Business Model
Develop and implement a business model including who is your customer, what the customer value, and how you deliver value at an appropriate cost.
Business Model — “the story that explains how an enterprise works”
Management writer Joan Magretta
What is a Business Model?
A business model is the framework of how a company plans to make money with its products and targeted audience in a specific market. The term business model refers to a company’s plan for making a profit. It identifies the products or services the business plans to sell, its identified target market, and any anticipated expenses. Business models are important for both new and established businesses. They help new, developing companies attract investment, recruit talent, and motivate management and staff. Established businesses should regularly update their business plans or they’ll fail to anticipate trends and challenges ahead. Business plans help investors evaluate companies that interest them.
Business models can be complex or simple, depending on what stage of development your company is in. For example, if you’re just beginning to explore ideas for your startup, you may only need a one-page document or spreadsheet that lists the product or service you plan to sell plus its cost structure along with how much revenue each unit will generate at different price points. As your business develops further into production mode, however, your plan will evolve into something much more detailed—including extensive financial projections based on expected sales volume over time as well as potential risks associated with those projections (such as competition from similar products/services by other companies).
Why does a company need a Business Model?
A business model is a tool that helps you to figure out the elements of your business, such as:
- What problem are you solving for whom?
- How will you create customer value?
- How will your product or service get to customers?
- How will your business stay competitive?
- All revenue and costs you can anticipate.
Business models are important for both new and established businesses. They help new, developing companies attract investment, recruit talent, and motivate management and staff. Established businesses should regularly update their business plans or they’ll fail to anticipate trends and challenges ahead.
What are the key elements of a Business Model?
Key Partnerships. Who are our key partners and suppliers? Which key resources are from which partner? What key activities are done by partners?
Key Activities. What key activities do our value proposition, channels, customer relationships, and revenue streams require?
Value Proposition. What do we provide our customers? What problem are we solving? What are we offering to each customer segment?
Customer Relationships. What type of relationship does each customer segment want? How costly are the relationships? How do we integrate them with the rest of our business model?
Customer Segments. Who are our customers? From whom are we creating value?
Key Resources. What key resources do our value proposition, channels, customer relationships, and revenue streams require?
Channels. How will we reach our customer segments? How are our channels integrated? Which channels are the most efficient?
Cost Structure. What are the most important costs in our business model? Which key activities and key resources are the most expensive?
Revenue Streams. What are customers willing to pay? What and how do they currently pay? How much does each revenue stream contribute to overall revenue?
Difference between business plan and business model
The business model is how the company generates value. In contrast, the business plan is a document presenting its strategy and expected financial performance for the years to come. The two aren’t exactly interchangeable, but they are closely related. So let’s break down what each one entails:
Business Plan. A business plan is a document that describes your company’s goals and how you plan to achieve them. It helps you think critically about your business, including its strengths, weaknesses, opportunities, and threats (SWOT analysis). It’s also used to raise money from investors or banks. So in this sense, it’s more of an internal tool than one that’s shared with others outside of your organization.
Business Model. A business model describes how you make money within an industry—how you solve customer problems and deliver value to them in exchange for their hard-earned cash. For example, Uber makes money by connecting riders with drivers via its app; Airbnb lets people rent out extra space in their homes; Facebook makes money by charging advertisers to place ads on its platform.