Understand a Business Model with this Simple yet Effective tool!

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understanding business model

Understand your business model on a single page

The business model has now become a buzzword with the popularization of startup culture and entrepreneurship. Though many use this word loosely, very few know what it is and the way to design, test, and implement it for optimizing the profit of the business and the value delivered to customers.

What is a ‘business model’? – The Definition

Simply defined, a business model of an organization or a company is a way to earn profit by creating and delivering value to target customers and simultaneously capturing value (earning profit) for itself through a clear process that ensures it’s functioning.

Though we have defined business model in one sentence, but to truly understand it in detail, it is important to break this up into its constituent elements, understand the significance of each element and then recombine those elements to visualize them together to get the clear picture.

Business model canvas is a very powerful tool in understanding the business model in a simple, effective, and precise way. It was invented by Alexander Osterwalder; co-founder of Strategyzer & lead author of the book, ‘Business Model Generation’.

Business Model Canvas


Knowing the components

Any business model can be understood and mapped by understanding the components that constitute it. There are majorly 9 components of a business model that are sufficient to figure out every aspect of it.

Following are the nine components of a business model:


Value proposition

Value Proposition is the product, service, or solution that you offer to your potential customers which helps in creating value for them.  It defines the most important features and performance attributes of your offering and the way you relieve pains, create gains, or satisfy the needs of your customers through that offering.

Your assumptions in your initially designed value proposition need to be validated. That is why to test your assumptions, you try to know what your potential customers truly want or would pay for. One obvious way to know this is by asking them. This straightforward approach cannot reliably uncover all the attributes that customers expect or need.

Fortunately, many ways can help you to achieve this. Though you certainly have to reach out to your potential customers to get the essential insights, these ways can help to bring out most of the relevant information from them.

For example, you can list all the features of your offering and tag each of them with a price. Then you can ask your customers to buy (not in the real sense but virtually) those features based on their priority. The other way can be to ask your customers to prioritize features that marked on different cards. Here you show your customer one feature at a time and ask to rank them based on their preference.


Customer segment

It is a group of customers whom the value proposition is built around i.e. a group (of people or organization) which you intend to serve and create value for. In customer segmentation, the most common and popular approach is to create a persona or archetype of your customers based on demography. The information that you test & validate could include age, gender, profession, income, lifestyle, motivation, their influencers, decision-makers, etc.

During the stage of customer discovery, it is important to create a profile of your customers for knowing them in detail i.e. mapping a picture that includes their pain points, the benefits that they expect, and their needs.

Seeing the value proposition and customer segment in parallel helps in clearly understanding the co-relation between them. The value proposition canvas is an effective tool to achieve this.


Customer Relationships

It describes the type of relationship that you have with your customer segment. Customer relationships are established through channels. For some kinds of businesses, the relationship is personal like in passenger cars manufacturing companies while for the other, it’s automated like in almost all e-commerce companies. It has an impact on customer acquisition, customer retention, and overall customer experience.


Channel

Channels are required to reach to the customer segment to offer them the value proposition. This component helps to understand how different channels are integrated. Channel could be physical like stores, grocery market, etc. or virtual like e-commerce platforms or a combination of both.


Revenue Streams

These are the ways companies generate revenue for themselves from the customer segments to which they serve. Customers pay to businesses for the value that they get from the offering.

Exactly knowing what customers pay for, allow you to discover multiple ways of generating revenue from your customers. Revenues can come from one time sale of a product like television, laptops, etc., from licensing of intellectual property like patents, from subscription fee for using online services like productivity tools, platforms, or from offline services like fitness training. Online or offline advertising is also one of the revenue streams that generate revenue in the form of an advertising fee.


Key resources

These are the assets that companies need to make their business model work. Key resources enable businesses to create and offer Value Proposition, maintain customer relationships, reach customers, and generate revenue. They can be in the form of intellectual property like patents, trademarks, and copyrights, human resources, physical assets in the form of plant and machinery, vehicles, warehouses, infrastructure, etc. Key resources are required to carry out key activities.


Key Activities

Key activities are the actions that a company has to undertake to make its business model work successfully. Like key resources, they also enable businesses in reaching their customers, creating and offering a value proposition to their customer segment, maintaining customer relationships, and generating revenues. Key activities vary from business to business. For companies related to manufacturing, these can include manufacturing, maintenance, quality control & vendor development while for consulting businesses, these are consulting, training, etc. 


Key partners

These are suppliers external to your company. There are many reasons for companies entering into partnerships. Few of them are risk reduction, acquisition of resources of partners, delivering higher value to customers than their competitors. There can be many types of partnerships depending on the objective to be fulfilled like a buyer-supplier partnership, strategic partnerships between competitors, joint ventures for new businesses, etc. Partnerships help companies to focus only on their core strengths. No business can own all the resources needed to operate a company and even when they do that in rarest of the cases; they usually have to compromise with increased costs and risks.


Cost Structure

This component describes all the important cost drivers in the business model. All expenses incurred in the operation of the business model come under cost structure. All the costs that are associated with the above mentioned 8 components fall under this.

In context to cost structure, businesses can be of two types. One is value-driven in which companies focus only on value creation for their target customer segment. Such businesses deliver premium services or products to their customers. For example, luxury consumer stores, hotels, or premium touring service. The other is cost-driven where businesses strive to minimize costs through different approaches like low-cost automation, outsourcing, etc. For example, low-cost airline services.


Integrating the components

Now that you have the idea about different components of the business model, it’s even more insightful to see them together. Business Model Canvas is a great tool to map, design, and discover new business models. The integration of all components on a single sheet of paper makes it a highly effective tool for understanding the working of the entire business and subsequently suggesting and making essential or desirable changes

Business Model Canvas
Business Model Canvas


Conclusion

The business model is at the core of any business.  Without understanding the business model, you cannot know the loopholes or blockages that inhibit your operations or even growth. A clear knowledge of the business model can help companies in not only optimizing their operations but can also help them in adapting to changing needs.


Do you feel there is something more to be included? Kindly write to us. We will be more than happy to consider your valuable suggestions.