Your business model is the way you create value for your customers, how you create money, your growth strategy. The owner has to know what products or services he’s going to sell, on what markets and what is the expected profit.
Why having a business model is important?
A new business needs a business model to attract investment, recruit talent and keep teams motivated and focused on creating value. Established companies have to review their existing business models to make sure they respond to market needs and continue to innovate.
It is crucial for the future of your business what business model you choose. There are many options like pay-as-you-go, licensing, freemium, or subscription based. How you select them depends on the mechanism that creates more value for customers. Think about the problem you are trying to sell for your customers and what is the return on investment they get from your solution. Unfortunately, many companies choose the business model based on what makes the product easier to sell, not what makes the most sense for the customer.
Use the Business Model Canvas
Business model canvas is a framework invented by Alex Osterwalder and used extensively by companies around the world. It brings more clarity and strategic thought in the way the company operates. It can be used by companies that want to scale and the ones that want to infuse innovation into their existing business model. The canvas contains nine building blocks:
1. Value proposition
The value proposition is what your company offers. It is another way of saying what the means through which you solve a problem in the market is. Here is the place to enlist all the features and qualities of your product or service, how it differentiates from the competition. The value proposition is the centre of your business, the reason why your company exists. Many business owners equate the value proposition with the innovative technology used to create the products or services. There is an important distinction between problem and need. Businesses use technology to solve a problem, while the value proposition refers to how the company addresses customer needs.
2. Customer segments
Most companies create an archetype or a persona to better relate to customer needs. If the business is a start-up, there is no certainty about who the customer is, and you should keep iterating until that becomes clear.
3. Sales channels
Sales channels are about the distribution channels, how your products get to your customers. It can be online, offline or both. There are many opportunities for innovation in the way your product gets to the customer.
4. Customer relationships
How do you acquire, retain and grow customers? This section of the Business model canvas answers the questions “How do you engage customers”, “How do you persuade them to spend more and become repeat customers?”
5. Revenue model
The revenue model is about the connection between the value proposition and the customer segments. What are the revenue streams for your company? Here you decide how much a customer pays for your product and how you’re going to charge that money (e.g. direct sales).
In this section, you map out what are the resources you need to conduct business. It could be finances (the amount of money you need to keep the business afloat, loans, lines of credit, etc), physical resources like a manufacturing plant or specific technology or raw materials. It could also refer to intellectual resources like information, patents or data about customers. Human resources like experienced designers, programmers, scientists, etc. play an essential part as well. It is of utmost importance to keep all these resources integrated, to keep them working together in the interest of serving the end customer.
7. Key partnerships
Businesses cannot function without partners. They play a crucial function in your capacity to impact the market. Depending on what you want to accomplish, you choose the partners that will help you achieve your goals. The types of partnerships can be strategic alliances, joint ventures, or the classic supplier-buyer relationship. As your business evolves, the company will need different partnerships depending on the projects you want to develop.
In this section, you analyse the key activities that make the business model work. They change depending on what the company produces. Are you in the manufacturing business, consulting, or you built a platform that connects people? These are the key activities where you have to position yourself as an expert. People will buy a product if you’re willing to prove that what you’re offering is of high quality and brings value to their lives.
What are the cost and expenses to operate your business model? Here you want to map out the costs needed to run the business like personnel costs, office location, raw materials, everything you need to invest in the business. You have to be able to identify the most expensive key resources and activities and to measure the value they bring to the business. Together with the accounting department make a list of the fixed costs, the variable cost, economies of scale etc. All in all, you have to be in control of the total cost of running the business.
My mapping out your business using the nine building blocks, you’ll get a clear idea about how to design the business model that allows you to maximise the value you create for customers.