Jul 17, 2023
Staying relevant in today’s modern business environment requires businesses to be innovative, resilient, adaptable and forward-thinking: it’s a case of keep up, get ahead, or fall behind. Entrepreneurs readily understand how these characteristics must be in alignment across all aspects of their organisations – from operations to approaches to processes to leadership – if they are to meaningfully increase competitive advantage.
To understand how a business operates, and determine the particular tactics and strategies that will be most helpful in achieving its aims, business owners and leaders must get clued up on how the venture will generate value.
What is a business model?
In Why Business Models Matter, Joan Magretta states that, ‘business models are, at heart, stories that explain how enterprises work […] they describe, as a system, how the pieces of a business fit together.’
In short, a business model is the specific method by which a company can create and deliver value. It outlines the plan a business will use to generate money via its products and services and how it will deliver them to a specified target market or target customer base.
New and established businesses alike need to prioritise developing their business models if they are to remain successful. A solid business model is important for a number of reasons, for example:
- understanding value proposition
- anticipating market trends, changes and challenges
- determining product or service types, marketing strategies, resource availability, distribution, delivery, sales processes and pricing decisions
- aligning approaches and key activities to business goals
- meeting the needs of varied stakeholders
- supporting and reinforcing future growth.
While business models vary, all business owners should ask some similar key questions of themselves: what products or services will be available? How will these products or services be marketed? What expenses will be involved? How is profit going to be generated and what revenue streams will exist?
Different types of business model
Choosing the right type of business model for a company’s unique needs will vary from business to business, and each carries various pros and cons. Models may also change and evolve over time, for example with the release of a new product, a pivot to a different market, or in response to changing consumer behaviour. Again, there are numerous questions to be posed: how will recurring revenue be achieved? Is there an existing template that could be adapted, rather than developing a brand-new business model?
There are numerous options to choose from. Here are a selection of common business model examples:
Manufacturer business model – raw materials and converted into products by a manufacturer, and then sold to retailers, distributors or straight to customers. This model features in almost every industry and contains both small and global manufacturers. Examples include Dell, Amazon’s own products – such as Alexa, and Dulux.
Product-as-a-service business model – customers pay to use physical products, commonly via a cost-per-use, cost-per-mile or subscription. Examples include bike and boat rental companies.
Fee-for-service business model – customers are charged set fees for using services. Fees may take the form of commissions, hourly rates, monthly retainers, or charge set rates for different types of services, for example. Examples include accountants, beauty therapists and estate agents.
Freemium business model – customers can access aspects of either a product or service for free, but payment is required for more advanced features or areas. Software-as-a-service (SaaS) tends to make particular use of this set-up. Examples include apps such as Spotify (where the free version has audio ads, but subscribers benefit from ad-free listening) and Headspace (where further meditations and features are available to paying users).
Subscription business model – customers make recurring payments for ongoing access to either a product or service. Both bricks-and-mortar shops and e-commerce businesses make use of this model, as well as community projects and services. Examples include Netflix, HelloFresh and community allotments.
Bundling business model – where two or more products or services are sold as one unit – often for a cheaper price than the products or services would retail for individually. This is a popular model for companies pursuing high sales volumes, however profit margins are squeezed. Examples include PureGym, where users gain access to unlimited classes a month – as well as general facilities – for a low-cost monthly price.
Franchise business model – established companies share their ‘business blueprints’ with franchisees who purchase, and then reproduce, their model. Franchisers generally support franchisees with funding, marketing, business operations and training to ensure required standards of consistency and quality are maintained. In exchange, the franchisee then returns a percentage of the profits. Examples include McDonald’s and Domino’s.
Other key examples of business models include: revenue model, commission-based model – such as Uber, distribution model, bit vendor model – such as Apple iTunes, leasing/licensing model – such as Starbucks, manufacturer model, retailer model, middleman business model – such as a co-operative, platform business model – such as eBay, razor blades model and advertising/affiliate marketing model.
It’s important to remember that there is no such thing as a one-size-fits-all model. In fact, many organisations use models that contain elements of several different models.
What are the components of a business model?
The business model canvas, a concept developed by Alex Osterwalder, demonstrate the thinking behind how an organisation plans to generate profit and create value. It’s designed to provide a framework that can be implemented across organisational structures, systems and processes.
There are three main components that cover the main business areas:
· Desirability. Is it wanted by customers?
· Viability. What is its value and worth?
· Feasibility. Can it be delivered?
Each component contains further ‘building blocks’, aspects of the business that need to be determined to arrive at a holistic, comprehensive and logical approach to business model development. For example, the building blocks include:
· Value Propositions, Customer Segments, Channels and Customer Relationships (Desirability)
· Revenue Streams and Cost Structure (Viability)
· Key Resources, Key Activities and Key Partnerships (Feasibility).
Entrepreneurs and business providers who examine their ventures – regardless of the type of business model – in relation to the nine building blocks are better positioned to: map their existing business models, which helps with communicating and visualising the ‘story’ of their business; design and develop new business models; and manage a portfolio of business models.
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