What is a business model?
Business model innovation is the new management buzz word these days but a lot of managers are still clueless about what it really means, and even after getting past all the academic terms and definitions, they remain nonplussed with regard to where to start. Having been through the academic part of learning and multiple conversations with top executives, I will strip the term, ‘business model’, to its basic essence before moving to exciting part about ‘business model innovation’. Here is exactly how I explain business model to managers.
The term ‘business model’ refers to these three components:
1. Value Proposition
The value proposition refers to the value you want to sell to your customers. It could be tangible or intangible value. The way you think about your products or services should ideally be in terms of the value it offers, such as utility, convenience, comfort, beauty, confidence, etcetera.
The second essential component of any business model is,
2. Revenue model
The revenue model refers to who and how you achieve revenue. This is different from pricing model. There are terms to describe a few of these popular revenue models that you probably already heard of. A company can earn revenue from any of the following models: Subscription, advertising, rental/lease model, freemium models, affiliation, commission, etcetera. This list is not exhaustive. Familiar examples to illustrate this would be Linkedin that uses a freemium model. Users can use it for free but a premium is charged for additional services or features. Facebook on the other hand uses the advertising model.
And the last component is
3. Business Process and System
Business process refers to the methods and infrastructure you use to execute the first two components above: customer value proposition and revenue model. This is where you get a lot of management frameworks which talk about how you can deliver your value proposition and earn your revenue in a more efficient and scalable manner. You probably have heard of the Lean Six Sigma, Michael Porter’s strategic forces and so on. But, business process and system goes beyond the managerial framework you use. It also refers to the infrastructure, technology and other factors of production that you employ to deliver the value and to collect revenue. Amazon for example uses a combination of the ‘brick and click’ system to ‘deliver’ (literally) convenience to their customers over the internet while running a highly efficient warehouse that where they store their inventory. eBay on the other hand, executes its auction revenue model and delivers choices and variety to its customers via a platform on the internet, without having to worry about physical inventory storage.
All three components should reinforce each other to ensure that the business model is effective and sustainable. This means that your team needs to evaluate the value proposition, revenue model and the business process and systems constantly to ensure that your company stays ahead of the competition.
From: Taryn Augustina Mook. Taryn is a Business Strategy and Development Analyst. Prior to her current post, she was a graduate researcher in business model innovation
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