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13 February 2018

What is a Business Model and How to Make it Effective

Entrepreneur | Finances
Estimated reading time Time 4 to read

The concept of business model changed substantially over the last few years. It can no longer be defined as the way a company generates money or a person attracts clients. Its definition has gone farther and now refers to the pure needs of users and clients.

How is it possible that the largest private transportation company does not own a single vehicle? How is it possible that the largest accommodation company in the world does not own a single hotel?

Alex Osterwalder, in his book “Business Model Generation”, states that innovation in business models consists in creating value for companies, clients and society in general, i.e. in replacing obsolete models.

“A business model describes the rationale of how an organization creates, delivers and captures value for the client”

Alex Osterwalder

These are some examples of the new business models: the digital player iPod and the online store iTunes.com, which Apple used to create an innovative business model that made it the undisputed leader in online music. Skype offered international calls at very low rates as well as free calls between service users with an innovative business model based on P2P technology.

With the help of Zipcar, residents in many cities no longer need to own a vehicle; instead, they can rent any car for a few hours or days in exchange for a membership fee. This business model results from the new needs of users and the worrying environmental conditions.

Three mandatory elements in a Business Model

  • Profitability: No business is created to lose money; consequently, it must be profitable.
  • Scalability: Being able to create one now, another tomorrow and so on and so forth until you have a model that takes over the market.
  • Repeatability: Being able to standardize them to be able to replicate them anywhere, e.g. franchise products.

In other words, when you release a product or service, it must feature the three elements that should guarantee its market success: Desirable, Viable and Profitable.

How to create value with a business model

By being close to the client. By creating very close relationships from the very beginning so as to know the client’s needs or problems, while always listening to them and co-creating with them. And once the product has been released, it must be possible to receive feedback to be able to discern the model that allows clients to find the added value it brings.

“Customers comprise the heart of any business model. Without customers, no company can survive for long”

Alexander Osterwalder

Flexibility is the key to a business model’s success. For this reason, we highly recommend the Canvas Model because, using this method, you employ nine blocks to test whether you are targeting your product at the right segment or whether your value proposition really meets the needs of your clients.

“Businesspeople mistake objectives, mission and vision for strategy. And strategy is the path toward being unique,” Michael Porter. / Image: Daria Nepriakhina on Unsplash
“Businesspeople mistake objectives, mission and vision for strategy. And strategy is the path toward being unique,” Michael Porter. / Image: Daria Nepriakhina on Unsplash

How can I offer added value when compared to my competition? By providing a better solution to an existing need (adding value to your client) and improving how you deliver this solution. As a consequence, a good business model means finding a different way of competing.

9 Business models recommended by Guy Kawasaki

  1. Multicomponent. A good example is Coca-Cola, which is sold in supermarkets, neighborhood stores and vending machines. The same product is sold in different settings, for different prices and with different presentations.
  2. Market leader. Apple is the personification of a market leader that creates innovative and attractive products for its clients.
  3. Valuable component. Intel manufactures valuable elements for other products; these elements are not sold directly to the client but they differentiate the company from its competitors.
  4. Switcher. De Beers controls the supply of diamonds; this model involves several challenges: to win control of supply and to convince the consumers that this control is desirable.
  5. Printer and Toner. Also called Bait and Hook. This business model consists in selling a product that needs consumables, such as Nespresso machines.
  6. Freemium. Consists in giving services away up to a certain limit; after that, the clients need to pay. For example, Evernote, Spotify, Dropbox, etc.
  7. Eyesballs. Consists in offering a platform to create or share content that attracts visitors, normally selling advertising, e.g. Facebook, Huffington and Instagram.
  8. Virtual products. Consists in selling digital codes for products with almost nil costs and maintenance in terms of inventory. For example, Candy Crush and other videogames.
  9. Handcrafted. Furniture is an example of this business model that prioritizes quality and handcraftsmanship.

Other business models in the market:

  • Affiliation:  A company that wishes to sell a product and defines some kind of reward for suppliers, companies or people that attract clients or orders for its products.
  • Long tail:  The long tail business model is innovative because it offers a wide range of little sought-after items that may become profitable businesses and generate profit on the basis of a large volume of small sales.
  • Franchising or licensing. This business model allows entrepreneurs to “exploit” a proven business that works and is replicated where it does not exist yet.
  • Subscription. This business model consists in having the user pay a subscription in exchange for a value proposition. Classic examples are subscriptions for paid TV, magazines, newspapers and Netflix.
Netflix seems to make less profit with its content than other companies. However, this comparison does not take into account the value of data that are used to reduce the cost of buying new content. Source: Investopedia
Netflix seems to make less profit with its content than other companies. However, this comparison does not take into account the value of data that are used to reduce the cost of buying new content. Source: Investopedia

 

It should be noted that the axis of a business model is the Value Proposition, which consists in knowing what you have that others do not have and that people are willing to pay for. The best enterprises happen when the entrepreneur has first-hand experience of the need they wish to meet and offers a solution.

Consequently, if entrepreneurs and businesspeople want to dominate the market, rather than worrying about creating the ideal product they should worry about designing the “Business Model” that allows them to have profitable companies over time and that survives with residual income while making them the leaders in demand among their clients and consumers.

Guiovanni Quijano

@MktQuijano

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