What’s that? A business model? If you have already turned your dream business into a money machine, don’t bother to read on. But if business models sound like gobbledegook , you may find yourself reading every word of this post.
A business model is really the way that you go about offering and selling your product or service to customers. It allows you to maximise the money you receive for your idea, leaving nothing on the table. Before you get carried away at the many variants and flavours that business models come in, remember this: the best business model delivers a fantastic product or service to your customer at an unbelievable price.
Ideas for income streams need to be based on innovative business models. Competition is incredibly fierce, especially on the Internet where business models can be copied and implemented within 24 hours or less. Many Internet businesses are probably not generating the revenue streams that owners would like.
Coming up with an innovative business model can take as much creative thought as your original breakthrough idea for a product or service.
Many basic business models have been around for a long time. Selling products from a stall or store where customers come to collect their goods goes back a long way. Another is advertising – newspapers and magazines offer content to a target market. Advertisers are attracted to promote their products and services in a focused environment of potential buyers. Subscriptions, another well used business model, can be found behind many products and services, not just editorial products. Insurance — you pay a monthly or annual fee for an unanticipated financial or asset (cars, household goods, homes, aircraft, yachts, just about anything) loss. Another business model is monthly annuity income – even telephone companies charge a fixed monthly rental – in addition to usage charges. Tolls dip into pockets and extract their share but be careful with this one as customers don’t like to knowingly have money taken from them in this way.
There are many business models and ways of looking at them. Any one of them can help you to better understand business models, especially if it sparks an idea to innovate yours. For kitchen-table start-ups taking an idea from pure concept to implementation means coming up with an innovative business model that will make money and be acceptable to your customers. You just want to flip the light switch, not have to delve into all the business theory.
That said, a useful business model definition is detailed in the article “Reinventing Your Business Model (HBR, Dec. 2008, p. 50 – 59). The business model consists of four interlocking elements that create and deliver value: customer value proposition, profit formula, key resources and key processes. The first two parts define value for the customer and the company and the other two describe how to deliver value to the customer and company.
To rethink your own business model ask yourself these questions:
1. What value does my product or service provide?
2. How will my business make a profit?
3. What resources will my business need to deliver my great product or service?
4. How can my business effectively operate to deliver great value at an unbelievable price?
Let’s put business models into perspective – to remove some of the mystery. What sort of business model does a company have that goes from a market cap of $288 million in 2002 to $9.18 billion in 2010? We’re talking about Netflix. It sells movies by mail order and over the Internet. The business model to begin with has been mail order but in recent years with the introduction of Internet streaming Netflix sells through a subscription business model ($9 a month subscription fee). Revenues have risen from $272 million in 2003 to $2.1 billion in 2010.
Take a look again at the questions above: value for both business models (mail order rental business and Internet streaming) is important to the customer, profit comes from delivering value through effective mail order operations and innovating technology to video stream at a price acceptable to people who wish to watch movies direct from the Internet. (By the way don’t confuse a business model with a revenue model. A revenue model is the number of products you sell x the price.)
Even established companies challenged by the economy and competition will be looking at innovating their business models but understandably with caution. Start-ups have the advantage of being able to trial, run field tests and even test markets to prove their business models.
As you go about devising your business model, try not to be led astray through visions of making unrealistic pots of money. Unless your offering makes sense to both you and your customer, you will unfortunately sit with a credibility gap. Remember the dot com meltdown – vast sums poured into Internet businesses but when you looked at what some ventures purported to do, their stories did not add up. Selling products with shipping costs higher than what you could buy at a street level outfit only made sense to investors desperate (or crazy) enough to find any way to get a piece of the dot com action.
Producing ideas for profit is critical because businesses begin with an idea. But ultimately, a vital ingredient, if your idea is to fly, is your business model.
If you think your business model is a cut above the rest, why not enter the first international business model competition.