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A Guide to Understand Business Model

By Ze MingNo Comments

When conversing with entrepreneurs, you will often hear the term "business model" mentioned in their conversations. People who are unfamiliar with the phrase, like you and me, may believe that this is a minor part of entrepreneurship. But it is not, and in fact, it is the total opposite,

It is essential to one's business. Without it, the company would suffer significant disruption and may even go bankrupt. This article will be breaking down the phrase "business model", starting with definitions and progressing to the elements of business models and the types of business models to allow you to have a more in-depth understanding of the term.

What is a Business Model

The business model is a strategy that outlines how a company generates revenue. It is an overview of how companies provide value to their consumers within a practical price range. A business model can help companies identify how they will serve their customers, who their target market is, and the market demands.

The model also accounts for anticipated expenses such as product manufacture and marketing. The primary goal of a business model is to define four aspects of the company.

  • What kind of product or service will the company offer?
  • How it intends to market that product or service.
  • What kind of expenses it will incur.
  • How it expects to turn a profit.

It is a model that enables companies to experiment, test, and analyze different ways to structure their costs and revenue streams. Business models are crucial for both new and established businesses. For new and emerging firms, exploring alternative business models can assist them in determining if their business idea is viable and allow them to attract investments.

For established businesses, the business model serves as the framework for producing financial forecasts, setting milestones, and establishing a baseline for reviewing your business plan.

Elements of A Business Model 

When creating a business model, companies must understand that it is not just about completing their business plan or determining which products to pursue. It is about mapping out how you will create continuous value for your customers.

A business model consists of five elements that can assist businesses in creating and delivering value to their consumers. It is important for companies to incorporate all components of a business model as each element is tied to a significant part of the company infrastructure and may help you respond better to unexpected events that directly or indirectly influence your company. Below is a more extensive explanation of each element to guide you in developing a successful business model.

Identify a Specific Audience For Your Company

When developing a business model, companies must identify the types of customers who are interested in their products and services. It is because targeting a large audience will restrict your company from focusing on customers who actually need and desire the product or service of your company.

Companies should narrow their audience down to two or three detailed customer segments and outline each of their demographics, common challenges, and the solutions that the company can offer. This enables businesses to concentrate on providing value for those segments.

Establish Business Processes

The next element is business processes. Companies need to have a clear understanding of the activities that are required to make the business model work. Business processes are ways of working together to solve repetitive tasks consistently. These processes are used to convert inputs into finished goods or services.

Examples of recurring jobs include training, development, production, and others. Companies can determine their key business activities by first identifying the core aspect of their product or service. By better understanding the processes, companies can provide value to consumers more effectively. Successful companies have operational and managerial processes that allow them to deliver value in a way that can be replicated and scaled up.

Develop a Strong Value Proposition 

When developing a value proposition, businesses should address a customer's dilemma and communicate with the customer the value that your company can provide to the customer case as a problem solver. Companies should also showcase what distinguishes them from their competitors in the industry in order to create a compelling value proposition. Customers will be drawn to your product when they believe it can provide value that other alternatives cannot.

Record Key Business Resources

Key business resources are assets that are required to deliver the value proposition to the target consumers, such as people, technology, buildings, equipment, and others. By documenting the essential business resources that companies utilize to carry out daily processes, companies can ensure that their business model is sufficiently prepared to satisfy business demands.

Leave room for Innovation.

Companies need to leave some room for innovation while building their company plan. This is due to the fact that when the business model is developed, there would be numerous assumptions that customers would definitely buy the products of the company.

However, you won't fully know if your business model will suit their continuous wants until you begin to welcome paying clients. Therefore, rather than viewing the business model as a set plan, companies must constantly examine and modify their plan in order to identify the best business model for them.

Types of Business Models 

After having a better understanding of the definition and the core elements, let us look at the types of business models. They are various types of business models, and each one is different from the other based on the specific company and the industry. Here are some examples of the common types of business models.

Subscription Model

A subscription model is a recurring revenue model in which customers pay a weekly, monthly, or yearly fee in exchange for your products or services. The subscription model prioritizes customer retention above client acquisition. Because consumers can renew or cancel their subscription, this type of model focuses on retaining the customer for an extended amount of time and securing recurrent income from the customer for prolonged access to an item or service.

Streaming services such as Netflix and Disney+ are examples of the subscription model, they require customers to pay a fixed amount of money over a specified period in order to receive access to its content.

Business Model
Subscription Business Model

Razor and blades model

The razor and blades model is also known as the bait and hook business model. The razor and blades model is a pricing strategy in which the dependent product is sold at a low price to customers and profits are generated by a paired consumable product. You can examine the razor in your local store to have a better idea.

You will notice that the razors are cheap, but the replacement blades are not. The goal of this model is to encourage the consumption of consumers over time, based on a very low initial offer. The primary product, the razor, is only a diversion for the sale of the consumable, the blade, which is where the company generates income.

As a result, the original investment in the main product is dissolved in consumable and dependent items, guaranteeing a return on that capital.

The video game industry is an example of the razor and blades model. Game console makers tend to sell their gaming consoles at a low-profit margin, with the intention to recoup the lost earnings by charging a premium price for the games that customers will buy more frequently over time.

For instance, Microsoft makes no money on the sale of its Xbox One X game console even at an average $499 price, but it gets about $7 out of each $60 video game.

Business Model
Razor and Blade Business Model

Freemium model

The definition Freemium model is the same as the name. With the combination of the words "free" and "premium," the freemium model is a model that offers the basic features of a product to its customers for free and charges them for the premium version of the product which includes advanced features.

The Freemium model is known as the “business model of the Internet”, as it is a common strategy for businesses to offer something for free. The goal of this model is the attract consumers. By giving away the basic product for free, it will be easier to attract consumers, build a client base, and persuade them that the additional features have a more unique value proposition than the free one, and are worth the investment.

It is critical to remember that freemium is not a free trial. Instead, it helps to distinguish the extra value between the free and premium versions. LinkedIn is an example of a freemium model. The free version allows users to search for and connect with individuals, and receive unlimited InMail messages.

On the other hand, the premium version includes additional services such as Premium Business, which allows you to gain specific business insights and expand your business, and LinkedIn Learning, which allows you to enhance existing skills and learn new ones.

Business Model
Freemium Business Model

Choosing the Right Business Model 

After understanding the basics of a business, it is time to choose a business model for your company. But how do you know that the model is suited for your company? According to Forbes, out of the 4.4 million new ventures launched in 2020, not all will survive due to the intensely competitive nature of the business sector. As a result, ensuring that a business model is well-suited and aligned with the present market is essential for an entrepreneur. Here are a few factors to consider when deciding on the best business plan for you.

Consider your customer needs

The best way to evaluate your options is to think about where it adds value to the customers. It is easy to form your own view on which business model is the greatest. However, if the model does not provide value to customers, it will most likely fail. Because you're not keeping the needs of the customers in mind.

As a result, businesses must answer the question, "What problems are you going to solve for the consumer, and what are they worth?" Companies will be unable to establish the best strategy to market a product if they do not grasp what they are going to solve for their consumers.

Consider how your customers buy

Another important factor is to consider how your customer buys. You will have a better understanding of which model can help you capture the market if you evaluate how your customers buy. Companies may learn more about their consumers by analyzing their purchase habits and behaviour.

For example, would your consumer purchasing behaviour be more receptive to the freemium model or a subscription model?

Consider the market

The next crucial factor is to analyze the market you serve. Creating a business model according to a particular need is essential for success in the long term. Companies can conduct tests to determine whether their target consumers are interested in and willing to purchase their products and services.

By doing so, companies can evaluate and determine if the model is suitable for the market. Companies can also study the approaches they take to stay afloat and consider different strategies and techniques they might adapt to their businesses to differentiate themselves from the competition.

Conclusion 

To conclude, a business model is a strategy that outlines how a company generates revenue. It gives companies an overview of how are they able to provide value to their consumers within a practical price range.

The factors, elements, and types of models to consider when developing a business model might seem daunting, but by devoting time and effort to developing your business model today, you are taking the necessary steps to position your firm for future development and success.

References

What is a Business Model

Elements of A Business Model

Types of Business Model

Choosing the Right Business Model

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