Some experts think that the phrase “business model” is being used to mean so many fuzzy and half-baked business plans nowadays because of the advent of the Internet. They believe that all it takes, these days, is to have some web-based business model with some unrealistic means of getting profit spell out, then boom a presumptive new business is born – which, by the way, fail 95% of the time.
As Magretta, the editor of Harvard Business Review stated in her article titled “Why Business Model Matter”, the phrase “business model” was one of the great buzzwords of the Internet boom, which people routinely invoked to mean all manners of flaw business plans. She said a company did not need any clear a strategy, or some special competence, or even any customers at times but a web-based business model that promised some out of this world profit in some unknown future. Because such business models lack substance, they always fail woefully and the investors that bought into it end of losing their monies.
Business models are actually stories, good stories, that when conceived and thought out well can have a fairy-tale-like ending – happily ever after! Magretta said in her “Why Business Model Matter” that business models are stories at heart, and she went further to describe creating a new business model as engaging in writing a new story. That as the story progresses at some level, they look like variations of old ones, “reworkings of the universal themes underlying all human experience”. In the end, this new story will be a lot better than the old ones.
Variations, most especially, in existing companies business models come in different forms. Some will come and change the process of doing business, while others, everything else will remain the same, but will open/target an entirely new market. Only the business owner (s) can tell, based on their target objectives, what the business model is going to look like.
So, you see, upon all the misuse and overuse, business model importance cannot be overlooked and that what it meant to have one should be understood by business people at this point. This is especially true to beginners and entrepreneurs in today’s business world. The established players, presumably, are well conversant with the term and know how to pull a good business model. No company can do without a good business model – that is the phrase, “a good business model.”
You may want to check out this article that examines the database as the foundation of business intelligence.
What is a Business Model?
According to Investopedia, “a business model is a company’s plan for making a profit. It identifies the products or services the business will sell, the target market it has identified, and the expenses it anticipates.”
A business model is a road map that a new business in development will use to guide its path from the conception through the execution of the business. It is what will be used to attract investment – often, investors identify a good business through its business model. It will serve, also as a tool to recruit talent and motivate management and staff.
Not only new businesses, even established businesses have to, from time to time, revisit, revise and update their business plans often. If they neglect that, they will definitely fail to plan for the change that will always be there in the business environment and cannot keep up with the competition. When investors show interest in a business, they will need to evaluate and scrutinize the company’s business plan.
Now that we know that the business model is important for a business, how do we go about creating one? From the look of things, this is going to be a tough job that requires a lot of focus, brainstorming and lots of space, probably hundreds of pages of paper to be able to put all the parts together. And another difficult task there is putting everything in your head without missing out an important part. This is where the business model canvas comes handy—heard of that? Let’s see.
What is a business model canvas?
Business model canvas is a one-page document consisting of nine interrelated building blocks that describe what a business does in terms of a value proposition to the customers and what the cost and operation of a business are going to be. Business model canvas is customer-focused. It has nine building blocks or components.
The components of a business model canvas are:
Customer segments: This building block states who are the customers that a business intends to serve. Is it a one customer segment or two or even more? The customer segment (s) must be stated clearly here. Example, Facebook has two main customer segments: users and advertisers.
Customer relationship: How does a business intend to get to its customers and how to keep those customers and maintain a good and mutual benefit relationship that will last long? In short, this building block addresses customer relationship matters.
Channel: This section is all about how to deliver what your offering to the customers. If it’s a service that you offer, how can your customers receive this service? If it’s a product you produce, how can you sell the product to your customer?
Revenue streams: How do you capture the most value from your customers? In other words, how do you generate revenue from selling your product or offering your services? Are you going to give some portion free and receive some revenue when some of the customers upgrade as most Internet companies do nowadays? Is it going to be a one-time payment or a subscription payment, like Netflix? This building block is especially important for the survival of your business.
Value proposition: Here, a business needs to know what value it creates to its customers. What problem is the business solving for its customers? Why do the customers buy from you, not the other? Values are created in several ways, examples could be coming up with a new product/service that will solve some existing customers’ problems. Some could be a pricing model that will give customers high quality but less price, some values are created by simply making it convenient for customers to receive product/services and so forth.
Key partners: Are people or companies that fulfil some of your company’s activities – that are important, but your company cannot do it by itself. They are basically strategic partners that a company cannot do without them. Some questions to ask if this person or company is a key partner could be, does this person/company have resources that my company need and can’t provide ourselves? Does the activity it provides reduceS cost to the company? Is it the best out there in terms of quality, effectiveness and the likes? Is this partner the one my company needs now or later? Key partners are really strategic partners that a company must work with to deliver its value propositions.
Key activities: What does a company do to deliver its value proposition? Does it make things like production of some raw materials, finished products or does it provide services like consultancy where you always have to come up with a personalized solution to your various clients? Do you as a company provide a platform for users as Facebook does as your main activity? This is where your key activities have to be specified and must go hand in hand with the company’s value proposition. If your key activities do not relate to your value proposition, then it means something is wrong.
Key resources: These are the resources that help to make or facilitate the making of the company’s product or service. Resources come in four different forms; they are:
- Human resources, these are the people that are needed to run the business. These are the key employees in the company who actually make things happen.
- Physical resources: They are the equipment, the buildings, the gadgets and so on that are used to make things work in the company. These physical resources must be there for the company to operate.
- Intellectual resources: These are expertise that a company needs to make its products/services. The patents, the copyright or sometimes even partnerships are some of the intellectual resources required for a company.
- Financial resources: Financial resources is the most important resources that allow the company to acquire almost all the other resources. Here, a company has to specify her financial resources like the line of credit, access to loan and so on so forth.
Cost structure: In this section of the business model canvas, a company needs to map out the key activities to cost. Therefore, cost structure needs to be aligned with your value proposition. Cost structure comes after specifying key activities, key partnerships and key resources. This way, a company can assign a cost to each of these vital activities, and that will give an idea of how much cost there is and how to go about it.
Below is a template of a business model canvas, take a look:
Once you get your business idea, the next and logical step is to get one of these templates and fill it out. This will set you right in. And it is advised that when filling out the canvas, you should try not to do it alone; you need at least 3 to 5 members in a team to be able to draft the first one, and if it possible use a board with different coloured markers so that everything will be spelt out clearly and that nothing is left on touched or unattended.
One last thing
Another aspect that is not found in a business model canvas is innovation, which in fact, is very important for any business, most especially modern businesses like technology companies. Innovation should be part and parcel of any business because as the famous Greek philosopher, Heraclitus, says “change is the only constant thing in life”, that is also true in business, in fact, it’s truer in business. So, when a business model is being crafted, it should be in such a way that will allow easy changes that may occur along the way in the future. For sure, things will definitely happen as the business progresses, and changes are bound to happen. Putting that at the back of your mind as you make your business model is necessary and will save you a lot of headache in the future.
To sum up
We have learned that business models are very vital for our business success. Of course, not the fuzzy half-baked superficial ones that are continually being provoked nowadays in the name of business model, but some really serious and well thought out plan that will lead to eventual success. We also looked at the business model canvas and explained individually, all of its nine building blocks briefly.
That is all about what we have in this article, let me hear your thoughts regarding a business model in the comment section below. Thank you.
Magretta, J (2002). Why business model matter? Retrieved from https://hbr.org/2002/05/why-business-models-matter?referral=00060
Kopp C. M (April, 2019). How companies make money. Retrieved from https://investopedia.com/terms/b/businessmodel.asp
EPM (2018). Business Model Canvas Explained with Examples. Retrieved from https://expertprogrammanagement.com/2018/10/business-model-canvas-explained/