You might have heard of the term business model many times before, and might not have had complete understanding of what it means. And this lack of understanding normally results in entrepreneurs not thinking about all the important aspects of the business model for their startup or startup idea. Business model is simpler than you think, let’s see how.
What is a Business Model?
Simply put, a Business Model is how your start-up has planned to deliver value in the market through your set of products/services, and in turn how you will benefit from the activities. In other words, a Business Model talks about how “value” is being exchanged in the market. It is the core of your Business Plan/Idea, and is worth defining at the outset.
The Business Model is a very important piece of the Business Plan for an entrepreneur. It is the starting point of creating a new start-up. The founders and co-founders should spend ample time in brainstorming their Business Model to discover the real difference that their start-up is targeted to make.
For example Uber Cabs offers the same service as Meru Cabs, of providing transportation for a fee, but differs vastly in their Business Model. Uber’s Business Model targets premium customers, who are willing to pay for better cars and who are comfortable with using their credit cards for payment. Also, Uber decided to be a pure mobile application based service, where there is no phone number or call-centre. Therefore, the way Uber is delivering and capturing value in the market is very different from Meru.
This also indicates that two start-ups or business that are dealing with or developing the same product or service can be vastly different in how they function. Therefore, defining Business Models can help understand the key differentiating factors to set a new company apart.
So, to summaries, Business Models are nothing but a formal way of defining what you do, how you do it, who do you do it for, what do you need to do it and how will you benefit from it. Let’s now see what are the various building blocks of a Business Model and how an entrepreneur can ideate a business model for his startup.
The building blocks of Business Model
The building blocks of a business model are nothing but the various aspects common to every startup. But the way a startup combines these all blocks gives the startup it’s a unique blueprint and differentiates it from others. So, to define the Business Model, first begin with defining the following building blocks:
The start-up’s Products/Services: This is the core of your business. In other terms, this is your value proposition. Define it in as much detail.
The Target Market: A clear idea about which segment of the market you are targeting is useful. It helps you focus on a defined set of the market, and tune your offering based on their needs.
The Relationship with the Target Market: This relates to how involved the customer is with the business. Is your Business Model around co-creation? Are customers given personalized or customized services?
Methodology of delivery or products/services: This relates to the channel of delivery. Are you an online only store? Are you a ‘bricks and clicks’ store that operates offline as well? This is important to define.
Resources required developing or producing the products/services: A start-up must clearly identify all the resources it needs to develop or produce the offering.
Core activities and tasks that the start-up will undertake: Focusing on the few key aspects is the best strategy. A start-up cannot do everything possible, so must choose to focus on the critical pieces, and define what these critical pieces are.
Any Partners or Suppliers that are critical to the business: Skills, resources and partnerships that are not in-house, but are still critical to the business should be defined.
Revenue Model with all different streams: Capturing value from the market is as important as delivering value. Enough time should be put into identifying the various revenue streams that could be developed. At the end of the day, a business can only run if it is turning up a profit.
Cost Structure with all elements of business cost: Every cost in detail should be ascertained. Cost assessment helps in realizing the viability of many ideas. Some ideas sound great, but when costs are put down on paper it becomes imprudent.
With these building blocks, ideation can be done through brainstorming sessions. An entrepreneur should bring his team together to discuss and debate on these aspects of the start-up. Everything should be put down in writing, and the key points should be reviewed and revisited regularly. We will look at some basic techniques of Business Model Generation in the next blog.