Business model

A business model is a visual representation of how a company operates. It is compiled to simplify the process of evaluating the success of the implementation of ideas. In simpler terms, this is a schematic description of the company’s profit: it reflects what the business receives income for, what expenses it has, in what ways it will achieve its goals. As a result, there is an understanding: what products are more profitable to sell.

Building a business model is of particular importance for investors. They meet her when they want to invest in the company. And in general, a schematic presentation helps to launch the project faster, because everyone can see what the work will be based on.

Only a developing business can be helped by models to assess risks, while a long-standing business can be helped to find points of growth and efficiency improvement.

Business model: what is it

So, we found out that a business model is a schematic description of internal processes. Do not confuse it with in-depth research, they are two different things. Rather, it is an express analysis, during which it is possible to understand:

• which way to choose for development;
• how to build processes to improve the result;
• what resources should be attracted additionally.

This helps to put the situation on the shelves and look at it from the side. This format makes it easier to understand the situation and allows you to find fresh, non-trivial ideas.

Business Model Structure

The most commonly used pattern is created by Alexander Osterwalder and Yves Pignet. There are 9 blocks in the model, each of which is responsible for its own directions:

1. CA. _ It is a key element of any business. Therefore, you need to write down as accurately as possible the portraits of those who will be interested in your offer. Moreover, there may be several such portraits. For each of them, proposals should be prepared based on their needs and problems. The more accurately you make a portrait, the higher your sales will be.
2. USP . This is where the benefits come into play. They should be based on the problems that the consumer wants to solve with their help. It is important to indicate why you should buy from you and not from your competitors.
3. Sales channels . Describe how you will interact with customers and talk to them about the product, how you will communicate the value of the offer.
4. Building relationships with the consumer . Here, options are being worked out to attract and retain customers. It is worth determining how to communicate with the target audience, whether a person will be able to understand the product or whether he will need help.
5. Determination of sources of income . The ways of income are different – from selling, for a subscription, for renting something, from advertising, etc. Also, this block involves the development of pricing principles. It is important to understand how much the consumer is willing to pay for your product.
6. Resources – financial, human, intellectual or physical. Prepare a list of what you need to start a business and grow it.
7. Processes . This is where debugging takes place: production and sale of goods, solving customer problems and servicing them, automating routine processes, etc.
8. Partners . It is necessary to prepare a list of suppliers and partners with whom you can build cooperation.
9. Costs . They also need to be taken into account. Decide where and how much you have to spend. This will help identify the most expensive items and understand how much money is needed to start and develop.

Popular types of business models with proven effectiveness

• Brokerage : the entrepreneur organizes the interaction of buyers and sellers, for which he receives a percentage for each transaction. The most striking example of such a model is marketplaces, such as Ozon.
• Advertising : profit is received for advertising on the site. It uses YouTube.
• Crowdsourcing : the profit comes from advertising, but the content is not handled by the business, but by the users of the site. This can be seen on the example of Yandex.Zen.
• Manufacturer : the product is transferred without intermediaries. An example is Oriflame.
• Distributor : the purchase of goods is carried out from manufacturers, and then sold with its own margin. This model is used by any chain supermarket, such as Magnit.
• Franchising : The fee comes from providing access to a successful and years-established business model. It is used by Burger King and many other world famous fast food restaurants.
• Razor and blade : the main product is sold at a negligible price, large profits are made from consumables. Gillette razors and refills are an example of this.
• Rent : everything is clear here, but if not, an example is car sharing.
• Subscription : This is access that is provided for a period of time. For example, Yandex.Plus.
• Affiliate Marketing : Profits come from promoting someone else’s offerings. So does Aviasales.
• Freemium : some of the features are free for consumers, but you will have to pay extra to use additional functionality. Spotify uses this model.

How to build a business model: an example

Consider how to start building an effective business model step by step using the example of a luxury furniture store:

• Determine what you offer: exclusive furniture from famous European designers in stock and to order.
• Who might be interested in the offer: Entrepreneurs aged 30-50 with above-average income. Of course, it is better to paint the portraits in more detail, but as an example, we decided to choose only one portrait of the target audience.
• Interaction channels: website, social networks, showroom.
• How to maintain relationships: promotions, selection of furniture for the interior of the house, full support when choosing positions.
• What they pay for: for the furniture itself, for the work of designers and managers (full support), delivery.

These items are related to the revenue side. Now let’s move on to consumables:

• Resources: specialists, warehouse, website and software.
• Processes: debugging logistics and connecting the cash register.
• Attracting partners abroad.
• How much it will take to start a business: calculations are required here, an example of which, for obvious reasons, we cannot provide, but for a knowledgeable businessman who knows all the introductory information, this is not difficult.

Common mistakes in business models

1. Error in understanding the organizational structure. Often, when building a scheme, there is a misunderstanding of who to put as the head of a unit if, logically, it is subordinate to several persons. You should not jump over the leadership team: the hierarchy should be clearly visible, and there should be a clearly designated boss in the field.
2. Problems with the formation of divisions or departments. There is no understanding of how the work is built inside them, who manages and is responsible for what. Because of this, there is confusion and failures in the distribution of responsibilities.
3. There is no clear separation of processes and projects. For the first, it is important to prescribe the stages of the work and appoint those responsible for their passage. And projects are one-time works that are performed on demand, so it is impossible to prescribe possible outcomes in advance, you need to act based on the situation.
4. Excessive or insufficient description of business models. Options are equally bad for efficiency. Often, when trying to prepare an ideal business model, aspiring entrepreneurs include a lot of unnecessary details in it, which is why they miss important details. You should not rush from one extreme to another: extra details can always be put in a separate document and a link to it – the responsible persons will get acquainted with it, and those who do not need it will simply not fill their heads with information they do not need. About the abstract description everything is clear. If there is an understatement, then everyone understands it in their own way, which means that the result will be different for everyone. It is unlikely that we will be able to come to a decision in this scenario. After all, what TK, such is the result.

In general, a lot is built on the business model. Particularly business success. It depends on the degree of its development whether the start will be successful, how soon it will be possible to achieve development, how large the army of the company’s fans will be. 

Conclusion

Business model – a description of the process of making money. It describes the conditions under which interaction with consumers takes place and what their benefits from cooperation are. The term originated in the era of mass distribution of personal computers and accompanying programs for building tables. They helped businessmen make plans and control cash flows. Changes are made in real time, and therefore all fluctuations in processes are visible here and now. This is how entrepreneurs manage to control changes in the situation and understand which of them will affect their business today.

The structure consists of three simple elements:

1. Startup: raw materials, production, people, etc.
2. Sale: promotion, advertising, service.
3. Money: how payment is made, in what terms, what is the volume of receipts, etc.

Thus, it can be used to conduct research on what is already available for the business, what is missing, and how much money you will earn.

Note that a business model is not the same as a business plan. There is no detailed analysis of the situation, and therefore it cannot be used to make important decisions. It helps to evaluate key hypotheses and determine the list of risks that a startup or a long-lived business may face. It helps to make sure that the product will meet the expectations of the client, and also to understand how the profit will come. Therefore, its choice and construction should be approached with all responsibility.