Updated: December 9, 2014
An integral part of starting a business or launching a new product to the market is determining the business model best suited for your enterprise. This will make up your basic framework on how you will create and provide value to your consumers and consequently, generate revenue. Numerous companies have found success and profits by simply developing unique and creative business models.
Currently, there are many existing business models that one can study and adapt. Each industry would usually have its own prevailing business model. By simply scanning your environment, doing research on your target market and studying your internal resources, one can easily find the best business infrastructure that would ensure optimum cashflow. Make sure you have included accurate financial management software keep track of your expenses and to further increase your cash flow.
Before we discuss how to come up with the right business model, let us first look at the most basic and probably the oldest business model, the shop keeper. This is the framework commonly utilized by small businesses such as the sari-sari store or your neighborhood barber shop. Under this framework, one simply needs to find a suitable location, put up the store, display the products and wait for customers to come. Transactions and payments are made directly and immediately without the necessity to provide additional support after the sale is made.
If all businesses were run like this, then you could imagine how hard it would be to market big products and more complicated services. This is the reason why over the years, business models have been created to provide more sophisticated means to generate revenue for the company. There is no definitive list of business models that one can choose from although there are those which have been proven both efficient and profitable. Some of these are the subscription model, the bait and hook, the auction business model, multi-level marketing and the premium service business model.
What is a business model and how do we create one for our business?
Basically, a business model is a simplified description of how a company will run with respect to maximizing revenue. It can pertain to the core operation of the business or just a part of the enterprise such as specific product or service offerings. In general, conceptualization of a business model is done by synthesizing nine different aspects of the business and analyzing these data to come up with best framework that will provide optimum profits. By seriously considering these building blocks and focusing to enhance one or two aspects, a business can come up with an effective infrastructure to find success.
The Nine Building Blocks of Creating A Business Model
- Value Proposition – what are you offering to your customers?
- Customer Segment – to whom specifically are you offering your product or service?
- Distribution Channel – how are you planning to reach your customers?
- Customer Relationship – how does your target market perceive your company or product?
- Core Capacities – how well can you execute various business models?
- Value Configuration – is the business model beneficial to both the business and the customers?
- Partner Network – how can your business alliances contribute to the framework?
- Revenue Streams – how will the business model create profit?
- Cost Structure – how much will it cost for you to execute the business model?
Success Stories In Business Modeling and Innovation
Designing an effective framework often leads to various innovations that propels businesses to excel in their fields. Moreover, coming up with such systems help provide effective strategies to reach your target consumers. Below are examples of how business modeling and innovation worked for some companies:
- Cebu Pacific Air’s low-cost airline fares whose value configuration was designed to target non-travelers in the country
- Gillette innovated on the bait and hook business model by selling their razors for an extremely low price in order to generate income from repeat sales of their blades
- Forever Living products found success in using multi-level marketing as a distribution channel
- Intel thrived on partnerships within its business network to market their processing platform
- Google tapped an innovative revenue stream by linking highly specific search results and content with text and image advertisements
Personal Case Study: Water Refilling Station
Let us try to see what we’ve learned by studying one of the most common businesses we see locally, the water refilling station. Over the years, this enterprise had increased in numbers around the metro, causing competition levels to soar. If you’re planning to put up your own, it may help to consider various business models that can give you an edge in the market. Traditionally, the revenue model of this business has been the shop keeper model.
I was fortunate to talk to one of the water refilling station owners in our village and asked him how his business was able to survive through the years amidst growing competition and market saturation. Here are some of the things I’ve learned and how these strategies relate to the nine building blocks of business modeling:
- He targeted not just the local residents but also tapped nearby food establishments, proposing consignment orders and bulk discount rates (Customer Segment and Partner Network)
- He gave away free water dispensers to households in exchange for one year weekly water delivery subscription. (Customer Relationship and Value Configuration)
- He also sells cheap ice cold water as retail to tricycle drivers (Distribution Channel and Revenue Streams)
If you have an existing business or planning to start one soon, then I suggest that you seriously consider innovating on various business models. Doing so can really help you make your venture a success. Lastly, to learn more business concepts and investing strategies, please subscribe to Ready To Be Rich.
References and Suggested Reading:
Osterwalder, Alexander. “The Business Model Ontology – A Proposition In A Design Science Approach”. 2004
Wikipedia, The Free Encyclopedia. “Business Model“. 23 June, 2008.