Business Model
Business model is a description of the way chosen for a business to make profits. There are several main things defined by a business model, which make it clear how exactly a business is going to be operated. The most important features of a business, which are reflected in said model, are the very product the business intends to produce or provide, the specified target audience for this product, and all the planned expenditures.
Business models are useful tools for both new companies and established entities, as a business model aids in clearing out the strategy, incentivizing employees and executives to move in the right direction. Additionally, a well-defined business strategy helps to attract investors, as they are able to see the company’s objectives and perspective profitability, if it’s correctly planned, described and explained in a business model. A business model, which is regularly updated, is important for an established business to stay in trend.
So, for a successful and long-term oriented business, it might be crucial to create a suitable business model. There are various types of them nowadays. In most cases, an entrepreneur might take one of the already existing forms, and adapt for a certain business, identifying its original features and means of profiting.
Main features of Business Models
A business model might be alternatively viewed as a detailed plan, which represents the sources, main principles and core strategy of a certain business in a specific area. The main feature defined in such a plan is the value proposition, which explains what exactly the business is about to offer to its customers.
The value proposition doesn’t just name a good or a service a business is going to sell, but defines that product’s value, why it might be desirable by people, and what makes it special in comparison with other goods and services.
Other important aspects required to be covered by a business model include the following:
- Business costs and sources of financing, which must be thoroughly assessed and planned, startup costs are considered to be especially important to be evaluated;
- Business’s target audience, which define a certain category of people with a specific set of traits and characteristics, at whom the product is aimed;
- Strategies chosen for marketing, which describes how exactly the chosen target audience would be attracted;
- Overview of the business area in general, which defines the business’s competitors in the area;
- Planned expenditures and the revenue, which shows what results the business is going to achieve.
It’s also allowable to describe prospects of partnership with other businesses and companies, as profits are closely connected with a successful start and promotion of the new company and its product.
Business Model quality evaluation
Prices and costs are the main sides of a business that require to be reflected in a business model, as they make it clear whether a business is profitable, why it is profitable and how those profits are gained in the process.
Prices set in a business model must be taken from analyzing and assessing of the market segment the business in question is going to operate in, as it’s crucial to define a competitive price that would be acceptable by customers and at the same time would bring a considerable revenue for the company. Expenses are also an important issue for forecasting and evaluating, because it might be difficult to predict all possible expenditures appearing in a course of doing business, but still, it’s necessary to define as many of them as possible. A common mistake of a novice businessman is to take into consideration only the initial costs needed for a start, and expect the business to bring profits immediately. While in reality, it often takes a considerable amount of time for a company to become profitable, and all the expenses from the period when there are no actual profits should be mentioned in a business model.
There are various indicators analysts and economists may use to evaluate a business model. One of the most popular tools for such evaluation is a company’s gross profit, which is compared with the same measure of the most successful company in a segment, or with the same measure of a company considered to be the main competitor of the business in question. Although the use of this indicator only might be not enough, so it’s also possible to use cash flow or net income for assessing the quality of a business model.
Business Models main varieties
Due to the fact that there might be as many kinds of business models as there are ways of organizing a business, it’s worth mentioning the most commonly used forms of them. It’s necessary to remember, though, that hybrid types are also possible, and a new form of a popular business model might emerge any time soon.
Still, the most popular business models nowadays are the following:
- Retail, which implies the business in question purchases various goods from other entities and provides customers with those goods;
- Manufacturing, which means that the business produces the good and then sells it to other entities or directly to customers;
- Fee-for-service, which is often used by service providers and implies charging a certain sum of money for performing certain services, which may vary under different conditions;
- Subscribing, which requires regular payments in return for a fixed quantity of a good or a service provided once in a certain time period;
- Marketplace, which is based on providing a possibility for other businesses to operate;
- Razor blade, named after the most famous example, which is based on a principle of providing the main product at a low price and profiting on selling expendables for that product;
- Franchising, which aids in expanding businesses in various locations by selling the right to use the existing brand name and strategy to entrepreneurs in those locations, usually under the condition of sharing the earnings;
- Pay-As-You-Go, which is based on the principle of charging payment according to the amount of a product being used by a customer;
- Brokerage, which implies mediation between buyers and purchasers of a service or a good in various business areas.
