A business model is a detailed description of how your company works, what sort of company it is and how it will make money. It’s a whole picture of the company: its objectives, its strategy, what it provides, the infrastructure, how it is organised, trading practices, operation processes and policies. Primarily it focuses on value: how the company creates value (whether this is financial, social or some other value), how it delivers value and how it captures value.
A business model is tailored to the company’s intended market: what do they want? How do they want it? How can the company most efficiently cater to those demands and make money?
A business model should lay out a strategy of how your company will differentiate and price products or services, the best way to reach and sell to customers, how your product is going to reach the customer (i.e. delivery and distribution), and how you’re going to build a good relationship with your customers and encourage brand loyalty.
Examples of business models…
One of the oldest business models is the ‘bait and hook’ model (or ‘razor and blades’ business model if you’re looking for a more cutthroat description). This is how many mobile phone networks work: they lure you in with the bait (e.g. a swanky new “free” phone) and then hook you with the cost of air time. It’s about using a basic item to attract consumers and then generating revenue through charging for services and associated products.
Another example is the ‘premium’ business model. This is the model of most luxury brands and services such as Rolls Royce, Chanel and Louis Vuitton: offering high-end products and services that will appeal to discriminating customers. They’ll be expecting a lower volume of sales than other brands, but they will be expecting to get higher profit margins on those sales. Much of the business model will be focused on brand image.
Evolving from this and the ‘bait and hook’ business model is the ‘freemium’ business model. LinkedIn is a good example of this. They build up a customer base through offering a service free of charge and then charge a premium for advanced products, features or the chance to ‘upgrade’ your account.
Other business models include: franchises (such as McDonald’s), direct sales models, models that depend on advertising revenue (such as free online resources and newspapers), ‘bricks and clicks’ models (integrating an online [clicks] and offline [bricks] presence), brokerage, and many more. Technology has engendered a whole spate of new business models as companies rely on new ways of reaching customers, e.g. through social media or viral advertising.
Business model frameworks…
You can use various different frameworks to conceptualise and portray your business model. One of the most popular ways is through using a ‘Business Model Canvas’. This uses nine business model building blocks to build up a ‘canvas’ to describe your business model.
Otherwise you might want to look into alternative frameworks (or even invent your own), such as maps, reference models, flow charts, organic, centralised, or ‘hub and spoke’ frameworks. Really, it depends on the nature and the focus of your business model.
Business modelling is an essential part of starting your own business. It can help you clearly capture and design your business, and later on, it can be used as a tool to innovate and transform your company.