Business Model - What it is and How You Create One
Here, you will learn more about what a Business Model is, how to create one, and examples of different Business Models suitable for various industries. You will also receive tips on how to develop your existing Business Model to adapt to changes and enhance your competitiveness.
Definition of a Business Model
A business model is a description of how your business is going to make money and create value for customers. The business model serves as a conceptual tool that helps you, your employees, and other stakeholders understand how the company's business operations are intended to function.
A business idea is a fundamental starting point that identifies one or more problems in a target group on a market that your business will solve.
A business model is a strategy or a plan for how the company will generate revenue, create value, and conduct its business in a sustainable way. It is largely about identifying the core of your business's operations, how the business should function, and generate profitability in the long term. Once your business model is clear, it's time to draft a document in the form of a business plan.
A business plan is a document containing a more detailed and structured description of how the company will implement its business idea based on its business model. The plan often describes both objectives, activities and the most important key performance indicators to be used to assess how well the company is moving towards its goals.
In order to create a business model and a business plan for your business, you should consider the most important aspects of your company's business:
- What is the product or service being sold and how well does it meet the needs (often called product market fit)?
- What does the sales and marketing strategy/distribution channels for the product or service look like, and what is the value proposition to customers (often called go-to-market strategy)?
- What costs will the company incur to develop and sell the product or service?
- What requirements or expectations do we have on the profit margin, and can you, for example, accept a lower margin initially to later reach a higher level?
- What should your mix of revenue streams look like?
- Who are you addressing; target customer, target group, and potential customer base?
- What are the fixed and variable costs, pricing, and costs for the company's assets?
- What does the competitive situation look like, both in terms of customer market and employee market?
- Key performance indicators (KPIs) to measure success.
Your business model should create value for your customers
A business model functions as a "formula" or a "system" that defines the value you are going to provide to your customers, and the business model and business plan describe how you are going to deliver this. These should constantly adapt to your company, as the world changes.
All business models share three common pillars:
1. Value Proposition: The value proposition is about your company's "why". Why a customer should buy from you and why a stakeholder should be interested. It is primarily the value that a customer or stakeholder gets by purchasing your product or service. In practice, it can involve defining customer segments, necessary relationships, and the company's place in society.
2. Value Creation: Value creation describes the processes that will be used to create the product or service and the resources required (such as labour or raw materials). In practice, this involves activities, distribution, partners, suppliers, and technology.
3. Revenue Model: A revenue model is a description of how revenue is generated now and over time, which revenue streams to follow (e.g., e-commerce, subscriptions, - or freemium models). The business model thus dictates how sales should take place.
It's also about pricing, the value of your brand (intangible values), and who will pay for the value. It's not always your end user.
Examples of Different Business Models
- A Circular Business Model is a model where the profit is based on the service or the utility that the product offers, not on the product itself. The business model aims to minimise the need for resources and maximise the use of existing resources and waste in new production loops. Value is created throughout the product's entire lifespan, and the business model is designed to reduce resource use and waste by reusing, recycling, and upgrading products and materials.
- E-commerce as a business model means that the company sells goods or services online. This could either be a standalone web store or a sales platform like Amazon or Etsy. E-commerce has become increasingly popular in recent years, particularly with the growth of mobile devices and faster internet connections.
- Franchising is a business model (and corporate model) where an individual or company (the franchisor) licenses its business idea, brand, and/or system to another individual or company (the franchisee) in exchange for a fee and a portion of the revenues. Franchising is common in the fast-food industry but also occurs in other sectors such as hotels and travel agencies.
- The Dropshipping Business Model means that the company doesn't have its own inventory but instead collaborates with a third-party supplier who handles the inventory and the delivery of the products to the customer. The advantage of this business model is that the company can reduce its costs and the risk of overstock, but there is also a risk for delays or problems with deliveries.
- Freemium is a business model where the company offers a basic version of its product or service for free, but charges for more advanced features or add-ons. This is often used in app and software development, where the company hopes that users will upgrade to the paid version after having tested the free version.
- The Subscription Business Model involves customers paying a recurring fee to use the company's product or service. This is common in the media industry, where subscription-based models are used to access streaming services.
Develop Your Business Model
Often, a company's existing business models are well established, but when creating new revenue streams, innovating, transforming, creating new technology, or reviewing their business model, the old business model or governing philosophy can be challenged, replaced, or improved.
Six tips on how to develop your business model:
1. Ask yourself what happens if you don't adapt to the change and challenge your USPs.
2. Be humble and realise that you may not understand everything about the change.
3. Instead of striving for too much, you can use tools like the Business Model Canvas to get an overview of the company's activities and "tweak what you have."
4. Leadership is central to daring to challenge the established way of working and thinking. It's important that managers are humble and responsive.
5. Focus on customers' behaviour and how the technology change can affect customers.
6. The Business Model Canvas is a model for creating and visualising business models. It consists of a simple and clear template used to define and describe all the different components involved in a business model: Customer Segments, Value Propositions, Channels, Customer Relationships, Revenue Streams, Key Resources, Key Activities, Key Partners, and Cost Structure.
3 Ways to Rethink Your Business Model
- Business Logic: This is the way your company does business. It's about how the company makes money, what activities it performs, how it utilises its resources, and how it aids its customers. This logic should be a clear part of the company's business model.
- Company's Place in the Value Chain: The company is part of a larger chain that extends from those who supply raw materials to those who buy the end product. Where the company fits into this chain can affect how it does business. For example, a company that makes a final product will have a different business model than a company that offers a service using that product. It's important to know where the company fits into this chain.
- Company's Competitive Strategy: This is the company's plan to outperform its competitors. It may involve offering unique products or services, selling similar products or services for less money, or focusing on a specific group of customers. This strategy impacts how the company assists its customers and earns money, and it's a critical part of the business model.
To include these aspects in the business model, you first need to determine the company's business logic, its place in the value chain, and its competitive strategy. Afterwards, you should include these parts in the description of the company's business model and outline how these components should evolve.
Customise Your Business Model to Your Industry
It's important to note that each industry can have a range of different business models depending on the company's size, goals, and competitive situation. For instance:
Service and Consulting Firms: Hourly or project-based fees, subscription models, or commissions on results.
Retail and Distribution: Wholesale and retail sales, dropshipping, e-commerce, and franchising.
Hybrid Organisations: Membership fees, grants, sponsorship, and sales of related products or services.
Transportation: Freight and logistics services, passenger transport, and ridesharing services.
Real Estate Companies: Rental income, property sales, and property management services.
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