What is Your Business Model?

Posted on December 09, 2015 by Sanjay Behuria, One of Thousands of Business Coaches on Noomii.

Business models are changing all the time. Gone are the days when entrepreneurs started a business without a model – they had an idea, had some resources to back them and started off – learning and tweaking on the go. They still do that and may even get lucky, but whether they are starting out or well entrenched they now need to have business models which are used as leading the business rather than lagging and tagging along as the business moves. The two A’s – Apple and Amazon are two of the leading businesses of today which have reinvented their business models constantly and ahead of what we call crisis intervention. Crisis intervention here means reacting to a situation after it has happened.

So what is a business model? Any organization whether for-profit or nonprofit must create, deliver and retain value. It creates and delivers values to its customers and other stakeholders while it retains value for its own growth and sustainability. Here is a definition " A business model describes the rationale of how an organization creates, delivers and captures value. " [Osterwalder, Alexander; Pigneur, Yves. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. Wiley, 2010.]

Any business must have four main areas: customers – those who buy or use its services); offer – the product or service that the customer buys; resources – building, website, servers, inventory, people and whatever it takes to bring the product to the customer; and lastly, financial sustainability – it must make money to pay for the creation and delivery of the product or services it offers to the customer. To efficiently conduct the business and create, deliver and capture value the organization depends on nine activities it must consider.
Customer segment – who should be my customer?
Value proposition – what value am I providing – why should they buy?
Channels – what are the channels through which the product or service will be delivered?
Customer relationships – how to find and keep the customer?
Revenue streams – what are the different revenue streams?
Key resources – what are the key resources needed?
Key activities – what are the key activities undertaken?
Key partnerships – what partnerships must be forged to do the business?
Cost structure – what are the cost implications of the business?

Customer segment – If you are making a single product and your customer is the entire population with non-discriminatory choices and demand for your product is inelastic, then you don’t need to think of segmenting your customer base. However, this is often not the case. First there was a car and those who afford it could buy it. No one thought of those who wanted to but could not afford a car. Then came Toyota and cars became affordable for those who were left out by the earlier car makers. Or take the Tata Nano in India. By making a small, affordable car, they created a whole new market segment of car owners. Therefore whether you need to segment your market for your existing products and services or not, you definitely need to segment the market, if you wish to stay ahead of the competition and sometimes it may be question of survival. Customers are segmented whether the organization does a conscious segmentation or not. They are segmented on demographics, gender, income and expenditure, education, service expectation, delivery channels and can be grouped and sub-grouped under many heads.

Value proposition – Why should someone or a particular segment buy your product or services? What customer problem does it solve or what need it satisfies? Does it convert a want into a need, add new features to something that is already satisfying a need or create a whole new need?

• Channels – To be able to sell a product or service you have to communicate, distribute and sell the product.
• Customers will need to know about you and your product and services so communication channels will be used for raising awareness
• Customers will need to evaluate the value proposition – how and where will they do it?
• Will it be direct sales – own stores or website or door delivery; will be indirect sales – partner stores, retail network or wholesalers.
• Will there be after sales service – how will that be provided?

Customer relationships – First, customers will have to be acquired and then retained. It is a proven fact that selling to a new customer (acquisition) is much more expensive than selling again and again to the same customer. While acquisition requires a different type of customer relationship, retention is a completely different ball game. There need to be different strategies for both, even different people doing the two different activities – almost like they are two different customer segments. Financial services customers with high net worth, expect a different kind of service (personalized) compared to customers who open a simple web account and do their own transactions without ever stepping into the organization or meeting anyone there. When customers buy online, they are interested in who is saying what about the company – so many of them are building communities and providing online reviews of customer experiences. By providing ATM’s, banks are providing customers the opportunity for self-service.

Revenue streams are the cash that the company generates from selling its products and services. Here cash also means receivables. A company can have a onetime revenue, e.g. when it sells a car for full amount, or a recurring revenue stream – when it leases the car on a monthly payment basis. How a company prices its offers is a key to revenue streams, if the price is less than cost, the company will be out of business very quickly.

Key Resources – What are the key resources required for your business – Key resources can be – human, financial, physical, intellectual or a combination of all of these. A research institution will need intellectuals as its key resource, while a microfinance company will list both people and finance as its key resources.

Key activities – what are the key activities of the company – are you in the business of software development, banking or manufacturing.

Key partners – every company needs key partners. They may be forged with non-competitors or competitors as strategic alliances. Partnerships will also be needed with suppliers, distributors, retail agents. Partnerships may be for leverage, for revenue sharing, for aggregation to create a critical mass or outdo competitors, or for risk reduction. There are many reasons for seeking partners – what are yours?

Do you need to build a business plan. A Business Coach will be able o help you create it and hold you to your commitments to achieve your goals.