Do you need a business model?
The starting or running of a business requires more than the selling of products or services to prospective customers in return for compensation. You need a plan of exactly how you will convert the exchange process into a profitable venture. Unfortunately there is not one best recipe or process to develop a business model. There is also a difference of opinion of what should be included in a business model. Many of the older research and articles on business models have been done by scholars at universities and have been written in a academical and complex language. The average business person and entrepreneur won’t have access to it. Lately there is some excellent work available on business models. In this post want to highlight some of the most important aspects of a business model.
A business model is less detailed than a business plan. A business model is not a business plan. A business plan describes how you will execute your business model. According to Roger Clarke (2004) a business model should answer 4 basic questions.
- Who pays? The consumer, producer, or third parties?
- What for? Goods, services, expertise, assurances of quality or security.)
- To whom?
- Why? – The perceived value
A business model defines the manner by which a business delivers value to customers, entices customers to pay for value, and converts those payments to profit. It therefore reflects your proposition about what customers want, how they want it, and how a business can organise to best meet those needs, get paid for doing so, and make a profit. The value proposition is the reason why clients favour a specific provider over another one.
We group customers into various segments according to their needs and characteristics. Understanding and meeting customer needs is a pivotal point in the development of business models. Relationships and servicing are established with customer segments according to their needs. Revenue streams are generated from each customer segment. One must know for what value customer segments are willing to pay.
Each value proposition consists of a group or bundle of benefits that a business offers customers. Customers don’t buy product specifications and features. They buy the perceived advantages and benefits of a service or product. Most yuppies driving modern motor cars with the best sound systems care less about the features of the combustion engine and latest components of an electronic circuit.
Over the years, business models have become much more sophisticated. Instead of just offering a basic product or service, businesses offered a basic product that will ensure the use of additional products or services. A business will sell you an inexpensive printer for your computer to ensure that you will buy their ink cartridges. This is called the bait and hook business model. Another good example is cheap cell phones (bait) and the hook airtime.
The simplest business model may the best. If you have products and services that is in high demand it will simply be easier to sell. A very complex range of products that is not user friendly is much more difficult to sell.
Business ideas could have various origins. The sources could be:
- An unsatisfied customer need . Many successful entrepreneurs start a business because their own personal needs couldn’t be satisfied by the market.
- A technology (innovation) that allows doing business in a different or more efficient way. Think of how Skype started offering free phone calls because they used the readily available and free Internet as an infrastructure, rather than a proprietary network.
- A new product or service that the market hasn’t seen yet, or that is offered with a different or better value proposition. Various cheap flights were introduced all over the world during the last 5 years. Apple’s iPad is another example with the company selling 1 million iPads in less than one month.
An idea must be developed into a business model. During the business model development process it is better to generate alternative business models or prototypes rather than one single model. Evaluate the strengths and weaknesses of several models. This should eventually lead to a better choice of business model.
Test your business ideas by considering the followings things:
- Customers: Who are the prospective customers for the business idea? What are their needs? Are there enough potential customers? Do they have buying power? Are they easy to reach?
- Trends: What are the key trends that may affect the business idea? Could some of the key trends render the business idea obsolete in the future e.g. technical and legal trends. Are key trends going to boost the business idea in the future. Socio-economic trends play a very big role. Better education, food and health care cause people to live much longer. This has an extensive impact on the product and service demands of older people.
- Competitors: Which other companies are already operating in this area? What are their key products and services? Who are the key role players in this area? How will you compete?
- Macro environment: Which macro-factors must be in place to make the idea reality? The macro environment consists of forces that originate outside of an organisation and generally cannot be altered by actions of the organization. E.g. The sociocultural dimensions of the environment consist of customs, lifestyles, and values that characterise the society in which the business operates. In many developing countries people changed from active life styles to sedentary lifestyles and consuming unhealthy foods in too great quantities. This has an chain effect on what is demanded by them. Because of life style change 90 million people in China are suffering from diabetes today.
A business model that works and makes sense today might be outdated and obsolete in the near future. You need to have a good understanding of a model’s environment and how it might evolve in the future in order to adapt or redefine the business model. The future is never certain but trend analysis and scenario building will be of great assistance. Painting pictures of the future makes it much easier to generate potential business models.
Some people think the e-commerce is so different that you only need a “black box” to generate money. Many prospective entrepreneurs in the e-commerce environment waste their time by following unscrupulous “gurus” selling them 7 figure money pumping machines making money while they sleep. Almost all of these “business models” land the customer out of pocket with nothing in return. If you don’t understand all the components and see the business model in successful operation don’t buy into it. Behind all transactions are real people with real needs. Money simply won’t be printed electronically out of thin air.
- Osterwalder A and Pigneur Y, (2010). Business Model Generation. John Wiley & Sons Incorporated.
- Clarke, Roger, (2004) Open source software and open content as models for e-business. Retrieved from http://www.rogerclarke.com/EC/Bled04.html
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