Business Model: What It Is, How to Build It, and Why You Need It

A business model is a schematic representation of the interconnected processes of a company. It shows what and to whom to sell, and also determines the profit.

Below, we will consider in more detail what a business model is and what it is used for.

Free business model template. Source: online.visual-paradigm.com

Unlike in-depth research, a business model does not examine a company in the minutest detail. It is a quick analysis that studies:

• The company's direction of development;
• Ways to optimize processes;
• What you need for growth.

Why a Company Needs a Business Model

At the launch stage:

• It calculates how much money will be needed for the startup, what expenses will arise each month, and the expected level of profit in the early stages of operation.
• It analyzes how customers interact with your business and also reduces expenses.

In case of losses:

The business model saves the unprofitable business. An innovative product or service is certainly important, but it is not always necessary to outperform competitors. The main thing is to constantly improve your processes and adapt the business model to new technologies.

Attracting investments:

• Developing a business model creates a simple and logical description of the project concept.
• It explains to financial partners that the product is in demand and how it differs from analogs.
• The project's business model demonstrates the connection between processes, which increases investor confidence.

Overall, a business model:

• Forms a clear vision of how the business will operate.
• Adapts the company to changing market conditions and adjusts the course of development.
• Promotes more efficient solutions based on analysis and forecasting.

Developing a model is an important step for any business that wants to grow and succeed.

What a Business Model Consists of

Let's find out how the structure of a business model works.

Source: online.visual-paradigm.com

The above is an example of the most famous template, developed by Alexander Osterwalder and Yves Pigneur. It clearly represents your business model, evaluates its effectiveness, and finds ways to optimize it. The structure consists of nine interconnected blocks, each of which plays a crucial role in building and developing your business. Let's consider them in more detail.

1. Segments of your audience

• Who are your customers? The first step is to clearly define your target audience. You need to understand who exactly will buy your goods or services.
• Find out what problems and needs your target audience is experiencing. What is important to them in a product? What value do they expect to receive?
• Target audience segmentation. You may have not one, but several target audiences. Divide them into segments based on similar characteristics and needs.
• For each segment of the target audience, form a unique value proposition that takes into account their specific desires and purchasing power.

2. Value Proposition (USP)

• What do you offer? Describe your products or services. What problem do they solve for the customer?
• What makes you unique? Analyze the market and competitors. Why should the buyer choose you? At the core of a successful business model lies the satisfaction of the user's needs. The better you do this, the higher the likelihood of their loyalty and repeat purchases.

3. Distribution Channels

• How do you communicate your value proposition? Identify the channels through which you communicate about your product and its advantages. This could be advertising, PR, participation in exhibitions, interaction through social networks, etc.
• Delivery and service. Consider how to transport the product. Will it be physical delivery, online access, or another form? Create a positive interaction experience with your business at all stages — from initial product introduction to after-sales service.

4. Customer Relationships

• Develop strategies for attracting new customers and retaining existing ones.
• Identify the most effective ways to communicate with customers — in person, through newsletters, chatbots, etc.
• Do people need additional training to use your product? Consider support options and self-service opportunities.

5. Revenue Streams

• List the ways of generating revenue. This could be direct sales of goods or services, subscription, rental, licensing, commission fees, or advertising on your resources.
• Define pricing principles considering your costs, market situation, and the value of the offer to the customer. Think about convenient payment methods.
• Forecast expected revenue considering the chosen sources and pricing strategy.

6. Key Resources

What do you need? Make a list of everything necessary for launching and operating your product: financial resources (capital, investments), skilled employees, intellectual property (patents, copyrights), physical resources (equipment, facilities), etc.

7. Key Processes

• Describe the main processes related to production, sales, and delivery of the product/service to customers.
• How do you address user problems and ensure quality service?
• Consider IT systems, software, and equipment needed to support and develop your operations.

8. Key Partners

• Who will help you grow? Make a list of suppliers, contractors, distributors, and other partners with whom cooperation is necessary to achieve your goals.
• Analyze the benefits you gain from partnering with them and the value you provide to them.

9. Cost Structure

• Where do you spend money? Identify all expense items related to running the business: production costs, marketing, personnel, rent, utilities, etc.
• Find ways to reduce unnecessary spending and increase the efficiency of your business.

Filling in all the blocks provides a comprehensive picture of your business model. This tool:

• Assesses the viability of your business idea.
• Works out the details and eliminates potential weaknesses.
• Clearly presents your business to investors or partners.
• Identifies opportunities for optimization and increased profitability.

How to Evaluate a Business Model

When developing a business model, companies often underestimate the costs before turning a profit. It's not enough to simply calculate expenses before launch. Companies need to operate until their income exceeds their expenses.

Analysts look at gross profit (revenue minus cost of goods sold). By comparing it with competitors, one can judge the effectiveness of the model.

High gross profit is a sign of a well-thought-out plan. But uncontrolled expenses are a signal of ineffective management, which can (and should) be corrected. A strong business model will set the company on the right track.

Types of Business Models

Let's explore the various types of business models.

An innovative approach distinguishes modern businesses. There are not only traditional models like direct sales or retail stores but also many other options. Companies even combine them. Let's examine a few:

Subscription. These models attract customers for the long term and offer a product with regular payment for a specified period of use. Most often, these are digital companies providing access to software, music, movies.

Example: Netflix.

Retail Trade. A familiar model to most, where a company (retailer) purchases products from manufacturers or distributors and interacts directly with customers.

Example: Target, Walmart, and Best Buy.

Manufacturing. The business purchases raw materials and produces finished products using its own equipment and machinery. It manufactures both individual and mass-produced goods. Sales are made through distributors, retail chains, or directly to customers.

Example: Tesla.

Hourly Payment. Instead of selling products, these companies offer services for a fixed fee or hourly rate. They often specialize in a specific field.

Example: Consulting firms.

Freemium. Businesses attract customers with a basic version of the product with limited features. As users engage more, the company tries to transition them to a premium version with enhanced features and the need to pay. Example: Dropbox.

Marketplaces. They earn by providing a platform for transactions. Transactions could occur without them, but the marketplace simplifies, accelerates, and enhances the security of the process.

Example: Etsy (online marketplace for handmade goods).

Affiliate Programs. Such businesses are based on marketing and reaching the audience of a specific individual or platform. Companies pay for promoting their product, and the partner receives a commission from sales or a fixed fee.

Example: Bloggers promoting makeup products on their channels.

The "Razor and Blades" Model (consumables). The company sells the main product at a low price and then earns on consumables with a high margin.

Example: Gillette (razor handles and replacement cartridges).

The reverse "Razor and Blades" Model. The brand trades in an expensive main product and then offers consumables at a low price.

Example: Apple.

Franchise. The franchising model utilizes existing business plans to expand and open branches in new locations. Most often, these are brands from the food, equipment, or fitness industries.

Example: Starbucks coffee shop chain.

Pay-Per-Use. Some companies use a model where the amount depends on how much of the product or service is consumed.

Example: Utility services.

Brokerage. Such brands receive a percentage of the amount paid when a deal is made. Brokers are most common in real estate and trading.

Example: Airbnb, where the platform takes a percentage of the rental fee for each booking.

Business Model or Business Plan?

Business Model:

Brief analysis of the company.

What it helps with:

• Optimizes costs.
• Rescues unprofitable projects.

Creation:

• Using free templates (Visual Paradigm, Miro).
• Building from scratch.

Business Plan:

Detailed research based on market analysis.

What it develops:

• Promotional strategies.
• Action plan for unforeseen circumstances.

Goals:

• Attracting investments.
• Understanding the indicators at which the company will generate income.

Format:

Yearly calculation in Excel or Google Sheets.

Complexity:

• Requires knowledge of economics.
• For large projects, it is recommended to involve professionals.

When to use?

• The business model is used in the early stages of development to brainstorm key ideas and concepts.
• The business plan is needed at later stages when a more detailed analysis and investment attraction are required.

Building Business Models

Below, let's examine the creation of a business model using an example. Let's consider launching an online course on web development.

Target Audience:

• Beginners in the profession.
• Professionals looking to enhance their skills.
• Small and medium-sized business owners (for website creation/improvement).

Unique Selling Proposition (USP):

• Practice-oriented course.
• Regular updates of materials (modern technologies).
• Affordable price.
• Support from mentors.

Communication channels:

• Targeted advertising on social networks and search engines.
• Partnerships with educational platforms.
• Free webinars.
• Bloggers.

Customer relationships:

• Various pricing plans (basic, advanced, individual).
• Unlimited access to materials.

Revenue streams:

• Sales of the course itself.
• Additional lessons or support.

Resources:

• Educational platform.
• Social media group for posting news and interacting with students.
• Team of experienced mentors.

Processes:

• Content development and updates.
• Webinars.
• Student support.
• Marketing.

Partners:

• Marketing manager.
• Bloggers (for outreach).

Costs:

• Payment for mentors' work.
• Marketing.
• Platform development and maintenance.

Conclusion

The business model is the cornerstone of any successful enterprise. It defines how a company will make money, describes the target audience, value proposition, sales channels, and customer relationships.

In essence, it is a roadmap that briefly analyzes the market, optimizes expenses, and builds a long-term development strategy. Entrepreneurs test their ideas, attract investments, and, most importantly, achieve success in a competitive market.