Whether you are just starting out to establish your business, or have been operating for a few years, giving time to pause and robustly think about your business model is sure to reap some reward. Even if you do not change it, merely thinking long and hard about it is good practice. Debating it with peers or a business coach is even better as you will not be held back by only your own possible limiting beliefs.
If giant, well-established companies like P&G and General Electric use the Business Model Canvas to interrogate their existing and new businesses then small businesses should learn from that discipline.
What is a Business Model?
When asked, many entrepreneurs tend to focus on their passion, namely the product. However, the business model has other very important components that need to be thoughtfully considered to build a strong and sustainable business that grows in value over time.
Sometimes a business model is called a “term of art” where most people know it when they see it but cannot accurately describe it in simple terms. Referring to Einstein, if you cannot explain it to a six-year old, then you don’t understand it yourself.
Formally, a business model is a conceptual structure that supports the viability of a product or company and includes the purpose and goals of the company and how it intends to achieve them. All the business processes and policies that a company adopts and follows are part of the business model.
It is a framework that is supposed to answer who your customer is, what value you can create/add for the customer and how you can do that at reasonable costs.
How to Compile a Business Model?
The Business Model Canvas is a strategic tool for developing new business models or documenting and improving existing ones. This tool has been widely touted ever since Alexander Osterwalder, the founder of Strategyzer.com, introduced the template for business models in 2008.
It helps a company align its activities by understanding the potential trade-offs. The BMC is a great tool that offers focus, flexibility, and transparency. You no longer require tens of pages of a traditional business plan to understand the intricacies of the business. In a single page, the Business Model Canvas explains the core elements that drive the business and leaves out all the unnecessary stuff.
The key to the tool is that it forces you to carefully think about all the components of your business. The two main components are the product on one side while the second part deals with everything related to selling the product, from finding the right customers to distributing the product.
Types of Business Models
What business model you choose depends on your business needs and what value you want to create for your stakeholders. There are different types of business models meant for different businesses, ranging from the basic retail model that everyone knows and understands, to the technology-driven models such as freemium and platform models like Uber.
The retailer sells directly to its consumers, either online, in physical outlets, or a combination of the two. This is the bricks-and-clicks model that gives flexibility to the business since it is present online for customers who live in areas where they do not have brick-and-mortar stores. The products are purchased from the manufacturer or distributor and then sold to the consumer at a profit.
The manufacturer model is where the business produces the finished product and sells it either directly to the end-user or via a distributor. Examples include automobile or appliance manufacturers, or food manufacturers producing products to be sold on retailers’ shelves.
The distributor is usually directly linked to the manufacturer and retailer. They could range from wholesale importers selling to retailers to car dealerships where they are the interface with the customer.
A popular route to market is the franchise option. If you can be first to market with an innovative business idea you could be the franchisor to get your brand and product distributed quickly in the geography where you plan to operate. This is a lucrative model that could generate recurring revenues in perpetuity. The franchisee model is a less-risky option for entrepreneurs wishing to run their own businesses where they simply tap into the franchisor model and brand and pay royalties for as long as they operate under the brand.
These are the various “traditional” business models. The internet has revolutionised the way entrepreneurs can operate their businesses and have upended several traditional businesses in the process. The so-called “Amazon effect” that impacts traditional retailers is a case in point.
The freemium model is one of the most common business models on the Internet. Companies offer basic services to the customers for free while charging a certain premium for extra add-ons. The basic service is free but with limitations or restrictions that the premium service does not have. Examples include advertising in the free model and none in the premium service such as Spotify. Storage restrictions are a key component of the free version for example OneDrive, while the premium version has one terabyte (1TB) of space available, besides a host of other benefits.
This model is one of the most adopted models for online companies because it is a cost-effective way to scale up and attract new users and then convert them to paying customers.
The nickel-and-dime model is where the basic product provided to the customers is very cost-sensitive and hence priced as low as possible and then charge for every little extra. Low-cost airlines are examples of this model, where the flight ticket is at a lower price while they charge other things such as food, baggage and other minor services.
The platform aggregator business model is where the company acts as a platform between disorganised sellers on one side, and disorganised buyers on the other side of the platform. Uber and Airbnb are examples of this model. The company earns its revenues via commissions without having to build a large balance sheet of assets such as vehicles or hotel rooms.
The ideal is to have a recurring revenue model such as the subscription model that is used in businesses where the customer acquisition costs may be high. There are various types of revenue models under the subscription banner, but the basic model is to retain customers over a long period and charge them for the duration of the contract.
All these models also include a further dynamic of whether there is a lot of human interaction with the customers, the high-touch model, and the low-touch model where there is minimal human interaction to sell the product or service.
Of course, most companies do not operate on any one of these business models but rather on a combination of some. These could include a high-touch subscription model such as life insurance, or a low-touch retailer model like Amazon. Consider the various options and figure out where you want to take the business before deciding on the model best suited to your circumstances. It may evolve over time as more resources such as cash and people become available.