A business model is a core framework of how an organization can create value and generate revenue. A newer and fresher approach to look at a business model is by categorizing it into four basic components – customer value proposition, profit formula, key resources and key processes, which are the essential building blocks of any business. In this blog, Business Kitz will cover everything from the types of business models to creating a business model.
Business model vs business plan
While it is common to confuse a business plan and a business model, there is a clear difference but complementary relation between the two. Together, both documents outline the creation of value and the delivery of this value to customers and should be updated whenever necessary.
A business plan is a document that outlines in greater detail the steps and resources that will be required or involved with the operation of the business. This is also where the plan highlights the industry or market problem, the need for solution, competition, financial capabilities and a business structure that can be implemented successfully.
On the other hand, the business model provides the skeleton of every aspect of operating the business, from how the business will be generating profits to how the company will be engaging with contractors. The business model should be flexible in terms of adapting and making changes to operational strategies, to allow more room for growth and to meet the changing customer needs.
Why is it important?
The business model helps in not only identifying the target market, costs and expenses for the products or services offered, but also anticipating challenges and opportunities. Every business, be it big or small, should have a business model ready as it determines the various essential operational strategies relating to marketing, sales, distribution, pricing, production, etc. A lack of preparation of the same can lead to the company losing out on strategic improvements, future trends and opportunities, leaving no room for growth and adaptation.
The business model provides a simplified and customer-centric approach in terms of decision making by putting various elements together and eventually finding the right fit for your business idea. It also helps in providing a uniform approach and understanding of the business’ foundation and offers innovative thinking which can lead to first mover advantage and rapid growth.
What are the types of business models?
There are multiple business models out there for all the different types of businesses and offerings, including traditional and hybrid models. Some common business models include;
Subscription business model: Customers pay a recurring fee, can be monthly or yearly, for access to the product or service you offer.
Freemium business model: A combination of “free” and “premium”, where customers are offered your basic products or services, while being encouraged to upgrade to your premium offerings that are only available with a fee.
Free trial business model: Customers are either offered partial or full access to your products and services, free of charge for a limited time period.
Licensing business model: Allows your business as an innovator, to monetize your products by licensing them to other businesses.
Franchise business model: Allows your business (franchisor) to license your branding and intellectual property to an independent business (franchisee).
Affiliate business model: Your business offers a commission to an affiliate for their successful marketing efforts relating to your business.
How to create a business model?
As you are now aware that a business model answers important questions relating to your vision and business strategy, it is time to start building your business model. A business model is commonly mistaken to be a lengthy and detailed document, but it is actually a concise visual representation of your business’ core components and strategies that are effective in nature.
Research, streamlining and defining core elements of your business is essential to building a successful and effective business model. To help with that, here is a list of factors that you can take into consideration when creating your business model;
1. Identifying your target market
To create a strong business model, understanding the target market is critical as it puts a strong focus on what the target market demographics and expectations are, and hence streamlines production and operational efforts required from the business.
2. Defining the problem and providing an effective solution
In addition to defining and understanding your audience, knowing what problem your business is trying to solve and provide a solution for is critical. It is therefore important to conduct sufficient research, evaluate and improve on your solutions before finalising.
3. Defining your needs
While trying to finalise your solution, consider factors such as production, resources, management, marketing, finance, etc. that you will be needing. Partnering with the correct stakeholders and businesses will also be beneficial as it will determine how much your business will be able to leverage these relationships and provide better offerings to the target market. Considering and assessing the difficulties and challenges your business may face along the way is also crucial to be able to adapt and provide to your target market.
4. Setting up
One of the most fundamental aspects of a business model is coming up with a strategy that shapes the way your business will be making money. This is also determined by several factors, not limited to the ones stated above, as they can be contributing in terms of adding value to your business and influencing the way you create and deliver value to your customer.
5. Testing and finding your perfect model
When everything is finally in place, remember to validate your business model. This can be done by constantly refining and iterating your offerings, where you actively anticipate market challenges, set measurable goals, perform test launches, and collect valuable insights from reviews, surveys and feedback.
A business model systematically describes what your business is all about and helps in building and creating value for your customers. Knowing what direction to follow, what your pricing strategy will be, who to partner with, along with many other decisions are extremely critical and fundamental in terms of how your business will be achieving goals and generating value.
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