Business Model

A business model is the conceptual structure supporting the viability of a business, including its purpose, its goals and its ongoing plans for achieving them. At its simplest, a business model is a specification describing how an organization fulfills its purpose. All business processes and policies are part of that model.

According to management expert Peter Drucker, a business model answers the following questions: Who is your customer, what does the customer value,and how do you deliver value at an appropriate cost?

The business model concentrates on value creation. It describes a company's or organisation core strategy to generate economic value, normally in the form of revenue. The business model indicates how the firm will convert inputs (capital, raw materials and labour ) into outputs (total value of goods produced) and make a return that is greater than the opportunity cost of capital and delivers a return to its investors. This means that a business model’s success is reflected in its ability to create returns that are greater than the (opportunity) cost of capital, invested by its shareholders and bondholders.

Types of Business Models:

  1. Manufacturer: A manufacturer makes finished products from raw materials. It may sell directly to the customer`s or sell it to a middle man i.e an other business that sells finally to the customer. Ex: Ford, 3M, GeneralElectric.
  2. Distributor: A distributor buys products from manufacturers and resells them to the retailers or the public. Ex: Auto Dealerships.
  3. Aggregator: Aggregator business model is a recently developed model where the The money is earned as commissions. Ex. Uber,  Airbnb, Oyo.
  4. Retailer:A retailer sells directly to the public after purchasing the products from a distributor or wholesaler. Ex: Amazon,
  5. Franchise:A franchise can be a manufacturer, distribute or retailer. Instead of creating a new product, the franchisee uses the parent business’s model and brand while paying royalties to it. Ex: McDonald’s, PizzaHut.
  6. Bricks-and-clicks: A company that has both online and offline presence allows customers to pick up products from the physical stores while they can place the order online. This model gives flexibility to the business since it is present online for customers who live in areas where they do not have brick-and-mortar stores. Ex: Almost all apparel companies nowadays.
  1. Nickel-and-dime:In this model, the basic product provided to the customers is very cost-sensitive and hence priced as low as possible. For every other service that comes with it, a certain amount is charged. Ex: All low-cost aircarriers.
  2. Subscription:If customer acquisition costs are high, this business model might be the most suitable option. This model lets you keep customers over a long-term contract and get recurring revenues from them through repeat purchases. Ex: Netflix, Dollar ShaveClub.
  3. High Touch: The High Touch model is one which requires lots of human interaction. The relationship between the salesperson and the customer has a huge impact on the overall revenues of the company. The companies with this business model operate on trust and credibility. Ex: Hair salons, consulting firms.
  4. Low Touch: The opposite of the High Touch model, the Low Touch model requires minimum human assistance or intervention in selling a product or service. Since as a company, you do not have to maintain a huge sales force, your costs decrease, though such companies also focus on improving technology to further reduce human intervention while making the customer experience better at the same time. Ex: Ikea, Survey Monkey. 

Purpose of business model:

  • It saves you from going with the first best business model
  • It enables Lean Startup and Customer Development
  • It saves time by not having to write a 100-pages document
  • It is easy to understand for the whole team
  • It helps to pitch your business model to investors
  • You can explore multiple options in a kind of scenario analysis
  • It is easy to change, so you can incorporate your learnings and keep it up dated and relevant

Elements of business model:

1)Value Proposition

Define how a company's product or service fufils the need of customers.

-Examples of successful value propositions

-Personalization/ Customization

-Reduction of product search, price discovery costs

-Facilitation of transactions by managing product delivery

2)Revenue Model

Define how the firm will earn revenue generates profits and produce a superior return on invested capital

-Major types:

Advertising revenue models: CNN.com Subscription revenue models: MATCH.com

Transaction fee revenue model: EBay, E-Trade, Hotwire Sales revenue model: Amazon, LLbean, Gap.com

Affiliate revenue model: E-pinions, Banner Exchange, Edmunds à sends traffic to another website

3)Market Opportunity

Refers to a company's intended market space and the overall potential financial opportunities available to the firm in that market space

4)Competitive Environment

Refers to the other competition selling similar products and operating in the same market space

-Influenced by

How many competitors are active? How large operations are

The market share for each competitor How profitable these firms are

How they price their product

5)Competitive Advantage

Achieved when a firm can produce a superior product and/or bring a product to market, at a lower price than most, or all, of their competitors.

-Types of competitive advantage:

First mover advantage

Unfair competitive advantage

6)Market Strategy

Plan that details how a company intends to enter a new market and attract strategy

7)Organizational Development

Describes how the company will organize the work that needs to be accomplished

8)    Management Team

Employees of the company responsible for making the business model work

-Strong management team gives instant credibility to outside investors

Conclusion:

A business model is a plan for how a company is going to make money. This can be simple or very complicated. The business model should include details on all operations, as well as short- and long-term visions for the business' growth. Without a business model, investors and owners will not have a clear idea of how to best grow the business, and it will be much harder to create a stable and sustainable concern.

In Consultaxx, we provide complete business planning and consultation. Feel free to contact us.

 

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