What is a business model? Why is it important? What are the key elements of a Business Model Canvas?
A business model is a critical element for any startup success or Blue chip company as it is what unlocks value in the long-term.
To develop a business model, companies need to create value for several stakeholders. Thus, a business model is about what makes users go back to your service or product. It is about how businesses can get value from your solution. It is about how suppliers grow their business through it.
A business model is all those things together. In short, when those pieces come together, that is when you can say to have a business model.
A common misunderstanding is to think of business modeling as a one-page business plan. However, a business plan is a document with a specific aim. It contains a bunch of assumptions about your business.
It also contains financial projections about the business for the next 3-5 years. However, those assumptions can be hardly tested. The business plan thus remains a document that lives in the imaginary world.
Another misconception around business models is to confuse them with the monetization strategy or the revenue model of a company. While this is an essential piece of the puzzle, it is just one of the components of a successful business model.
Business models imply the understanding of operations, customer acquisition, retention, supply chain management, besides monetization, For instance, a vital component of the Coca-Cola business model is its distribution strategy.
Each company will develop a unique model among the many types of business models which is what makes your company robust in the long-run!
The primary aim of a business model is to create a sustainable chain, able to unlock value for several players in a market, industry or niche.
Therefore, this value chain will start from a value proposition; a promise you make to the key players and partners in that market, industry or niche depending on where you start.
Although there is not a single way to define a business model, there is a standard called “Business Model Canvas” which is a good way to start to understand what are the pieces and moving parts of a company value creation process.
As highlighted in the business model canvas there are Nine key ingredients for any business model to succeed:
- Value Proposition: What value do we deliver to the customer? Which one of our customers problems are we trying to solve? What customer needs are we satisfying?
- Customer Relationships: What type of relationship does each of our customer segments expect us to establish and maintain with them?
- Customer Segments: For whom are we creating value? Who are our most important customers?
- Market Channels: Through which channels do our customer segments want to be reached? How do we raise awareness about the company’s products or services? How do we deliver a Value Proposition to customers?
- Revenue Streams: For what value are our customers really willing to pay? Compared to what they are currently paying?
- Key Activities: What key activities do our value propositions require? Production factories? Distribution channels?
- Key Resources: What key resources do our value propositions require? Physical? Intellectual? Human? Financial?
- Key Partners: Who are our key partners or key suppliers?
- Cost Structures: What are our most important costs inherent in our business model? Cost driven Vs Value driven? Fixed costs Vs Variable costs? Economies of Scale Vs Economies of Scope?
Business modeling is a continuous journey of discovery. It never ends. As a company scales or it creates options to scale, the whole business model will transform and the question on whether it will be sustainable for the next stage of growth and scalability stays open.
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