What is business model?
A Business Model is a conceptual structure that supports the viability of a product or company and explains how the company operates, makes money, and how it intends to achieve its goals. All the business processes and policies that a company adopts and follows are part of the business model. For some its a systematic way to unlock long-term value for an organization while delivering value to customers...
Any business is a system. A system is the combination of several elements, interconnected, in order to constitute an organized whole. A business is understood to be a system because it consists of several parts or functions and needs all of them to be successful. A model is a description of a system. This description can be done linearly, with texts and numbers, for example, or visually, like a drawing, a doll, a graphic.
The Business Model in this case, is the possibility of viewing the description of the business, of the parts that compose it, so that the idea about the business is understood by those who read the way the owner of the model intended. Using visual aids (like the Whiteboard, self-adhesive stickers and colors) is also a fun way to work collaboratively. It is always good when creating to be able to hear the opinion of possible partners, partners, potential customers, family, friends, in short, whoever is willing to help. After all, anyone looking at the full Chart should be able to view the model and suggest innovations that can then be validated. Remember: when creating the model, the paper accepts everything. You can imagine different situations and then test and choose those that will actually be implemented.
Successful businesses have adopted business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands.
“A Business Model describes the logic of creating, delivering and capturing value on the part of an organization.”
A business model for a new enterprise should also cover projected startup costs and sources of financing, the target customer base for the business, marketing strategy, a review of the competition, and projections of revenues and expenses.
- Everything it takes to make something: design, raw materials, manufacturing, labor, and so on.
- Everything it takes to sell that thing: marketing, distribution, delivering a service, and processing the sale.
- How and what the customer pays: pricing strategy, payment methods, payment timing, and so on.
A common mistake in creating a business model is underestimating the costs of funding the business until it becomes profitable. Counting costs to the introduction of a product is not enough. A company has to keep the business running until revenues exceed expenses.
A business model may also define opportunities for partnering with other established businesses. An example would be an advertising business that could benefit from an arrangement for referrals to and from a printing company.
The Business Model and The Business Plan.
Difference between business model and business plan.
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.
The Business Model precedes the preparation of the business plan. It is through analysis and reflection on it that it will be possible to see if the original idea will be valid, if all the parts fit together forming a truly system. Therefore, the model describes the business creation logic, that is, it shows that the reasoning and the interconnection of the parties make sense. At this point, the issue of delivery and capture of value should be very well explored. Delivery refers to how the customer receives the offer and the capture of value refers to the possibility of receiving feedback on how the customer is perceiving what is being delivered. The business plan describes how the business will be built, with steps, deadlines, cost sheets, revenues, etc.
If the Business Model is changed, the business plan must be changed as well.
The two tools must remain alive and connected. Sebrae has several solutions for preparing the business plan. To obtain the Business Model, the tool is the Framework, which we will see below.
Business model design includes the modeling and description of a company's:
- value propositions
- target customer segments
- distribution channels
- customer relationships
- value configurations
- core capabilities
- commercial network
- partner network
- cost structure
- revenue model
If something defines the digital economy, it is the need to search and converge new business models to find the best way to achieve the proposed objectives. In most cases we will see mixed business models, that is, the result of the combination of several of them that sometimes make it difficult to fit strictly in one or another model.
Visual ThinkingIt consists of using drawings to represent ideas or situations. The Board uses visual thinking, allowing you to see the model as a drawing and not as a text sheet. When looking at a Chart, you can quickly understand what kind of business it is.
Drawing allows us to compare the relationships between the different blocks and find out if it makes sense to do all of these things, if they complete each other. The Business Model described in the Chart gives us much more clarity about whether an idea is viable or not.
Systemic view It is the possibility of understanding the whole based on an analysis of the parts and the interaction between them.
When looking at the Chart, it is easy to see the whole in the relationship of the parties, that is, to see the whole business by the nine related blocks, through the side of that value with the side of Efficiency and considering the four aspects that any company involves: o that, who, how and how much.
Due to the possibility of being visual and allowing systemic vision, it becomes much simpler for people not directly involved in the business to support, help, collaborate in the construction and analysis of the model. It enables people of different hierarchies, knowledge and experiences to influence and contribute to making the business more innovative.simplicity and applicability
The Business Model is one of the most used tools by entrepreneurs and companies, either to start a business, or to innovate in already established companies. With less time to create and much more clarity, the Framework gives us the chance to check and correct, focuses on everything that is most important and helps to discover links that we would not have noticed in a long descriptive text.
5 Tips to create your business model If there is an idea or the need to expand, change and innovate in an existing business it is time to put into practice the creation of the Business Model.Before starting, have in hand:
1. Do you have an idea? Even if it is an embryonic idea, the Framework will help to visualize better - even if it is necessary to complete it later. The Chart does not need to be completely completed in a single moment.
2. Never write directly on the board. Always prefer the use of stickers for several reasons: for the use of colors (see extra topic on the topic), for the ease of writing, drawing, rewriting, changing places, grouping, in short, using freely without having to change it.
3. The Board can be started by any block. But in most cases, the best option is to start with the double Value Proposition / Customer segments. It is in this combination that the soul of the company lies.
4. Don't be afraid to make mistakes. Even if it is not quite clear yet, put on the stickers and paste the first ideas on the board. The visualization helps to confirm that you are on the right path, if you need to improve, add or change.
5. The model is a roadmap for recording and validating hypotheses. Those who do not constantly update their Business Model run the risk of seeing their market occupied by competitors who create models with alternative values to their own.
A sheet with a drawing of the table; colorful self-adhesive stickers; ordinary pens or, if possible, pens of various colors.
In the early history of business models it was very typical to define business model types such as bricks-and-mortar or e-broker. However, these types usually describe only one aspect of the business (most often the revenue model). Therefore, more recent literature on business models concentrate on describing a business model as a whole, instead of only the most visible aspects.
The following examples provide an overview for various business model types that have been in discussion since the invention of term business model:
Bricks and clicks business model
Business model by which a company integrates both offline (bricks) and online (clicks) presences. One example of the bricks-and-clicks model is when a chain of stores allows the user to order products online, but lets them pick up their order at a local store.
Collective business models
Business system, organization or association typically composed of relatively large numbers of businesses, tradespersons or professionals in the same or related fields of endeavor, which pools resources, shares information or provides other benefits for their members. For example, a science park or high-tech campus provides shared resources (e.g. cleanrooms and other lab facilities) to the firms located on its premises, and in addition seeks to create an innovation community among these firms and their employees.
Cutting out the middleman model
The removal of intermediaries in a supply chain: "cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediate (such as a distributor, wholesaler, broker, or agent), companies may now deal with every customer directly, for example via the Internet.
Direct sales model
Direct selling is marketing and selling products to consumers directly, away from a fixed retail location. Sales are typically made through party plan, one-to-one demonstrations, and other personal contact arrangements. A text book definition is: "The direct personal presentation, demonstration, and sale of products and services to consumers, usually in their homes or at their jobs."
Distribution business models, various
Fee in, free out
Business model which works by charging the first client a fee for a service, while offering that service free of charge to subsequent clients.
Franchising is the practice of using another firm's successful business model. For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods and avoid investment and liability over a chain. The franchisor's success is the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.
Sourcing business model
Sourcing Business Models are a systems-based approach to structuring supplier relationships. A sourcing business model is a type of business model that is applied to business relationships where more than one party needs to work with another party to be successful. There are seven sourcing business models that range from the transactional to investment-based. The seven models are: Basic Provider, Approved Provider, Preferred Provider, Performance-Based/Managed Services Model, Vested outsourcing Business Model, Shared Services Model, and Equity Partnership Model. Sourcing business models are targeted for procurement professionals who seek a modern approach to achieve the best fit between buyers and suppliers. Sourcing business model theory is based on a collaborative research effort by the University of Tennessee (UT), the Sourcing Industry Group (SIG), the Center for Outsourcing Research and Education (CORE), and the International Association for Contracts and Commercial Management (IACCM). This research formed the basis for the 2016 book, Strategic Sourcing in the New Economy: Harnessing the Potential of Sourcing Business Models in Modern Procurement.
Freemium business model
Business model that works by offering basic Web services, or a basic downloadable digital product, for free, while charging a premium for advanced or special features.
Pay what you can (PWYC)
A non-profit or for-profit business model which does not depend on set prices for its goods, but instead asks customers to pay what they feel the product or service is worth to them. It is often used as a promotional tactic, but can also be the regular method of doing business. It is a variation on the gift economy and cross-subsidization, in that it depends on reciprocity and trust to succeed.
"Pay what you want" (PWYW) is sometimes used synonymously, but "pay what you can" is often more oriented to charity or socially oriented uses, based more on ability to pay, while "pay what you want" is often more broadly oriented to perceived value in combination with willingness and ability to pay.
Value-added reseller model
Value Added Reseller is a model where a business makes something which is resold by other businesses but with modifications which add value to the original product or service. These modifications or additions are mostly industry specific in nature and are essential for the distribution. Businesses going for a VAR model have to develop a VAR network. It is one of the latest collaborative business models which can help in faster development cycles and is adopted by many Technology companies especially software.
Other examples of business models are:
Auction business model
All-in-one business model
Low-cost carrier business model
Loyalty business models
Monopolistic business model
Multi-level marketing business model
Network effects business model
Online auction business model
Online content business model
Online media cooperative
Premium business model
Professional open-source model
Pyramid scheme business model
Razor and blades model
Servitization of products business model
Subscription business model
Network Orchestrators Companies
Virtual business model
A business model design template can facilitate the process of designing and describing a company's business model.
Although Webvan failed in its goal of disintermediating the North American supermarket industry, several supermarket chains (like Safeway Inc.) have launched their own delivery services to target the niche market to which Webvan catered.
Example of Business Model Canvas.
Technology centric communities have defined "frameworks" for business modeling. These frameworks attempt to define a rigorous approach to defining business value streams. It is not clear, however, to what extent such frameworks are actually important for business planning. Business model frameworks represent the core aspect of any company; they involve "the totality of how a company selects its customers defines and differentiates its offerings, defines the tasks it will perform itself and those it will outsource, configures its resource, goes to market, creates utility for customers, and captures profits".
A business framework involves internal factors (market analysis; products/services promotion; development of trust; social influence and knowledge sharing) and external factors (competitors and technological aspects).
A review on business model frameworks can be found in Krumeich et al. (2012). In the following some frameworks are introduced.
Business reference model
Business reference model is a reference model, concentrating on the architectural aspects of the core business of an enterprise, service organization or government agency.
Component business model
Technique developed by IBM to model and analyze an enterprise. It is a logical representation or map of business components or "building blocks" and can be depicted on a single page. It can be used to analyze the alignment of enterprise strategy with the organization's capabilities and investments, identify redundant or overlapping business capabilities, etc.
Industrialization of services business model
Business model used in strategic management and services marketing that treats service provision as an industrial process, subject to industrial optimization procedures
Business Model Canvas
Developed by A. Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, the business model canvas is one of the most used frameworks for describing the elements of business models.
The OGSM is developed by Marc van Eck and Ellen van Zanten of Business Openers into the 'Business plan on 1 page'. Translated in several languages all over the world. #1 Management book in The Netherlands in 2015. The foundation of Business plan on 1 page is the OGSM. Objectives, Goals, Strategies and Measures (dashboard and actions).