Complete guide outlines what is a business model, definition of a business model and explains types of business model.
CONTENTS
What is a business model?
The contents of a business model
The purpose of creating a business model
How can a business model be specifically described?
The 4 elements of a business model
1. Value proposition
2. Business structure
3. Income model
4. Enterprise spirit
What is a business model?
Definition of a business model:
A business model consists of a value proposition, an architecture of value creation and a revenue model, to which is often add the enterprise spirit. Its description enables potential investors, among other things, to identify the key factors of business success or failure. Innovations in the business model can supplement or replace product or process innovation in increasingly saturated markets.
How to develop a business model
The business model is the foundation of every company and describes how it works.
What is business models use in the modern world? That answer is that even the best business idea is usually not sufficient if it is not based on a well thought-out and functioning business model that captures the most important pillars of future success.
Although there is no uniform content definition of a business model, certain content can be highlighted which should be covered by a business model. Since the dawn of the internet, a wide variety of new business models have developed in the digital space, but regardless of whether offline or online – successful business models have answers to certain questions.
How to use a business model canvas template
What are business model components?
First of all, a business model should have information about the benefits the future company will bring to customers. Or which problem a new and innovative business idea should solve. This is an extremely important topic, especially when it comes to setting up a company. Because a convincing answer defines how successful or promising a company can be in the market. The question of the benefit that a company creates for its customers ultimately leads to the unique selling proposition for all types of business model.
Another important aspect that should be covered with a business model is the way in which this benefit is generated for the customer. One can speak of the so-called architecture of value creation here. This part of the business model should record the steps in which the service is created.
Finally, the business model deals with a company’s earnings model. This should define how and from what sources the company will generate its income and expenses.
How to use the Johari Window Model
The purpose of creating a business model
The preparation of a business model serves several purposes – on the one hand, when writing the model, those involved deal very intensively with all important aspects of the company, which can help them to understand it better themselves. On the other hand, the unique selling point can be elaborated even more clearly, thus enabling better positioning on the market. In addition, a mature business model enables a better assessment of the scalability of a business idea.
Example
Daniela has a very interesting business idea. In order to analyze whether her idea has the potential to be successful, she designs a rough business model in the first steps.
How can a business model be specifically described?
The business model thus reflects how a company manages to generate sales. The business model of manufacturing companies differs significantly from that of a service company. The difference arises mainly from the way in which value is added. While a manufacturing company produces an end product through various processing steps, the value for the service provider arises when the service is provided by the customer or on a customer’s property.
In fact, there are hardly any pure service providers or pure manufacturing companies left today. The approaches are mixed according to customer requirements, which in turn can create competitive advantages for the companies offering them.
According to Alexander Osterwalder and Yves Pigneur (authors of the “Business Model Generation” manual), a company’s business model describes the basic principle according to which an organization creates, communicates and records values. It can best be described by the following aspects:
Unique selling point/Unique selling proposition
Submarkets
Key activities
Key partner
Customer relationship management
Distribution channels
Key resources
Cost structure and revenue channels
The 4 elements of a business model
In the business model you describe four central things:
- what value or benefit you create for your customers ( value proposition ),
- how you create this value ( business structure ),
- how you earn money with it ( income model ) and
- what drives you as an entrepreneur and which people you bring into your team for this ( entrepreneurial spirit ).
1. Value proposition (customer benefit)
The term describes the statement with which you want to be useful to your customers: Why should your customers be enthusiastic about your business? Many founders think that a good product is enough to inspire people. And of course what you produce is important . In the end, however, customers buy the benefits of your product. This can be life relief, happiness, simplicity or comfort.
And the entire business model must deliver this customer benefit. If you sell a product that simplifies the life of your customers, but you fail in sales and the product can only be obtained with great effort, then your promised customer benefit will not arise.
The value proposition element consists of the building blocks customers and benefits.
Customers: Who are your clients What makes them stand out?
For a good business model, you should describe exactly who should belong to your target group and what tasks you take on for them. Founders like to talk about markets. Markets just don’t buy anything, individual customers buy. Be specific here, because the more specific you are, the easier it is to address customers with appropriate marketing measures.
In addition to the target group, you describe which task you are solving for this clientele. Tasks are more specific than needs. One task that you can solve, for example, is to hang up a picture quickly and easily. In English one speaks of “jobs-to-be-done”.
The customer benefit: Why will your customers be excited?
Think about what exactly your customers will get from you and your business. The product is not the benefit. The benefit arises when buyers get their tasks solved in a special, better way than before. What do you do to make their life better?
2. Business structure
What is the business model aspect of structure? This second element is about the actual structure of your business. What are you offering exactly? How do you design your sales? How do you create your offer exactly? What skills do you already have? Which key partners do you need? You describe all of this with your business structure. You act like an architect. He does not brick himself, but develops the big picture and acquires helpful business connections for the implementation.
The element consists of the modules offer , sales and communication, production, core skills and key partners .
Offer: What are you offering What do you sell to your customers?
The offer is specifically what customers can buy from you. What is that with you Is it a product, a service, or a combination of both? At the end you write an invoice for this offer – which should also make the difference to the benefit description clear to you.
Sales and communication: How do you reach your customers?
Without distribution, customers cannot buy your product. Without the right communication channels, your potential customers won’t even find out about your product. Often founders dream that the fabulous product will sell itself with a little marketing. In doing so, they overlook the fact that sales means more. If you set up direct sales without intermediaries, i.e. sell directly to end customers, you can control how your offer is positioned. You lose reach compared to indirect sales, in which you try to reach customers through business partners (e.g. dealers).
Production (core activities): How does what you offer come about? What do you do yourself, what do your customers, what do your partners do?
Production is about how you “produce” the offer (and thus the benefit) for your customers. Even if you are not creating a physical product, but a service: Your offer must be produced . So think about which steps and activities are necessary to provide your offer. When it comes to production, one often speaks of a “value chain”. You probably have to do core activities yourself, not other things.
Core skills: What are you good at What skills do you / your team need to build?
Your core skills are things that you are good at, that require almost no effort, that are easy for you, that you may even like to use. In addition to a business idea at the beginning of a foundation, these skills are often the only thing available You will certainly quickly know what skills and competencies you yourself have. Or maybe you lack skills that you can then bring on board either with staff or key partners. The core skills of your company also help to make you distinguishable among customers. Often they are not easy to imitate by competitors.
Key partner: Which external partners do you need?
In your production, it is best to focus on that where you can create the greatest value with your core skills. You should hand over everything else to partners, because this way you can concentrate on the essentials: building up the company. Among the partners who can do something much better than you are, there are not only suppliers who you could simply exchange. You must carefully select and maintain key partners who are critical to your business.
3. Income model
The third element is about money, costs and income, in short: the profit you want to make. With the income model, you show how you want to earn money and where your costs are incurred. The element consists of the components cost structure and sources of income .
Cost structure
What do you have to spend money on? How flexible are these costs? Every company costs. Be it because of rent or material, be it because of salaries. You can track down most of the costs when you look at your business structure – especially the production of your offer. There are many running costs there. In addition, your investments – e.g. for your shop equipment – cost money that you have to keep. The relationship between fixed and running costs – your cost structure – is central to the success of your company.
Sources of income
For what and when does money go to you? With the sources of income you describe how you generate your turnover, i.e. in which way your customers pay you for which service.
4. Enterprise spirit
The fourth element is about you, your team, your values and the spirit that should be lived in your company. The company wouldn’t exist without you. Without your team, there is no one who makes good (or bad) products. In the beginning you only have yourself and your values that you want to live in the company. It is the person who makes a business. The human being and what he stands for. The people you hire, the key partners you work with, become part of the corporate spirit. The element consists of the building blocks founders & team as well as values.
Founders & team: Who is there and why?
The team is the heart of every company. With the composition you have a considerable influence on how the company develops. When choosing team members, ask yourself what skills you need to be able to build your company. This is not just about technical skills, but also about social skills. Only with the right mix will your team be able to achieve extraordinary things.
Values: What are your company’s values?
Values are soft factors that can be critical to your business. This is about rules that shape cooperation, such as ideals, manners and the like. For example, how you deal with customer complaints plays a role. Values only deserve their name if they work and are lived in everyday life.
Online business models on the road to success worldwide
Digital technologies, especially the Internet, offer companies new opportunities to create value. In this way, sophisticated digitization strategies are developed to increase efficiency, process quality and sales, as well as to reduce costs and error rates. Innovative technologies are integrated into existing business models or used to develop new business models .
Particularly innovative start-up companies can, depending on the orientation of their business model, aim to open up new markets or to disrupt existing markets by crowding out analogue competitors.
