals that entrepreneurs should be wary of.

 The Green Lights in Business Model Development
The Green Lights are key factors that make a business model strong and successful.
These factors help entrepreneurs attract the right customers, offer valuable products or
services, and ensure reasonable profits. Let’s break them down in simple terms with
examples.
1. Target High-Value Customers - Not all customers are the same. A high-value
customer is someone who:
✔ Is easy to find
✔ Is willing to pay a fair price
✔ Can be persuaded with little effort
✔ Brings in more customers through referrals

💡 Example:
•Apple targets tech-savvy professionals and creative users who want high-quality
devices and are willing to pay for premium products. They don’t need much advertising
because Apple’s reputation and existing customers help attract new buyers.

If an entrepreneur struggles to find high-value customers, they can partner with

distributors or retailers to reach the right audience.
 The Green Lights in Business Model Development

2. Offer Products or Services with Great Value - Customers buy products

that offer something unique and valuable. This could be quality,
convenience, innovation, or customization. A business must also ensure
fast and efficient delivery so that customers get what they need when they
need it.

💡 Example:

•Amazon provides fast delivery (Amazon Prime) and personalized product

recommendations, making it a top choice for online shoppers.

•Starbucks does not just sell coffee—it offers an experience with comfortable
seating, free Wi-Fi, and a relaxing atmosphere.

To stay competitive, businesses must keep improving their products or

services using new technology, partnerships, and innovations.
 The Green Lights in Business Model Development
3. Offer Products or Services with Reasonable Profits - For a business to be
successful, it must make a profit. There are two ways to do this:

1.Increase the price – This might not work if competitors offer lower prices.

2.Reduce costs – This helps increase profits without losing customers.

💡 Example:
•McDonald's keeps prices affordable by using efficient cooking processes, bulk
ingredient purchasing, and self-service kiosks to reduce costs.

•Tesla saves money by producing its batteries and using direct-to-customer sales,
avoiding dealership costs.

Ways to reduce costs and improve profits:

✔ Improve distribution (use local suppliers, optimize delivery routes)
✔ Reduce unnecessary labor (use automation or self-service options)
✔ Streamline production (use lean manufacturing to minimize waste)
✔ Add extra services that bring in more income without high costs (e.g., extended
warranties, premium versions, or subscription services)
 The Red Lights in Business Model Development
Red lights in a business model signal potential problems that can hinder success and
profitability. Entrepreneurs should recognize these warning signs early to avoid costly
mistakes.
1. Satisfying Customers Becomes Too Costly and Irrational
🔴 Problem: If the cost of keeping a customer happy is too high, the business loses money instead
of making profits.

•Warranty Costs: If a product breaks easily, the company may need to replace or repair it often,
increasing expenses.
✅ Example: A startup selling cheap smartphones offers a one-year warranty. Many devices break
within months, and replacements cost more than the actual profit per phone.

•After-Sales Costs: Some products require installation, technical support, and customer
service which can be expensive.
✅ Example: A software company sells an accounting tool for a one-time fee, but users keep calling
for free support. The cost of helping customers exceeds the revenue earned from selling the
software.

💡 Solution:
•Outsource services or charge extra for extended support.
•Focus on selling low-maintenance products that don’t require costly after-sales services.
 The Red Lights in Business Model Development
2. Being a Market Leader is Difficult to Sustain
🔴 Problem: Staying at the top of an industry requires continuous investment in marketing,
innovation, and expansion. If the business can't keep up, it may lose its leading position.

📌 Key Challenges:
1.Dependence on Large Customers: If one or two clients generate most of the revenue, losing
them could ruin the business.
✅ Example: A small bakery supplies cakes to one big supermarket. If the supermarket
switches to another supplier, the bakery’s income drops significantly.

2.Powerful Competitors: Large companies control most of the market, making it hard for small
businesses to compete and grow.
✅ Example: A local coffee shop struggles to attract customers because Starbucks dominates the
area.

3.Rapid Technological Change: If new technology changes how products/services work,

businesses must invest in research & development.
✅ Example: DVD rental stores (like Blockbuster) failed because streaming services like Netflix
changed how people watch movies.

💡 Solution:
•Diversify customers (don't rely on just one or two major buyers).
•Stay ahead by embracing new technology and trends.
 The Red Lights in Business Model Development
3. Return on Investment (ROI) Takes Too Long and Is Too Small
🔴 Problem: A business should make a profit within a reasonable time. If it takes too long or
profits are too low, the business may not survive.

📌 Warning Signs:
1.Low ROI in the First Three Years: If a business makes less than 25% return on its investment
in three years, it's a sign of a weak business model.
✅ Example: A new organic skincare brand invests $100,000 but earns only $10,000 per year. At
this rate, it will take 10 years to recover the investment.

2.High Capital Requirements for Expansion: If launching a new product or service requires
too much money, it slows down growth.
✅ Example: A local fashion brand wants to expand to a second store, but the cost is too high, and
profits from the first store aren’t enough to support the expansion.

3.Limited Capacity to Handle Growth: If a business can’t handle increased demand, it might
lose customers.
✅ Example: A homemade cake business receives too many orders but lacks equipment and
staff to fulfill them. Customers get frustrated, leading to negative reviews and lost sales.

💡 Solution:
•Find ways to increase profits without increasing costs (e.g., automation, outsourcing).
•Ensure a scalable business model that allows growth without excessive investment.