The term “business model” might make people uneasy in the corporate world. That’s because it appears to be more complex than it really is. In this post, we will try to explain what business models are and why they are important.
First of all, business models can be defined as a conceptual framework that proves the financial viability of a business, including its purpose, objectives and current plans to achieve them. Easy, right? Now let’s dig a little deeper.
According to the management expert Peter Ducker, a good business model answers the following questions:
- Who is your client
- What does he value?
- How can you deliver value at an adequate cost?
UNDERSTANDING IT BETTER: Michael Lewis, author and financial journalist, sums up this concept in a simple and straightforward way: it’s how you plan to make money.
Here it is important to note that business plans and business models have different approaches to customer insight. Business plans are static while business models are dynamic and tend to focus more on the value that will be delivered to the customer.
Steve Blank, a celebrated Silicon Valley entrepreneur, says that beyond the traditional product/service development process, it is also important to master the customer acquisition and development process – from discovery to validation and acquisition. Besides that, it is necessary that problem and solution be known to define who is this consumer or user.
Where to start?
Thanks to the consultant and theorist Alexander Osterwalder, the task of structuring a model for your business is simple. The Business Model Canvas or Business Model Framework, created by him proposes a way to obtain systematic understanding of the business in addition to a new design to innovate or promote improvements to current models.
It is a way of fresh perspective to help review what your value proposition is, who your customers (target audience) and your partners are, your sources of revenue, your distribution channels, amongst other aspects.
The Business Model Canvas is composed of nine blocks that form the visual map of the business:
- Key activities: The most important activities to affect the business’ value proposition.
- Key resources: The resources necessary to create value for the customer. They are considered assets of the company and are essential to maintain and support the business. These resources can be human, financial, physical or intellectual.
- Network of partners: Business alliances that complement other aspects of the business model.
Value proposition: Products and services offered by the business.
Clients (“For whom?”)
- Client segments: Target audience for a company’s products or services.
- Channels: The means by which a company provides products and services to customers. This includes a company’s marketing and distribution strategy.
- Relationship with clients: The company establishes links between itself and its different customer segments. This is called customer relationship management (CRM).
Finance (“How much?”)
- Cost structure: The monetary consequences of the means used in the business model.
- Revenue flow: The way the company makes money through a variety of revenue flows. A company’s income.
TIP: There are several different types of canvas which can be adapted to different purposes. Click here and check out an example of a canvas adapted for Digital Transformation.
Why should you always be attentive to your business model?
It is important to stress that business models should be seen as adaptive. By using business models, companies can see which aspects need to be maintained, modified or improved in order to provide more value to their customers. In addition, you can check which features should be best utilized, and what other means can be used to get closer to consumers.
On the other hand, they can also choose to transform its whole business model, modifying its value proposition and rethinking its service. This can occur due to context changes – For example, consumer behavior or new economy paradigms (Increasingly focused on digital and connectivity).
The innovation of a business model can be very positive, mainly because, in its simplest form, it does not require the implementation of new technologies. It is possible to deliver products or services using existing technologies for existing markets. These changes may often be invisible to the outside world; however, they can increase competitiveness and bring advantages that are difficult for competitors to copy.
Well-designed business models are important tools for structuring and analyzing a value proposition, and can work as an image of the principles that govern it and as a compass.
Interested in learning more about your company’s business model, product or service? The Business Model Innovation whitepaper can help you get started (click here to check it out).