What is a Business Model?
Millions of entrepreneurs are out there, but only a few are successful. Some are geniuses, but what sets most apart is simply operating the right business model.
Business models describe how a company makes money. It’s a structure that takes income and turns it into profits for the owners.
Defining a business model should be simple. But in reality, it is complicated and counterintuitive. Most founders construct their enterprises on common sense instead of what will work.
Getting the models wrong is why many founders go out of business unnecessarily. Most would be successful if they’d just made a couple of tweaks here and there.
The purpose of this post is to help you understand startup foundations. We explore business models likely to work for entrepreneurs, including some examples of existing profitable approaches.
The Basics of Business Models
Business models are a roadmap to company success. The idea is to create a structure of ideas that will allow the company to thrive once operational.
Some business models are simple. Others are complicated. However, what works is the only thing that matters. Even the most straightforward approaches to business can be wildly successful.
The end goal of a business model is value creation and capture. You need a structure that will draw currency out of the economy and into your pocket.
Value creation describes providing customers with something they want to pay for. Whatever it is should be desirable.
Value capture means making money from value creation. It occurs when the cost of producing goods or services is less than what you charge for providing them.
Key Elements of a Business Model
Every business model must have specific elements to ensure value creation and capture.
A Value Proposition
A business model must have a value proposition for customers and prospects. That could be a problem you solve or a need you address in your target market.
Here are some value propositions of different business types:
Dog grooming salon – keeping dogs clean, comfortable and flee-free
Nail painting studio – giving manicures that make people look and feel great on special occasions
Cloud hosting company – providing companies and website owners with backend services for their sites
Restaurant – providing delicious food that stops people from feeling hungry
A Target Market
A business model must also address your target market – a group of customers with shared characteristics. Understanding your audience’s demographics improves your products’ relevance.
For example, your target market might be cyclists if you run an online cycling store or pet owners if you are launching a dog grooming salon.
Sales & Marketing Channels
Sales channels are another element of successful business models. You must know where you will find and interact with customers.
For example, your sales channel might be:
Social media
TV
Radio
Media publications
Superstore advertising
Billboards and public transport displays
Word-of-mouth
Wraps on your cans and trucks
Search engine results
Customer Relationships
How you will form customer relationships is also critical for your business model. You should explore whether you will transact with them once or multiple times or allow self-service. You want to establish things like business repeatability and revenue predictability.
Sources of Revenue
Business models should also include revenue sources (how you will capture the value you create). For instance, you might use:
Advertising income
Freemium models (where users pay for additional services when they need them)
Subscriptions
Direct sales
Leverage
Cost of Doing Business
The cost of doing business in your industry is another consideration for your business model. You want to know the expenses associated with running your firm. (Too high, and they could make your enterprise inviable).
Key Resources
Writing down the resources you need to run your business is also worth consideration. What skills do you need? Which key people must you employ? How will you procure supplies?
Operational Activities
Finally, your business model should include a run-down of your essential operational activities. These include what you will do day-to-day on tasks like marketing, production, service design, and hiring.
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Different Types of Business Models
There are various established business models already out there. However, they aren’t always suitable for startups looking to break new ground.
Startups usually bypass retail or manufacturer paradigms and adopt lightweight business models that can bring in money fast.
These include:
Freemium business models draw in a large user base with free services, with revenue generated by paid add-ons
Subscription services for a minimum viable product (MVP) that generate consistent income streams
Marketplaces that connect existing buyers and sellers
On-demand services that only have cost outlays when customers make purchases
Sharing economy models to facilitate peer-to-peer transactions
Importance of Understanding Startup Foundations
The importance of understanding startup foundations is considerable. Enterprises that get it right are much more likely to thrive.
For example, understanding your business model reduces risk. Only 10% of startups are successful, but those with a healthy business model are more likely to succeed.
Better business models can also improve efficiency. Once proper processes are in place, startups can do more with fewer resources.
Superior business models also bolster investor confidence. Companies with attractive value creation and capture concepts are more likely to receive the capital they require to build to scale.
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Examples of Successful Business Models
Understanding what makes a great business model is challenging in abstract terms. However, concrete examples can help you decide on a promising direction for your enterprise.
Netflix
Netflix operates a successful business model because it masters every element. For example, the company’s value proposition is superb – all the TV shows, documentaries, and movies you want for a low monthly fee. It also excels in value capture – offering an ongoing subscription instead of relying on customers to pay it every month.
Spotify
Spotify is another example of a superior business model. It offers ad-supported access to a massive music catalog, with a paid ad-free service on a subscription.
Airbnb
Finally, Airbnb offers a sharing economy model, connecting buyers and sellers of short-term room lets and accommodation on its marketplace. It takes a cut of every transaction.
Common Mistakes in Developing a Business Model
Startups make several mistakes when developing their business models. These include:
Too much complexity that requires many moving parts to come together to make a profit
Failing to meet regulatory standards or breaking the law
Making unrealistic financial projections in the first year
Failing to understand the true needs of the target market
Not defining a clear value proposition that prospects understand
Conclusion
Now that you understand the basics of what a business model is and how to create one, it's time to take action. Start by clearly defining each element of your model, from your value proposition to your revenue streams. Test your assumptions and get feedback from potential customers. And don't be afraid to iterate and refine your model as you learn and grow.
Remember, building a successful startup is a journey, not a destination. By laying a strong foundation with a well-designed business model, you'll be well on your way to turning your vision into a thriving business. So, stay focused, stay committed, and keep pushing forward – the world needs what you have to offer!
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