Business model describes how you make money. In other words, where your income comes from or will come from. This is essential for entrepreneurship and financial functioning of every business. Business model defines the way the company generates value from its services or products. The business model can concern both the entire business or just one particular product or service.
What is a business model based on?
Every business has its customers. The customers pay for what the business sells, offers, creates, mediates or supplies to them. These can be the products or services that generate revenue for the business. Revenues flow in a certain way - one-time, periodically, for a delivered piece or unit, as a flat rate or in some other way. And this is what is called business model - it defines what we trade and how we receive funds from customers. It says how the company makes its money.
A business model is always based on an offer of a service or a product to a customer.
When is the business model created?
The business model must be created even before we start a business or launch a new product or service. Without a clear business model, running a business should be out of question. It should be thought through carefully beforehand. Therefore, business plan is often part of business case or business plan. The process of making a business plan is part of business strategy.
Each and every company has its own business model (no matter the quality). Also, there is a business model behind every product and service. A good business model is usually one of the things that distinguishes the successful from the unsuccessful businesses. Note that similar companies can work on different business models.
What should be included in a business model?
Business model should always supply the answers to the following questions:
- To whom I sell (customers, segmentation) - For whom do we create value? Who are our most important customers?
- What I sell (offer, offered value) - What are the problems we solve for our customers? What needs of our customers do we satisfy?
- How much do I sell (pricing policy, cash flow) - What do customers pay for? How do they pay? How would they like to pay? How does each revenue stream contribute to total revenue?
- Channels (both distribution and sales channels) - How do I sell? * What are the distribution channels? * What are the sales channels? * How do we work with business partners? * Who are our key suppliers?
- What is the margin? Isn’t it too big or too small? How to define a scale?
- For what exactly the customers pay (the offer can be made up of different support services, some of which can be provided to the customer free of charge, etc.)
- What are the sources of income?
- When do customers pay? How long does it take until their payment reach you? How is the cash flow? How is it spread over time (eg. how the payments for SaaS are spread in the period of 3 years)?
- What is provided free of charge and what is paid?
- How do I sell? How do the funds from customers reach me?
- What do I need in order to sell (what infrastructure, delivery)?
- Cost and revenue plan (financial viability)
- How can I be useful to the customer?
- What are the different ways of monetization?
- Do we answer to the urgent need or do we offer dispensable goods?
- What is the cost structure? What are the most important costs associated with our business model? Which key resources are the most expensive? What key activities are the most expensive?
There is no shame in getting inspired by successful businesses - in other words, copying a business model that works successfully elsewhere and that is understood and accepted by the customers. This is very important for success. Simplicity is power - this is also true for the business model, because if a customer gets lost in a business model, this can negatively affect his shopping decisions.
What business models are out there?
The simplest model is the sales model, ie. buy for 10 dollars, sell for 12. But there is a wide range of more complex business models, such as: