Business Model
From Entrepedia: The Entrepreneurship Wiki
A business model can be a tried, tested, and true model, like a franchise business, or selling advertisements to generate revenue; however, it can just as easily be something completely innovative that will work best for your business idea, and that will generate the most profit for your particular startup. However, keep in mind the description of a business model given in an Entrepreneurship.org article: "Your business model will explain who your customers are, what they value, and how you'll profit from providing them that value in your product or service. In other words, how are you going to make money?"[1]
Collis Ta'eed, writing on The Netsetter.com blog, emphasises that "every business model can be boiled down to selling something to someone. Whether it’s selling advertising to people who want to market to your audience, selling a product, selling a subscription to a service, selling a third party product in an affiliate deal, or selling your whole startup to another company."[2]
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Finding/Developing a Business Model
It will be up to you to choose or develop a business model; as you know your business best, you are the best person to decide what should be the best opportunity to monetise it. However, there are many blogs, articles, and books available to help you make an advised decision. If you are considering using a pre-existing, tried-and-tested business model, there are a number of advantages as well as disadvantages to keep in mind. It might make it easier to get finance, and will have an existing business plan and marketing strategy in place with it; in addition, an established business model should have already ironed out a lot of the problems that have arisen.[3]
On the other hand, there's not as much room for freedom, and it may not work as well for your business has it has done for others. For example, Ta'eed warns entrepreneurs that, "While advertising is certainly a viable business model and there are some very large companies doing well with it, I don’t believe that advertising is the easy success formula that it sometimes is made out to be. Certainly I don’t think it should not be the first port of call for a budding startup.[2]
Ta'heed goes on to advise entrepreneurs to look closely at their business: "You can only sell something of value," he notes, "If you don’t have anything of value, then you don’t have anything to sell."[2] It is up to you, then to identify where within your business the value is, or could potentially be, generated. Is your product or service strong enough to really attract and maintain customers? If you are an online business, is your audience big enough to warrant selling advertisement space? If neither of these, or other usual centres of value, seem to exist within your venture, then you need to spend time figuring out just what is valuable within your business. Ta'eed suggests you look beyond the obvious: "Sometimes the value is being generated not for your main user group, but in a smaller subgroup."[2]
Questions to Consider
Some questions that you should keep in mind while you are considering your potential business model include:
- "Where is the value being generated?"
- "What components of pre-existing business models make them work?"
- "How could you improve on an existing model?"
- "How might an existing business model be adapted to make your business better than the competition?"
Finding the Value
There are a couple of different ways to uncover what part of your business is generating the most value. An article on developing business models on Entrepreneurship.org suggests that entrepreneurs look to their customers to see what is successful about their venture, to determine what the customer likes or dislikes. From there, Entrepreneurship.org advises entrepreneurs figure out what it really is that the customers value about the venture and use this information to develop their business model.[1]
On the other hand, Ta'eed recommends that entrepreneurs "follow the money... If you can figure out a way to help other people make money, you will always be able to charge them for it."[2] Essentially, if you can provide a service that will make doing something faster, easier, or less expensive for your customer, then they will be willing to pay for that service in order to make more money faster or more easily themselves. Your service will result in a profit, a positive for your customer, and therefore they will see your service as a justified expense themselves.
Both Ta'eed and Entrepreneurship.org recommend that any entrepreneur launching a startup be open to experimentation: consider existing models and see whether they can be adapted to suit your specific business needs. Alternatively, be open to allowing your chosen business model to change — if something else works better than what you've decided to go with, don't force your original plan to fit, adapt and go with what works!
Doing the Maths
Revenue - Costs = Profits
Price*Units - Product/Service costs = Profits
Business Model Components:
Value to customer How product/service
vs. Alternatives is produced
~ ~ Timing
Payment Method - Customer Acquisition =
Method Capital needed
~ ~
Market Entry Delivery
Existing Business Models
There are several standard existing business models out there which you could either implement or adapt to your startup, but remember to ask the questions mentioned above before you go running head into anything, and to be open to change and evolution if it is for the best. Most businesses will combine or alter these business models, and some may not be as appropriate for online businesses as they are for shops, and so on. However, having a general understanding of how some businesses undertake monetising their business idea can jump start your own business model development process:
- Bricks and Mortar
This is one of the more basic models, usually designed for a storefront business. It involves setting up a business at an ideal location where you display your products or services to potential customers. Entrepreneurship.org notes that many "Bricks and Mortar" businesses have evolved into "Bricks and Clicks" businesses, where they sell their products online as well as in a specific location, to increase their revenue and customer base. [1]
- Bait and Hook
This model refers to the practice of selling a series of low-priced items, and then introducing several higher-cost accessories to supplement the initial product. [1]
- Subscription
Although subscription generally refers to the newspaper/magazine industry, it has been adapted within other industries as well. One of the attractive natures of the subscription business model is its generation of yearly or monthly revenue. It also seems more convenient to many customers than some of the more complicated options, and can supply a constant stream of revenue. However, that does not necessarily mean that it is ideal, as it can be more labour intensive to track.[1]
- Direct Sales
It is just what it sounds like: remove the middleman and you will make it faster, easier, and cheaper to provide a product to your customers. You will essentially be "following the money." However, in some cases the middleman serves a specific purpose, so you should give some good consideration to what role they might play in the overall scheme of your venture.[1]
- Auction
Nearly everyone should already be familiar with the auction business model, and with the ways that it can be adapted to new uses, particularly on the internet in the form of websites such as E-Bay.
- Service
The service sector offers the most complex possible business models, comprising of "insurance, tourism, banking, education, franchises, restaurants, transportation, healthcare, consulting, investment, and legal services, among others." This business model relies on the efficiency, speed, and quality with which the service is delivered every time, and would likely focus on customer service and loyalty to survive. [1]
References
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 FastTrac, Kauffmann Foundation, "Developing a Business Model," Entrepreneurship.org, 2007 [1]
- ↑ 2.0 2.1 2.2 2.3 2.4 Collis Ta'eed, "How to Find a Business Model for Your Startup," The Netsetter.com, 26-03-2009 [2]
- ↑ Business Link, "A tried and tested business model," Business Link.com [3]
