eight key elements of business model

8 Key Elements Of A Business Model that You Should Understand

eight key elements of business model

There are many benefits to creating a business model, even if you’re not looking for investors. For example, setting up a business model helps you stay on target when setting up a company or revamping it. These elements can help you succeed as it enhances business growth. 

The business model is the primary aspect of your business plan. It not only helps you stay organized and focused but is needed if you’re looking for investors or loans.  They do vary, and by choosing the best model for your business , you can easily fill in the blanks when it comes to your specific business type. 

The following elements of the business model will help you consider various important factors. Then, as you reflect on these elements, you can see what points you may have missed. All in all, it’s an important part of starting up your own business . For example, if you’re looking for investors or a bank loan, putting together a business model will help you to articulate clearly what your product or service is about and how it will succeed.

1. Value Proposition

It is the description of what your product or service does to fulfill the customers’ needs. It should clearly define why a customer would buy from your company. The value proposition should be personalized and customized to include the reduction of product search, discovery costs on price, and how you’ll manage product delivery.

2. Revenue Model

This portion relates to how you plan to make money from your business through revenue and producing a good return on capital invested. It could potentially include advertising revenue, subscription revenue, transaction fees, sales revenue, and affiliate revenue. The type of revenue you bring in depends on your business, of course, but whatever your income plan is, it’s important to lay it out clearly for yourself and investors.

3. Market Opportunity

You want to lay out your company’s market space and include your target market and the overall number of people in this audience. If there is a lot of demand for your services/products across a large demographic, it warrants creating a business around this demand. In addition, the market opportunity allows you and others to understand the potential financial possibilities, and it’s essential to do enough research to have realistic financial numbers.

4.  Competitive Environment

If you’ve determined that you have a large target audience, you also want to ensure that the market isn’t saturated with your product or service. For example, you want to figure out who your competition is. Who is offering a similar product or service in your market space? Then, find out who they are and how big they are. Know their market shares, what they provide, and how much they charge for the product they sell.

5. Competitive Advantage

By knowing who your competition is, what they offer, and how much they charge, you can work to differentiate yourself from them. First, figure out how you’re different to encourage customers to choose your company. It might be selling a similar product or service for less or having a specific company culture that resonates with people. 

6. Market Strategy

You want to figure out how you plan to enter the market and attract customers, so it’s important to know how you will make your first impression. It needs to be a well-thought-out process, and you may wish to follow a sales funnel process .

Think of your target audience and how you can reach them with the most impact. You may choose to use social media influencers, do a campaign with a social media platform that makes the most sense for your business, and, of course, create a brand.

7. Organization Development

It’s also imperative to organize how your business will run to avoid chaos and keep things streamlined. You want to have organizational structures in place as this will help ensure that essential work is completed. In addition, you want to have a process that defines functions in the workplace, which will make it easy for employees to understand their roles and help them be as efficient as possible. Finally, organization development will directly influence how satisfied your customers are as orders and support are dispatched as quickly as possible.

8. Management Team

This business model aspect will explain the experiences and background that a company leader should look for. Whether you have your management team together or not, you want to consider what you need from them. If you have a strong team, they can change the business model and the business when necessary. Knowing how to pivot gives a management team credibility to investors. 

The business model you create will ensure your business is set up properly from the very beginning. It will help your business run smoothly, and it also helps get investors to believe in your company. This business model consists of all the aspects an investor or bank will want to look at. So, properly setting it up shows these investors that you know what you’re doing and have looked at all factors. It allows them to see how successful your business can be while allowing you to reflect on how well you’ll run your business. Check out our article explaining different types of business models here .

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eight key elements of business model

Staff writer: Loraine Couturier is a jet set writing chick from Canada that travels around the globe. Her writing and marketing skills are what keeps her eating exotic meals and jumping on planes. Loraine loves writing about pretty much anything and likes to pass on the knowledge she has to others. Visit her at https://www.facebook.com/jetsetwritingchick

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What Is a Business Model?

Understanding business models, evaluating successful business models, how to create a business model.

  • Business Model FAQs

The Bottom Line

Learn to understand a company's profit-making plan

eight key elements of business model

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

eight key elements of business model

Investopedia / Laura Porter

The term business model refers to a company's plan for making a profit . It identifies the products or services the business plans to sell, its identified target market , and any anticipated expenses . Business models are important for both new and established businesses. They help new, developing companies attract investment, recruit talent, and motivate management and staff.

Established businesses should regularly update their business model or they'll fail to anticipate trends and challenges ahead. Business models also help investors evaluate companies that interest them and employees understand the future of a company they may aspire to join.

Key Takeaways

  • A business model is a company's core strategy for profitably doing business.
  • Models generally include information like products or services the business plans to sell, target markets, and any anticipated expenses.
  • There are dozens of types of business models including retailers, manufacturers, fee-for-service, or freemium providers.
  • The two levers of a business model are pricing and costs.
  • When evaluating a business model as an investor, consider whether the product being offered matches a true need in the market.

A business model is a high-level plan for profitably operating a business in a specific marketplace. A primary component of the business model is the value proposition . This is a description of the goods or services that a company offers and why they are desirable to customers or clients, ideally stated in a way that differentiates the product or service from its competitors.

A new enterprise's business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy , a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company.

Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands .

When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company's business model. Admittedly, the business model may not tell you everything about a company's prospects. But the investor who understands the business model can make better sense of the financial data.

A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable. Counting costs to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses.

One way analysts and investors evaluate the success of a business model is by looking at the company's gross profit . Gross profit is a company's total revenue minus the cost of goods sold (COGS). Comparing a company's gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model. Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income . That is gross profit minus operating expenses and is an indication of just how much real profit the business is generating.

The two primary levers of a company's business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many analysts consider gross profit to be more important in evaluating a business plan. A good gross profit suggests a sound business plan. If expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves.

When evaluating a company as a possible investment, find out exactly how it makes its money (not just what it sells but how it sells it). That's the company's business model.

Types of Business Models

There are as many types of business models as there are types of business. For instance, direct sales, franchising , advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrid models as well, such as businesses that combine internet retail with brick-and-mortar stores or with sporting organizations like the NBA .

Below are some common types of business models; note that the examples given may fall into multiple categories.

One of the more common business models most people interact with regularly is the retailer model. A retailer is the last entity along a supply chain. They often buy finished goods from manufacturers or distributors and interface directly with customers.

Example: Costco Wholesale

Manufacturer

A manufacturer is responsible for sourcing raw materials and producing finished products by leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods or highly replicated, mass produced products. A manufacturer can also sell goods to distributors, retailers, or directly to customers.

Example: Ford Motor Company

Fee-for-Service

Instead of selling products, fee-for-service business models are centered around labor and providing services. A fee-for-service business model may charge by an hourly rate or a fixed cost for a specific agreement. Fee-for-service companies are often specialized, offering insight that may not be common knowledge or may require specific training.

Example: DLA Piper LLP

Subscription

Subscription-based business models strive to attract clients in the hopes of luring them into long-time, loyal patrons. This is done by offering a product that requires ongoing payment, usually in return for a fixed duration of benefit. Though largely offered by digital companies for access to software, subscription business models are also popular for physical goods such as monthly reoccurring agriculture/produce subscription box deliveries.

Example: Spotify

Freemium business models attract customers by introducing them to basic, limited-scope products. Then, with the client using their service, the company attempts to convert them to a more premium, advance product that requires payment. Although a customer may theoretically stay on freemium forever, a company tries to show the benefit of what becoming an upgraded member can hold.

Example: LinkedIn/LinkedIn Premium

Some companies can reside within multiple business model types at the same time for the same product. For example, Spotify (a subscription-based model) also offers a free version and a premium version.

If a company is concerned about the cost of attracting a single customer, it may attempt to bundle products to sell multiple goods to a single client. Bundling capitalizes on existing customers by attempting to sell them different products. This can be incentivized by offering pricing discounts for buying multiple products.

Example: AT&T

Marketplace

Marketplaces are somewhat straight-forward: in exchange for hosting a platform for business to be conducted, the marketplace receives compensation. Although transactions could occur without a marketplace, this business model attempts to make transacting easier, safer, and faster.

Example: eBay

Affiliate business models are based on marketing and the broad reach of a specific entity or person's platform. Companies pay an entity to promote a good, and that entity often receives compensation in exchange for their promotion. That compensation may be a fixed payment, a percentage of sales derived from their promotion, or both.

Example: social media influencers such as Lele Pons, Zach King, or Chiara Ferragni.

Razor Blade

Aptly named after the product that invented the model, this business model aims to sell a durable product below cost to then generate high-margin sales of a disposable component of that product. Also referred to as the "razor and blade model", razor blade companies may give away expensive blade handles with the premise that consumers need to continually buy razor blades in the long run.

Example: HP (printers and ink)

"Tying" is an illegal razor blade model strategy that requires the purchase of an unrelated good prior to being able to buy a different (and often required) good. For example, imagine Gillette released a line of lotion and required all customers to buy three bottles before they were allowed to purchase disposable razor blades.

Reverse Razor Blade

Instead of relying on high-margin companion products, a reverse razor blade business model tries to sell a high-margin product upfront. Then, to use the product, low or free companion products are provided. This model aims to promote that upfront sale, as further use of the product is not highly profitable.

Example: Apple (iPhones + applications)

The franchise business model leverages existing business plans to expand and reproduce a company at a different location. Often food, hardware, or fitness companies, franchisers work with incoming franchisees to finance the business, promote the new location, and oversee operations. In return, the franchisor receives a percentage of earnings from the franchisee.

Example: Domino's Pizza

Pay-As-You-Go

Instead of charging a fixed fee, some companies may implement a pay-as-you-go business model where the amount charged depends on how much of the product or service was used. The company may charge a fixed fee for offering the service in addition to an amount that changes each month based on what was consumed.

Example: Utility companies

A brokerage business model connects buyers and sellers without directly selling a good themselves. Brokerage companies often receive a percentage of the amount paid when a deal is finalized. Most common in real estate, brokers are also prominent in construction/development or freight.

Example: ReMax

There is no "one size fits all" when making a business model. Different professionals may suggest taking different steps when creating a business and planning your business model. Here are some broad steps one can take to create their plan:

  • Identify your audience. Most business model plans will start with either defining the problem or identifying your audience and target market . A strong business model will understand who you are trying to target so you can craft your product, messaging, and approach to connecting with that audience.
  • Define the problem. In addition to understanding your audience, you must know what problem you are trying to solve. A hardware company sells products for home repairs. A restaurant feeds the community. Without a problem or a need, your business may struggle to find its footing if there isn't a demand for your services or products.
  • Understand your offerings. With your audience and problem in mind, consider what you are able to offer. What products are you interested in selling, and how does your expertise match that product? In this stage of the business model, the product is tweaked to adapt to what the market needs and what you're able to provide.
  • Document your needs. With your product selected, consider the hurdles your company will face. This includes product-specific challenges as well as operational difficulties. Make sure to document each of these needs to assess whether you are ready to launch in the future.
  • Find key partners. Most businesses will leverage other partners in driving company success. For example, a wedding planner may forge relationships with venues, caterers, florists, and tailors to enhance their offering. For manufacturers, consider who will provide your materials and how critical your relationship with that provider will be.
  • Set monetization solutions. Until now, we haven't talked about how your company will make money. A business model isn't complete until it identifies how it will make money. This includes selecting the strategy or strategies above in determining your business model type. This might have been a type you had in mind but after reviewing your clients needs, a different type might now make more sense.
  • Test your model. When your full plan is in place, perform test surveys or soft launches. Ask how people would feel paying your prices for your services. Offer discounts to new customers in exchange for reviews and feedback. You can always adjust your business model, but you should always consider leveraging direct feedback from the market when doing so.

Instead of reinventing the wheel, consider what competing companies are doing and how you can position yourself in the market. You may be able to easily spot gaps in the business model of others.

Criticism of Business Models

Joan Magretta, the former editor of the Harvard Business Review, suggests there are two critical factors in sizing up business models. When business models don't work, she states, it's because the story doesn't make sense and/or the numbers just don't add up to profits. The airline industry is a good place to look to find a business model that stopped making sense. It includes companies that have suffered heavy losses and even bankruptcy .

For years, major carriers such as American Airlines, Delta, and Continental built their businesses around a hub-and-spoke structure , in which all flights were routed through a handful of major airports. By ensuring that most seats were filled most of the time, the business model produced big profits.

However, a competing business model arose that made the strength of the major carriers a burden. Carriers like Southwest and JetBlue shuttled planes between smaller airports at a lower cost. They avoided some of the operational inefficiencies of the hub-and-spoke model while forcing labor costs down. That allowed them to cut prices, increasing demand for short flights between cities.

As these newer competitors drew more customers away, the old carriers were left to support their large, extended networks with fewer passengers. The problem became even worse when traffic fell sharply following the September 11 terrorist attacks in 2001 . To fill seats, these airlines had to offer more discounts at even deeper levels. The hub-and-spoke business model no longer made sense.

Example of Business Models

Consider the vast portfolio of Microsoft. Over the past several decades, the company has expanded its product line across digital services, software, gaming, and more. Various business models, all within Microsoft, include but are not limited to:

  • Productivity and Business Processes: Microsoft offers subscriptions to Office products and LinkedIn. These subscriptions may be based off product usage (i.e. the amount of data being uploaded to SharePoint).
  • Intelligent Cloud: Microsoft offers server products and cloud services for a subscription. This also provide services and consulting.
  • More Personal Computing: Microsoft sells physically manufactured products such as Surface, PC components, and Xbox hardware. Residual Xbox sales include content, services, subscriptions, royalties, and advertising revenue.

A business model is a strategic plan of how a company will make money. The model describes the way a business will take its product, offer it to the market, and drive sales. A business model determines what products make sense for a company to sell, how it wants to promote its products, what type of people it should try to cater to, and what revenue streams it may expect.

What Is an Example of a Business Model?

Best Buy, Target, and Walmart are some of the largest examples of retail companies. These companies acquire goods from manufacturers or distributors to sell directly to the public. Retailers interface with their clients and sell goods, though retails may or may not make the actual goods they sell.

What Are the Main Types of Business Models?

Retailers and manufacturers are among the primary types of business models. Manufacturers product their own goods and may or may not sell them directly to the public. Meanwhile, retails buy goods to later resell to the public.

How Do I Build a Business Model?

There are many steps to building a business model, and there is no single consistent process among business experts. In general, a business model should identify your customers, understand the problem you are trying to solve, select a business model type to determine how your clients will buy your product, and determine the ways your company will make money. It is also important to periodically review your business model; once you've launched, feel free to evaluate your plan and adjust your target audience, product line, or pricing as needed.

A company isn't just an entity that sells goods. It's an ecosystem that must have a plan in plan on who to sell to, what to sell, what to charge, and what value it is creating. A business model describes what an organization does to systematically create long-term value for its customers. After building a business model, a company should have stronger direction on how it wants to operate and what its financial future appears to be.

Harvard Business Review. " Why Business Models Matter ."

Bureau of Transportation Statistics. " Airline Travel Since 9/11 ."

Microsoft. " Annual Report 2023 ."

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How to Design a Winning Business Model

  • Ramon Casadesus-Masanell
  • Joan E. Ricart

Smart companies’ business models generate cycles that, over time, make them operate more effectively.

Reprint: R1101G

Most executives believe that competing through business models is critical for success, but few have come to grips with how best to do so. One common mistake, the authors’ studies show, is enterprises’ unwavering focus on creating innovative models and evaluating their efficacy in standalone fashion—just as engineers test new technologies or products. However, the success or failure of a company’s business model depends largely on how it interacts with those of the other players in the industry. (Almost any business model will perform brilliantly if a company is lucky enough to be the only one in a market.) Because companies build them without thinking about the competition, companies routinely deploy doomed business models.

Moreover, many companies ignore the dynamic elements of business models and fail to realize that they can design business models to generate winner-take-all effects similar to the network externalities that high-tech companies such as Microsoft, eBay, and Facebook often create. A good business model creates virtuous cycles that, over time, result in competitive advantage.

Smart companies know how to strengthen their virtuous cycles, undermine those of rivals, and even use them to turn competitors’ strengths into weaknesses.

The Idea in Brief

There has never been as much interest in business models as there is today; seven out of 10 companies are trying to create innovative business models, and 98% are modifying existing ones, according to a recent survey.

However, most companies still create and evaluate business models in isolation, without considering the implications of how they will interact with rivals’ business models. This narrow view dooms many to failure.

Moreover, companies often don’t realize that business models can be designed so that they generate virtuous cycles—similar to the powerful effects high-tech firms such as Facebook, eBay, and Microsoft enjoy. These cycles, when aligned with company goals, reinforce competitive advantage.

By making the right choices, companies can strengthen their business models’ virtuous cycles, weaken those of rivals, and even use the cycles to turn competitors into complementary players.

This is neither strategy nor tactics; it’s using business models to gain competitive advantage. Indeed, companies fare poorly partly because they don’t recognize the differences between strategy, tactics, and business models.

Strategy has been the primary building block of competitiveness over the past three decades, but in the future, the quest for sustainable advantage may well begin with the business model. While the convergence of information and communication technologies in the 1990s resulted in a short-lived fascination with business models, forces such as deregulation, technological change, globalization, and sustainability have rekindled interest in the concept today. Since 2006, the IBM Institute for Business Value’s biannual Global CEO Study has reported that senior executives across industries regard developing innovative business models as a major priority. A 2009 follow-up study reveals that seven out of 10 companies are engaging in business-model innovation, and an incredible 98% are modifying their business models to some extent. Business model innovation is undoubtedly here to stay.

eight key elements of business model

  • RC Ramon Casadesus-Masanell is a professor at Harvard Business School and the author, with Joan E. Ricart, of “How to Design a Winning Business Model” (HBR January–February 2011).
  • JR Joan E. Ricart ( [email protected] ) is the Carl Schroder Professor of Strategic Management and Economics at IESE Business School in Barcelona.

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Business Model Canvas: Explained with Examples

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Got a new business idea, but don’t know how to put it to work? Want to improve your existing business model? Overwhelmed by writing your business plan? There is a one-page technique that can provide you the solution you are looking for, and that’s the business model canvas.

In this guide, you’ll have the Business Model Canvas explained, along with steps on how to create one. All business model canvas examples in the post can be edited online.

What is a Business Model Canvas

A business model is simply a plan describing how a business intends to make money. It explains who your customer base is and how you deliver value to them and the related details of financing. And the business model canvas lets you define these different components on a single page.   

The Business Model Canvas is a strategic management tool that lets you visualize and assess your business idea or concept. It’s a one-page document containing nine boxes that represent different fundamental elements of a business.  

The business model canvas beats the traditional business plan that spans across several pages, by offering a much easier way to understand the different core elements of a business.

The right side of the canvas focuses on the customer or the market (external factors that are not under your control) while the left side of the canvas focuses on the business (internal factors that are mostly under your control). In the middle, you get the value propositions that represent the exchange of value between your business and your customers.

The business model canvas was originally developed by Alex Osterwalder and Yves Pigneur and introduced in their book ‘ Business Model Generation ’ as a visual framework for planning, developing and testing the business model(s) of an organization.

Business Model Canvas Explained

What Are the Benefits of Using a Business Model Canvas

Why do you need a business model canvas? The answer is simple. The business model canvas offers several benefits for businesses and entrepreneurs. It is a valuable tool and provides a visual and structured approach to designing, analyzing, optimizing, and communicating your business model.

  • The business model canvas provides a comprehensive overview of a business model’s essential aspects. The BMC provides a quick outline of the business model and is devoid of unnecessary details compared to the traditional business plan.
  • The comprehensive overview also ensures that the team considers all required components of their business model and can identify gaps or areas for improvement.
  • The BMC allows the team to have a holistic and shared understanding of the business model while enabling them to align and collaborate effectively.
  • The visual nature of the business model canvas makes it easier to refer to and understand by anyone. The business model canvas combines all vital business model elements in a single, easy-to-understand canvas.
  • The BMC can be considered a strategic analysis tool as it enables you to examine a business model’s strengths, weaknesses, opportunities, and challenges.
  • It’s easier to edit and can be easily shared with employees and stakeholders.
  • The BMC is a flexible and adaptable tool that can be updated and revised as the business evolves. Keep your business agile and responsive to market changes and customer needs.
  • The business model canvas can be used by large corporations and startups with just a few employees.
  • The business model canvas effectively facilitates discussions among team members, investors, partners, customers, and other stakeholders. It clarifies how different aspects of the business are related and ensures a shared understanding of the business model.
  • You can use a BMC template to facilitate discussions and guide brainstorming brainstorming sessions to generate insights and ideas to refine the business model and make strategic decisions.
  • The BMC is action-oriented, encouraging businesses to identify activities and initiatives to improve their business model to drive business growth.
  • A business model canvas provides a structured approach for businesses to explore possibilities and experiment with new ideas. This encourages creativity and innovation, which in turn encourages team members to think outside the box.

How to Make a Business Model Canvas

Here’s a step-by-step guide on how to create a business canvas model.

Step 1: Gather your team and the required material Bring a team or a group of people from your company together to collaborate. It is better to bring in a diverse group to cover all aspects.

While you can create a business model canvas with whiteboards, sticky notes, and markers, using an online platform like Creately will ensure that your work can be accessed from anywhere, anytime. Create a workspace in Creately and provide editing/reviewing permission to start.

Step 2: Set the context Clearly define the purpose and the scope of what you want to map out and visualize in the business model canvas. Narrow down the business or idea you want to analyze with the team and its context.

Step 3: Draw the canvas Divide the workspace into nine equal sections to represent the nine building blocks of the business model canvas.

Step 4: Identify the key building blocks Label each section as customer segment, value proposition, channels, customer relationships, revenue streams, key resources, key activities, and cost structure.

Step 5: Fill in the canvas Work with your team to fill in each section of the canvas with relevant information. You can use data, keywords, diagrams, and more to represent ideas and concepts.

Step 6: Analyze and iterate Once your team has filled in the business model canvas, analyze the relationships to identify strengths, weaknesses, opportunities, and challenges. Discuss improvements and make adjustments as necessary.

Step 7: Finalize Finalize and use the model as a visual reference to communicate and align your business model with stakeholders. You can also use the model to make informed and strategic decisions and guide your business.

What are the Key Building Blocks of the Business Model Canvas?

There are nine building blocks in the business model canvas and they are:

Customer Segments

Customer relationships, revenue streams, key activities, key resources, key partners, cost structure.

  • Value Proposition

When filling out a Business Model Canvas, you will brainstorm and conduct research on each of these elements. The data you collect can be placed in each relevant section of the canvas. So have a business model canvas ready when you start the exercise.  

Business Model Canvas Template

Let’s look into what the 9 components of the BMC are in more detail.

These are the groups of people or companies that you are trying to target and sell your product or service to.

Segmenting your customers based on similarities such as geographical area, gender, age, behaviors, interests, etc. gives you the opportunity to better serve their needs, specifically by customizing the solution you are providing them.

After a thorough analysis of your customer segments, you can determine who you should serve and ignore. Then create customer personas for each of the selected customer segments.

Customer Persona Template for Business Model Canvas Explained

There are different customer segments a business model can target and they are;

  • Mass market: A business model that focuses on mass markets doesn’t group its customers into segments. Instead, it focuses on the general population or a large group of people with similar needs. For example, a product like a phone.  
  • Niche market: Here the focus is centered on a specific group of people with unique needs and traits. Here the value propositions, distribution channels, and customer relationships should be customized to meet their specific requirements. An example would be buyers of sports shoes.
  • Segmented: Based on slightly different needs, there could be different groups within the main customer segment. Accordingly, you can create different value propositions, distribution channels, etc. to meet the different needs of these segments.
  • Diversified: A diversified market segment includes customers with very different needs.
  • Multi-sided markets: this includes interdependent customer segments. For example, a credit card company caters to both their credit card holders as well as merchants who accept those cards.

Use STP Model templates for segmenting your market and developing ideal marketing campaigns

Visualize, assess, and update your business model. Collaborate on brainstorming with your team on your next business model innovation.

In this section, you need to establish the type of relationship you will have with each of your customer segments or how you will interact with them throughout their journey with your company.

There are several types of customer relationships

  • Personal assistance: you interact with the customer in person or by email, through phone call or other means.
  • Dedicated personal assistance: you assign a dedicated customer representative to an individual customer.  
  • Self-service: here you maintain no relationship with the customer, but provides what the customer needs to help themselves.
  • Automated services: this includes automated processes or machinery that helps customers perform services themselves.
  • Communities: these include online communities where customers can help each other solve their own problems with regard to the product or service.
  • Co-creation: here the company allows the customer to get involved in the designing or development of the product. For example, YouTube has given its users the opportunity to create content for its audience.

You can understand the kind of relationship your customer has with your company through a customer journey map . It will help you identify the different stages your customers go through when interacting with your company. And it will help you make sense of how to acquire, retain and grow your customers.

Customer Journey Map

This block is to describe how your company will communicate with and reach out to your customers. Channels are the touchpoints that let your customers connect with your company.

Channels play a role in raising awareness of your product or service among customers and delivering your value propositions to them. Channels can also be used to allow customers the avenue to buy products or services and offer post-purchase support.

There are two types of channels

  • Owned channels: company website, social media sites, in-house sales, etc.
  • Partner channels: partner-owned websites, wholesale distribution, retail, etc.

Revenues streams are the sources from which a company generates money by selling their product or service to the customers. And in this block, you should describe how you will earn revenue from your value propositions.  

A revenue stream can belong to one of the following revenue models,

  • Transaction-based revenue: made from customers who make a one-time payment
  • Recurring revenue: made from ongoing payments for continuing services or post-sale services

There are several ways you can generate revenue from

  • Asset sales: by selling the rights of ownership for a product to a buyer
  • Usage fee: by charging the customer for the use of its product or service
  • Subscription fee: by charging the customer for using its product regularly and consistently
  • Lending/ leasing/ renting: the customer pays to get exclusive rights to use an asset for a fixed period of time
  • Licensing: customer pays to get permission to use the company’s intellectual property
  • Brokerage fees: revenue generated by acting as an intermediary between two or more parties
  • Advertising: by charging the customer to advertise a product, service or brand using company platforms

What are the activities/ tasks that need to be completed to fulfill your business purpose? In this section, you should list down all the key activities you need to do to make your business model work.

These key activities should focus on fulfilling its value proposition, reaching customer segments and maintaining customer relationships, and generating revenue.

There are 3 categories of key activities;

  • Production: designing, manufacturing and delivering a product in significant quantities and/ or of superior quality.
  • Problem-solving: finding new solutions to individual problems faced by customers.
  • Platform/ network: Creating and maintaining platforms. For example, Microsoft provides a reliable operating system to support third-party software products.

This is where you list down which key resources or the main inputs you need to carry out your key activities in order to create your value proposition.

There are several types of key resources and they are

  • Human (employees)
  • Financial (cash, lines of credit, etc.)
  • Intellectual (brand, patents, IP, copyright)
  • Physical (equipment, inventory, buildings)

Key partners are the external companies or suppliers that will help you carry out your key activities. These partnerships are forged in oder to reduce risks and acquire resources.

Types of partnerships are

  • Strategic alliance: partnership between non-competitors
  • Coopetition: strategic partnership between partners
  • Joint ventures: partners developing a new business
  • Buyer-supplier relationships: ensure reliable supplies

In this block, you identify all the costs associated with operating your business model.

You’ll need to focus on evaluating the cost of creating and delivering your value propositions, creating revenue streams, and maintaining customer relationships. And this will be easier to do so once you have defined your key resources, activities, and partners.  

Businesses can either be cost-driven (focuses on minimizing costs whenever possible) and value-driven (focuses on providing maximum value to the customer).

Value Propositions

This is the building block that is at the heart of the business model canvas. And it represents your unique solution (product or service) for a problem faced by a customer segment, or that creates value for the customer segment.

A value proposition should be unique or should be different from that of your competitors. If you are offering a new product, it should be innovative and disruptive. And if you are offering a product that already exists in the market, it should stand out with new features and attributes.

Value propositions can be either quantitative (price and speed of service) or qualitative (customer experience or design).

Value Proposition Canvas

What to Avoid When Creating a Business Model Canvas

One thing to remember when creating a business model canvas is that it is a concise and focused document. It is designed to capture key elements of a business model and, as such, should not include detailed information. Some of the items to avoid include,

  • Detailed financial projections such as revenue forecasts, cost breakdowns, and financial ratios. Revenue streams and cost structure should be represented at a high level, providing an overview rather than detailed projections.
  • Detailed operational processes such as standard operating procedures of a business. The BMC focuses on the strategic and conceptual aspects.
  • Comprehensive marketing or sales strategies. The business model canvas does not provide space for comprehensive marketing or sales strategies. These should be included in marketing or sales plans, which allow you to expand into more details.
  • Legal or regulatory details such as intellectual property, licensing agreements, or compliance requirements. As these require more detailed and specialized attention, they are better suited to be addressed in separate legal or regulatory documents.
  • Long-term strategic goals or vision statements. While the canvas helps to align the business model with the overall strategy, it should focus on the immediate and tangible aspects.
  • Irrelevant or unnecessary information that does not directly relate to the business model. Including extra or unnecessary information can clutter the BMC and make it less effective in communicating the core elements.

What Are Your Thoughts on the Business Model Canvas?

Once you have completed your business model canvas, you can share it with your organization and stakeholders and get their feedback as well. The business model canvas is a living document, therefore after completing it you need to revisit and ensure that it is relevant, updated and accurate.

What best practices do you follow when creating a business model canvas? Do share your tips with us in the comments section below.

Join over thousands of organizations that use Creately to brainstorm, plan, analyze, and execute their projects successfully.

FAQs About the Business Model Canvas

  • Use clear and concise language
  • Use visual-aids
  • Customize for your audience
  • Highlight key insights
  • Be open to feedback and discussion

More Related Articles

What is an Action Plan? Learn with Templates and Examples

Amanda Athuraliya is the communication specialist/content writer at Creately, online diagramming and collaboration tool. She is an avid reader, a budding writer and a passionate researcher who loves to write about all kinds of topics.

  • 11.2 Designing the Business Model
  • Introduction
  • 1.1 Entrepreneurship Today
  • 1.2 Entrepreneurial Vision and Goals
  • 1.3 The Entrepreneurial Mindset
  • Review Questions
  • Discussion Questions
  • Case Questions
  • Suggested Resources
  • 2.1 Overview of the Entrepreneurial Journey
  • 2.2 The Process of Becoming an Entrepreneur
  • 2.3 Entrepreneurial Pathways
  • 2.4 Frameworks to Inform Your Entrepreneurial Path
  • 3.1 Ethical and Legal Issues in Entrepreneurship
  • 3.2 Corporate Social Responsibility and Social Entrepreneurship
  • 3.3 Developing a Workplace Culture of Ethical Excellence and Accountability
  • 4.1 Tools for Creativity and Innovation
  • 4.2 Creativity, Innovation, and Invention: How They Differ
  • 4.3 Developing Ideas, Innovations, and Inventions
  • 5.1 Entrepreneurial Opportunity
  • 5.2 Researching Potential Business Opportunities
  • 5.3 Competitive Analysis
  • 6.1 Problem Solving to Find Entrepreneurial Solutions
  • 6.2 Creative Problem-Solving Process
  • 6.3 Design Thinking
  • 6.4 Lean Processes
  • 7.1 Clarifying Your Vision, Mission, and Goals
  • 7.2 Sharing Your Entrepreneurial Story
  • 7.3 Developing Pitches for Various Audiences and Goals
  • 7.4 Protecting Your Idea and Polishing the Pitch through Feedback
  • 7.5 Reality Check: Contests and Competitions
  • 8.1 Entrepreneurial Marketing and the Marketing Mix
  • 8.2 Market Research, Market Opportunity Recognition, and Target Market
  • 8.3 Marketing Techniques and Tools for Entrepreneurs
  • 8.4 Entrepreneurial Branding
  • 8.5 Marketing Strategy and the Marketing Plan
  • 8.6 Sales and Customer Service
  • 9.1 Overview of Entrepreneurial Finance and Accounting Strategies
  • 9.2 Special Funding Strategies
  • 9.3 Accounting Basics for Entrepreneurs
  • 9.4 Developing Startup Financial Statements and Projections
  • 10.1 Launching the Imperfect Business: Lean Startup
  • 10.2 Why Early Failure Can Lead to Success Later
  • 10.3 The Challenging Truth about Business Ownership
  • 10.4 Managing, Following, and Adjusting the Initial Plan
  • 10.5 Growth: Signs, Pains, and Cautions
  • 11.1 Avoiding the “Field of Dreams” Approach
  • 11.3 Conducting a Feasibility Analysis
  • 11.4 The Business Plan
  • 12.1 Building and Connecting to Networks
  • 12.2 Building the Entrepreneurial Dream Team
  • 12.3 Designing a Startup Operational Plan
  • 13.1 Business Structures: Overview of Legal and Tax Considerations
  • 13.2 Corporations
  • 13.3 Partnerships and Joint Ventures
  • 13.4 Limited Liability Companies
  • 13.5 Sole Proprietorships
  • 13.6 Additional Considerations: Capital Acquisition, Business Domicile, and Technology
  • 13.7 Mitigating and Managing Risks
  • 14.1 Types of Resources
  • 14.2 Using the PEST Framework to Assess Resource Needs
  • 14.3 Managing Resources over the Venture Life Cycle
  • 15.1 Launching Your Venture
  • 15.2 Making Difficult Business Decisions in Response to Challenges
  • 15.3 Seeking Help or Support
  • 15.4 Now What? Serving as a Mentor, Consultant, or Champion
  • 15.5 Reflections: Documenting the Journey
  • A | Suggested Resources

Portions of the material in this section are based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.

Learning Objectives

By the end of this section, you will be able to:

  • Define a business model and its purpose
  • Describe a business model canvas
  • Describe a lean model canvas
  • Describe a social business model canvas

According to Alexander Osterwalder and Yves Pigneur , the authors of Business Model Generation , a business model “describes the rationale of how an organization creates, delivers and captures value.” Nevertheless, there is no single definition of this term, and usage varies widely. 29

In standard business usage, a business model is a plan for how venture will be funded; how the venture creates value for its stakeholders, including customers; how the venture’s offerings are made and distributed to the end users; and the how income will be generated through this process. The business model refers more to the design of the business, whereas a business plan is a planning document used for operations.

Each business model is unique to the company it describes. A typical business model addresses the desirability, feasibility, and viability of a company, product, or service. At a bare minimum, a business model needs to address revenue streams (e.g., a revenue model), a value proposition, and customer segments. In non-jargon English, this means you want to address what your idea is, who will use it, why they will use it, and how you will make money off it.

A canvas is a display that would-be entrepreneurs commonly use to map out and plan different components of their business models. There are several different types of canvases, with the business model canvas and the lean canvas being the most commonly used. There are hard-copy canvases modeled after an art canvas as well as digital versions. The original physical canvases are meant to serve as visual tools, used with sticky notes and sketches.

As developed by Osterwalder and Pigneur, the business model canvas has nine components, as shown in Figure 11.6 .

Link to Learning

Visit this site to see examples of completed Business Model Canvases for a variety of industries for a deeper understanding of how the different categories are filled in.

Osterwalder and Pigneur wrote Value Proposition Design as a sequel to Business Model Generation . Their value proposition canvas is a plug-in that complements the business model canvas, going in depth on activities such as encouraging entrepreneurs to address and tackle customer pains, gains, and jobs-to-be-done trigger questions, and designing pain relievers and gains. The complementary and accompanying activities and resources can be useful for a deeper dive into and understanding of customer value creation in the form of value proposition, although there are other approaches to conceptualizing your value proposition. For Christensen, the originator of the disruptive innovation and jobs-to-be-done theories, a value proposition is a product that helps customers do a job they’ve been trying to do more effectively, conveniently, and affordably.

Finding the intersection of your customers’ problems and your solutions is how you create a unique value proposition, according to the entrepreneur Ash Maurya , the author of Scaling Lean and Running Lean . In Running Lean , Maurya offers the following formula for creating an initial value proposition in the canvas, as shown in Figure 11.7 .

Maurya deviated from the standard business model canvas to create the lean canvas. It overlaps the business model canvas in five of the nine components: customer segments, value proposition, revenue streams, channels, and cost structure ( Figure 11.8 ]. Rather than addressing key partners, key activities, and key resources, the lean canvas helps you tackle problems, solutions, and key metrics instead.

Visit this site to see examples of completed Lean Model Canvases from some major companies for a deeper understanding of how the canvas can be applied.

While the business model canvas and the lean canvas are similar in format, there are differences in how they are used. It is generally accepted that the lean canvas model is a better fit for startups, whereas the business model canvas works well for already established businesses. The lean canvas is simpler; the business model canvas provides a more complete picture of a mature business.

Watch this Railsware video that demonstrates how the lean canvas model might be applied to startups to learn more. In the case example in the video, the lean canvas model is applied to the successful P2P ride-sharing app Uber, as if it were a startup.

Both the business model canvas and the lean canvas are designed for constant iterations, allowing for multiple versions and changes throughout the entrepreneurial process. Part of that process involves customer discovery; thus, the canvases invoke customer-focused design. The target customer is integrated into the canvas from the start through the use of a customer empathy map and a number of design-thinking ideation activities. 30 The customer empathy map is a portrayal of a target customer —the most promising candidate from a business’s customer segments—that explores the understanding of that person’s problems and needs ( Figure 11.9 ). Osterwalder and Pigneur used a customer empathy map as part of the design ideation phase of developing a business model canvas. There are differing versions of customer empathy maps, but most seek to answer common questions pertaining to the customer, such as:

  • With whom are we empathizing?
  • What do they need to do?
  • What do they see?
  • What do they say?
  • What do they do?
  • What do they hear?
  • What do they think?

Phillips, Proctor & Gamble, Microsoft, and Yeti are examples of well-known companies that make use of customer empathy mapping because, according to the journal Entrepreneur , every transaction can be turned into a meaningful and valuable customer interaction. 31 Once a company analyzes the results of customer mapping exercises, it may very well lead to new products that serve customer needs and/or wants.

For example, Philips used empathy mapping to detect a high level of fear in young patients immediately before an MRI medical procedure, so it invented a miniature version of the CAT scan equipment used in the procedure called the “kitten scanner” along with toy animal characters that were used to dispel the fear of MRIs among children. Proctor & Gamble created a new advertisement that was released for the 2012 Olympics visualizing the trials and tribulations of mothers raising young athletes, demonstrating Proctor and Gamble’s awareness that some of its customers wanted or needed empathy for the sacrifices they had made to help their children succeed. Likewise, Microsoft has attempted to demonstrate empathy with customers’ privacy concerns by developing an interactive website that explains not only how data is stolen but also how we can better protect our own data. 32

On their company website, the now-famous Yeti cooler company publicly extols the value of empathy mapping, explaining that it leads to better products. Yeti doesn’t just create one on its own, it actually asks its clients to work with the company to create an empathy map. 33 Thus, empathy mapping for Yeti is part of its product development process.

Customer empathy maps also strive to address customer pains (in this case, fears, frustrations, and anxieties) and gains (wants, needs, hopes, and dreams). 34

Strategyzer offers six videos outlining the business model canvas that total about 12 minutes; specifically they cover the prototyping journey from ideation to visualization of conceptualization.

Business Model Canvas 35

As Osterwalder and Pigneur describe it, according to Media Innovation and Entrepreneurship , their business model canvas blocks include revenue streams, customer segments, value propositions, cost structures, channels, key activities, key partners, key resources, and customer relationships.

Early on, your greatest focus should be on the right side of the canvas because:

  • These are, in many ways, the most critical aspects of starting a new venture (customer segments, value propositions, channels, and revenue streams).
  • The most fluid (revenue streams, channels, and value propositions will likely differ for the differing customer segments and, as you iterate and adapt throughout the customer discovery process, could likely change).
  • These follow a logical temporal order (there’s no need to focus on the costs of building a company if you won’t have customers).

In a follow-up to business model generation, the Strategyzer team created a second canvas, the value proposition canvas: https://www.strategyzer.com/canvas/value-proposition-canvas. The value proposition canvas is a new tool that pulls out the customer segment and value proposition blocks of the business model canvas, and encourages more in-depth exploration of those blocks to achieve a good fit between the two. The value proposition canvas tool looks at customer pains, gains and jobs to be done on the customer side and painkillers, gain creators, and products and services on the value proposition side. 36

Read this blog that provides a walk-through of how to fill in a value proposition canvas to learn more.

When you peel away the language used to describe business models, the early startup planning stages come down to a series of questions. When it comes to formulating a business model for a startup concept, another popular framework used in entrepreneurial circles is that of desirability-feasibility-viability Figure 11.10 ). This framework forces the entrepreneur to address broad questions about the startup concept:

  • Desirability: How desirable is the product? Who will use it and why?
  • Feasibility: How feasible is this idea? What are the costs of making it? How practical is the concept?
  • Viability: Will this idea remain viable? How will it make money? How will it be sustained over time?

These questions then begin to connect to form a narrative about where the startup concept came from, whom it serves, why it’s needed, how it will make money, and how it will be sustained in the future.

The value propositions, customer relationships, customer segments, and channels address the assumptions that will create customer value (desirability). The cost structure and revenue stream blocks are aimed at viability, or overcoming flawed business models. The key partners, key activities, and key resources are about execution and address feasibility. The risk of poor execution can undermine your assumptions that you chose the right infrastructure to execute your business model (feasibility). The risk of solving an irrelevant customer job (sometimes derisively labeled “a solution in search of a problem”) undercuts desirability in your business. The risk of a flawed business model would hamper the financial assumption that your business will earn more money than you spend (viability). Adaptability is about the assumption that you chose the right business model within the context of external factors such as technology change, competition, and regulation.

The business model canvas is not an exhaustive planning tool by any means. 37 , 38 The risk of such external threats is not specifically addressed on the canvas blocks. The external threats not specifically covered by the canvas blocks can be designed for adaptability, that is, the business model canvas is a necessary but insufficient component of determining the viability of the business idea/concept. There are many elements not included in the canvas that entrepreneurs must address. Industry analysis, including a competitive analysis, for example, falls “off canvas” but is important nonetheless.

The Lean Model Canvas

The lean model canvas is Ash Maurya ’s adaptation of the original business model canvas. As we noted earlier, gone are the customer relationships, key activities, key partners, and key resources blocks. Instead, a problem block is added, because as Maurya explains, “Most startups fail, not because they fail to build what they set out to build, but because they waste time, money and effort building the wrong product. I attribute a significant contributor to this failure to a lack of proper ‘problem understanding’ from the start.” Maurya next added a solution block to the lean model canvas, which corresponds well with features on a minimum viable product (MVP), which you will recall was covered in depth in Launch for Growth to Success . The lean model canvas also adds an “Unfair Advantage” block, similar to the block for competitive advantages or barriers to entry found in a business plan. 39

Social Business Model Canvas

As you’ve noticed by now, the core canvas components are common throughout the various versions. Many of the blocks of the social business model canvas are similar to those used in the business model canvas and the lean model canvas. 40 A few differences, as developed by Tandemic , focus on areas unique to social entrepreneurship ventures. For example, the new areas added include measures of what kind of social impact you are creating or developing, measures of surplus to address what happens with profits and where you intend to reinvest them, and measures of beneficiary segments, and social and customer value propositions. 41 These could be measures such as the number of trees planted, number of refugees housed and fed, jobs created, or investments made—depending on the venture. Social impact looks at an organization’s social mission beyond the bottom line. Measurement can differ among social entrepreneurs, but in terms of the canvas, impact measures are an effort to establish quantifiable metrics.

Social impact can be hard to measure, but nonetheless, many social entrepreneurs aim for long-lasting impact. 42 A 2014 report by the think tank, consultancy, and member network SustainAbility lists cooperative ownership, inclusive sourcing, and the “buy one, give one” model as three forms of social impact. 43 In addition to the Tandemic social business model canvas, there are other versions of similar canvases used for social entrepreneurship. For instance, Osterwalder adapted the business model canvas for mission-driven organizations into a mission model canvas. 44 There’s also a social lean canvas that adds purpose (explaining your reason for creating the venture in terms of social or environmental problems) and impact sections (describing the intended social or environmental impact). 45

This completed social business model canvas for the popular peer-to-peer lending platform Kiva illustrates how the business model canvas can and perhaps should be adapted for social entrepreneurship ventures.

What Can You Do?

Toms Shoes is perhaps one of the best-known companies for adopting a social entrepreneurship purpose into its business model. Part of its early success hinged on the fact that for every pair of shoes a customer bought, the company donated a pair of shoes to someone in need. The company won a prize in 2006 for its innovative solution to poverty. This “ 1-for-1 business model ,” sometimes commonly called the “Toms model” after the shoe company that popularized it, gained traction among other companies that followed suit in similar fashion, seeing both the social and the financial successes in the Toms model. Warby Parker is another example of a company that does essentially the same: A customer purchases a pair of eyeglasses, and the company donates a pair (although Warby Parker pays a third party to procure the glasses, as eyeglasses require an individual prescription, whereas shoes do not).

  • Can you think of an innovative social entrepreneurship business model?

The Birthday Party Project

Paige Chenault wanted homeless children in Dallas to feel special on their birthdays. Many have never experienced a birthday party. So this professional event planner sprang into action in January 2012. She launched the Birthday Party Project (https://www.thebirthdaypartyproject.org/), a nonprofit group whose mission is to celebrate the lives of homeless children (ages one to twenty-two). The group organizes monthly birthday parties with partner shelters. Since its inception, the concept has spread beyond Texas to cities across the United States, including Atlanta, Chicago, Los Angeles, New York, and San Francisco. In six years, the Birthday Party Project has celebrated 4,800 birthdays with 30,000 kids in attendance, eaten 40,000 cupcakes, cracked 30,000 glow sticks, and performed 1,100 renditions of “Happy Birthday.”

  • Identify a need in your community that could become a social entrepreneurship business, as Paige discovered with an initial passion project.
  • 29 Alexander Osterwalder and Yves Pigneur. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. Hoboken, NJ: Wiley, 2010.
  • 30 Charlene Perrin. “Create A Customer Empathy Map in 6 Easy Steps!” Conceptboard . March 28, 2019. https://conceptboard.com/blog/create-a-customer-empathy-map-in-6-easy-steps/
  • 31 Vineet Arya. “How to Infuse Empathy in Your Marketing?” Entrepreneur . June 28, 2019. https://www.entrepreneur.com/article/335987
  • 32 Vineet Arya. “How to Infuse Empathy in Your Marketing?” Entrepreneur . June 28, 2019. https://www.entrepreneur.com/article/335987
  • 33 Mike Godlewski. “The Secret to Knowing What a Client Is Thinking? Empathy Maps.” Yeti. February 8, 2016. https://yeti.co/blog/the-secret-to-knowing-what-your-client-is-thinking-empathy-maps/
  • 34 Germán Coppola. “What Is an Empathy Map, and Why Is It Valuable for Your Business?” Medium . November 28, 2017. https://medium.com/swlh/what-is-an-empathy-map-and-why-is-it-valuable-for-your-business-14236be4fdf4
  • 35 This material is based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
  • 36 Michelle Ferrier and Elizabeth Mays. Media Innovation and Entrepreneurship . The Rebus Foundation, 2017. https://press.rebus.community/media-innovation-and-entrepreneurship/.
  • 37 Jennifer van der Meer. "Do You Suffer from Value Proposition Confusion?" Linkedin . October 19, 2016. https://www.linkedin.com/pulse/do-you-suffer-from-value-proposition-confusion-jennifer-van-der-meer/
  • 38 “The Value Proposition Canvas.” Strategyzer . n.d. https://strategyzer.com/canvas/value-proposition-canvas
  • 39 Ash Maurya. “Why Lean Canvas vs Business Model Canvas?” Medium . February 27, 2012. https://blog.leanstack.com/why-lean-canvas-vs-business-model-canvas-af62c0f250f0
  • 40 "Social Business Model Canvas.” Business Model Toolbox . 2013. https://bmtoolbox.net/tools/social-business-model-canvas/
  • 41 “The Business Model Canvas Reinvented for Social Business.” Tandemic . n.d. http://www.socialbusinessmodelcanvas.com
  • 42 Ayse Guclu, J. Gregory Dees, and Beth Battle Anderson. “The Process of Social Entrepreneurship: Creating Opportunities Worthy of Serious Pursuit.” Duke/Fuqua case . 2002. https://centers.fuqua.duke.edu/case/knowledge_items/the-process-of-social-entrepreneurship-creating-opportunities-worthy-of-serious-pursuit/
  • 43 Lindsay Clinton and Ryan Whisnant. “Model Behavior: 20 Business Model Innovations for Sustainability.” SustainAbility . February 2014. https://sustainability.com/wp-content/uploads/2016/07/model_behavior_20_business_model_innovations_for_sustainability.pdf
  • 44 Alexander Osterwalder. “The Mission Model Canvas: An Adapted Business Model Canvas for Mission-Driven Organizations.” Strategyzer . February 25, 2016. https://blog.strategyzer.com/posts/2016/2/24/the-mission-model-canvas-an-adapted-business-model-canvas-for-mission-driven-organizations
  • 45 Social Lean Canvas. n.d. https://socialleancanvas.com/

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Elements of a Good Business Model

Key Elements of a Business Model

Are you ready to take your business to new heights? Want to ensure long-term success and profitability?

It all starts with a solid business model! In this blog post, we’ll explore the major elements of a good business model and how they can set you on the path to greatness.

Whether you’re a seasoned entrepreneur or just starting out, this guide will provide you with the insights you need to craft a winning strategy.

Let’s dive in and unlock the secrets to a thriving business!

1. Value Proposition: Your Unique Selling Point

One of the first essential elements you need to consider when developing a business model is your value proposition.

This is your unique selling point—the factor that sets you apart from your competitors. What problem are you solving? What need are you fulfilling?

Your value proposition should clearly communicate the benefits your product or service offers to customers.</p> <p>

? Pro tip : To craft a compelling value proposition, focus on the specific pain points your target audience experiences.

Tailor your solution to address these challenges effectively.

By offering something unique and valuable, you’ll attract customers and stand out in a crowded marketplace.

2. Target Market: Know Your Audience

Understanding your target market is crucial for any successful business.

Your business model should clearly define who your customers are and how you will reach them.

Conduct market research to identify your target audience’s demographics, preferences, and behavior.

This knowledge will help you tailor your marketing efforts and refine your product or service.

? Pro tip : Don’t try to appeal to everyone. Instead, focus on a specific niche or segment of the market. By understanding the unique needs and desires of your target audience, you can create a tailored solution that resonates with them and builds customer loyalty.

3. Revenue Streams: Diversify for Stability

When designing your business model, it’s crucial to consider your revenue streams.

How will you generate income?

Relying on a single source of revenue can be risky. Instead, aim to diversify your income streams to ensure stability and long-term profitability.

Explore various monetization strategies, such as product sales, subscriptions, licensing, or advertising.

? Pro tip : Look for innovative ways to generate revenue that align with your core business.

Consider upselling or cross-selling complementary products or services.

By diversifying your revenue streams, you’ll reduce dependency on any single source and create a more resilient business model.

4. Cost Structure: Optimize Efficiency

Managing costs is a crucial aspect of any business model.

By optimizing your cost structure, you can maximize profitability and maintain a competitive edge.

Take a close look at your expenses and identify areas where you can reduce waste or streamline processes.

Consider outsourcing non-core activities to save costs while focusing on your core competencies.

? Pro tip : Embrace technology and automation to increase efficiency.

Leverage software solutions to streamline operations and reduce manual labor.

Additionally, negotiate favorable contracts with suppliers and explore bulk purchasing options. By minimizing costs without compromising quality, you’ll create a lean and efficient cost structure that supports your overall business goals.

5. Key Partnerships: Collaboration for Success

No business operates in isolation.

Building strong partnerships can be a game-changer for your business model.

Identify key stakeholders and potential partners who can complement your strengths and help you reach your goals.

These partnerships can provide access to new markets, resources, expertise, or distribution channels.

? Pro tip: Seek out partnerships that align with your values and long-term objectives.

Look for mutually beneficial relationships where both parties can leverage their strengths to create value.

Remember, strong partnerships are built on trust, open communication, and shared goals.

6. Customer Relationships: Nurture Loyalty

Your customers are the lifeblood of your business.

Developing strong customer relationships is vital for long-term success.

Your business model should outline how you will engage, support, and retain your customers.

Consider implementing effective customer service strategies, personalized marketing campaigns, and loyalty programs.

? Pro tip: Focus on delivering exceptional customer experiences.

Go the extra mile to exceed their expectations and build loyalty.

Listen to their feedback, address their concerns promptly, and continuously improve your offerings based on their needs.

By nurturing strong relationships with your customers, you’ll create brand advocates who will support your business and contribute to its growth.

7. Key Activities and Resources: Optimize Your Operations

To execute your business model effectively, you need to identify the key activities and resources required.

Define the core functions that drive your business and allocate resources accordingly.

Determine whether you need physical assets, intellectual property, human capital, or technological infrastructure to deliver your products or services.

? Pro tip: Continuously evaluate and optimize your operations.

Regularly assess your processes, technologies, and resource allocation to ensure efficiency and effectiveness.

Embrace innovation and stay abreast of industry trends to stay ahead of the competition.

By aligning your activities and resources with your strategic goals, you’ll be better positioned to achieve sustainable growth.

8. Scalability and Adaptability: Prepare for the Future

A good business model should be scalable and adaptable to changing market dynamics.

As your business grows, you’ll need to ensure that your model can accommodate increased demand and expansion.

Additionally, it’s essential to stay agile and responsive to evolving customer needs and emerging trends.

? Pro tip: Build flexibility into your business model.

Anticipate potential challenges and plan for contingencies.

Continuously monitor market trends and customer feedback to identify opportunities for innovation and improvement.

By staying adaptable and prepared, you can navigate changes effectively and position your business for long-term success.

Related Posts

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A well-designed business model is the foundation for a successful venture.

By incorporating these key elements—value proposition, target market, revenue streams, cost structure, partnerships, customer relationships, key activities and resources, scalability, and adaptability—you can create a robust and sustainable business strategy.

Remember, building a successful business takes time, effort, and continuous refinement.

Stay committed to delivering value to your customers, embrace innovation, and adapt to changing market conditions.

With a solid business model in place, you’ll have the roadmap to unlock your business’s true potential and achieve remarkable results.

Good luck on your entrepreneurial journey!

Implement these elements into your business model and watch your success soar!

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Partha Chakraborty

Partha Chakraborty is a venture capitalist turned entrepreneur with 17 years of experience. He has worked across India, China & Singapore. He is the founder of Tactyqal.com, a startup that guides other startup founders to find success. He loves to brainstorm new business ideas, and talk about growth hacking, and venture capital. In his spare time, he mentors young entrepreneurs to build successful startups.

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8 Essential Elements of a Business Model You Need to Know

Before we can start a business, it is essential to develop an outline of the business plan even if you’re not seeking investors. In the end, establishing the business model will help to keep your focus on the goals. It will help you succeed, as it can help boost the growth of your business.

An effective business model should be the most important element that you should include in the business plans. It is not just a way to remain organized and focused, but it is also essential if you are in search of lenders or investors. They can be different, but when you choose the right option for your company it is easy to make the necessary adjustments in relation to your particular business.

We have listed eight key aspects of the structure of a business. These will assist you in evaluating the various aspects. This will make it simple for you to consider these components that are missing from your list. The 8 key elements of A Business Model are an essential aspect of starting an enterprise of your own. For instance, if you’re in search of banks or investors making an effective business plan will allow you to articulate clearly what the product or service is all about and how it will be successful.

1. Value Proposition

Value Proposition describes the product or service that your company can do to meet the customer’s wants. It should clearly state what a buyer will expect from your business. The value proposition must be individualized and tailored to reduce searches for products or services, and costs for discovery in relation to price. Also, it includes how you’ll handle product delivery.

2. Revenue Model

The Revenue Model refers to the way you intend to earn profit from your business by generating the production of revenue and also a positive return on capital investment. It could include revenue from advertising, subscriptions as well as sales revenue, transaction fees, and affiliate revenue. The kind of revenue you generate is dependent on the nature of your business however, regardless of what your income strategy is it’s essential to spell it out in detail to investors and yourself.

3. Market Opportunity

It is important to outline your business’s market and include your market as well as the total population of this group. If there’s a lot of interest in your product or service in a broad demographic that is why it is important to build an enterprise to meet the need.

4. Competitive Environment

Additionally, the market’s opportunity lets you and other people know the possibilities for financial success It’s crucial to conduct sufficient research in order for a realistic set of financial figures. If you’ve decided that you’ve got a significant potential market, you’ll need to make sure that your market isn’t overrun with your service or product. For instance, you’ll want to know who your competitors are. What is their product or service within the market you are in? Find out the names of these companies and what size they are. Find out their market share as well as the services they offer and what they cost for the products they offer.

5. Competitive Advantage

Knowing who your competitor is, what they provide and the amount they cost, you can create a strategy to distinguish yourself from them. The first step is to determine what you can do to attract customers to select your business. It could be by offering similar products or services at a lower cost or having a unique business culture that appeals to people.

6. Market Strategy

You need to decide how you intend to get into the market and entice clients, and it’s crucial to understand how you’ll create an impression on them from the beginning. It should be well-thought-out, and you might want to use a sales funnel.

7. Organization Development

Consider your audience and ways to reach them with the best impact. You can choose to utilize influencers on social media, run an advertising campaign using an online platform that is most appropriate for your company and, obviously, build an identity.

It’s equally important to arrange the manner in which your company operates to ensure that there is no chaos and to keep things organized. You also have organizational systems in your place because it will ensure that the work you need to do is done. Additionally, you need to have a system that defines the functions of the workplace. This will allow employees to comprehend their role and assist them in being efficient and effective. In addition, the development of your organization can directly affect how satisfied your customers are when orders and customer support are delivered promptly.

8. Management Team

The business model element will provide the experience and experience that a manager should be looking for. If you’ve got your management team in place or not, you need to think about what you want from them. If you have a solid team, they will be able to change the model of business and the company when needed. Learning how to pivot can give an organization’s management team credibility to investors.

Your business plan you design will ensure that your company is properly set up right from the start. It will allow your business to operate smoothly and can also assist in getting investors to be convinced of your business. The business model is comprised of the various aspects that a bank or investor will need to consider. Therefore, having it properly set up can show potential clients that you understand the way you’re going and have examined all the factors. This allows them to understand the potential for your business to be successful be, while also allowing you to think about the way you’ll manage your business. Read our article on the different kinds of models for business here.

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8 Types of Business Models & the Value They Deliver

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  • 26 May 2016

You want to start a company but aren’t sure about a viable business model. How might you create something that people are willing to pay for and could earn you a profit?

Before diving into potential strategies, it’s important to understand what a business is and does. At its heart, a business generates value for its customers. A business model is a specific method used to create and deliver this value.

What Is Value in Business?

A successful business creates something of value . The world is filled with opportunities to fulfill people’s wants and needs, and your job as an entrepreneur is to find a way to capitalize on these opportunities.

A viable business model is one that allows a business to charge a price for the value it’s creating, such that the business brings in enough money to make it worthwhile and continue operating over time. Whatever the business is offering must also satisfy the customer’s needs and quality expectations.

It’s important to note that value is subjective. What’s valuable to one person may not be to another. Moreover, the concept of value excludes any moral judgments about the intrinsic worth of an offering. For example, while most would agree that human life is more valuable than sports, some professional athletes make far more money than the average brain surgeon.

Nonetheless, the concept of value provides a useful bedrock on which to begin building your business model. In particular, consider what forms of value people are willing to pay for. Here are eight potential business models and the forms of value they deliver—as well as the pros and cons of each—to help you get started.

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8 Types of Business Models to Explore

A product is a tangible item of value. To run a successful product-focused business, try to produce the item for as low a cost as possible while maintaining a reasonable level of quality. Once the item is produced, your objective should be to sell as many units as you can for as high a price as people are willing to pay to maximize profit.

Products are all around us. From laptops to books to HBS Online courses (products don’t have to be physical), products are a classic form of value with high upside if you can get them right.

  • Pros: Many products can be easily duplicated. Thus, firms can achieve economies of scale after bearing some upfront costs of production.
  • Cons: Physical products need to be stored as inventory, which can increase costs. They can also be damaged or lost more easily than, say, a service.

Related: How to Create an Effective Value Proposition

A service involves offering assistance to someone else for a fee. To make money from your service, provide a skill to others that they either can’t or don’t want to do themselves. If possible, repeatedly provide this benefit to them at a high quality.

Like products, services are in abundance, especially in the knowledge economy. From hairdressers to construction workers to consultants to teachers, people with lucrative skills can earn good money for their time.

  • Pros: If you have a skill in high demand or a skill that very few others have, you can charge a fair price for your time and stand out in your field.
  • Cons: If you don’t charge enough for your services, or many people have your skill, your business may not be as lucrative.

3. Shared Assets

A shared asset is a resource that many people can use. Such resources allow the owner to create or purchase the item once and then charge customers for its use. To run a profitable business around shared assets, you need to balance the tradeoff of serving as many customers as you can without affecting the overall quality of the experience.

For instance, think of a fitness center. A gym typically buys treadmills, ellipticals, free weights, bikes, and other equipment and charges customers monthly membership fees for access to these shared assets. The key is to charge customers enough to maintain and, if needed, replace their assets over time. Finding the right range of customers is the key to making a shared asset model work.

  • Pros: This model provides people access to a lot of assets they wouldn’t otherwise have access to. In addition, many people are willing to pay a lot for access to trendy social spaces.
  • Cons: Because they don’t own the assets, customers have little incentive to treat your resources well. Make sure you have enough in your budget for quick fixes, if necessary.

4. Subscription

A subscription is a type of program in which a user pays a recurring fee for access to certain specified benefits. These benefits often include the recurring provision of products or services. Unlike a shared asset, however, your experience with the product or service isn’t affected by others.

To have a successful subscription-based offering, build a subscriber base by providing reliable value over time while attracting new customers.

The number of subscription services has exploded in recent years. From magazines to streaming services to grocery and wine delivery subscriptions, businesses are turning to the subscription-based model, often with great success.

  • Pros: This model provides certainty in the form of predictable revenue streams, making financial forecasting a bit easier. It also benefits from a loyal customer base and customer inertia (for instance, customers may forget to cancel their subscription).
  • Cons: To run this model, your business operations must be strong. If you can’t deliver value consistently over time, you may want to consider a different business model.

5. Lease/Rental

A lease involves obtaining an asset and renting it out for an agreed-upon amount of time in exchange for a fee. You can lease virtually anything, but it’s in your best interest to rent assets that are durable enough to be returned in good condition. This ensures you can lease the good multiple times and, perhaps, eventually sell it.

To profit from leases, the key is to ensure that the revenue you get from leasing the asset before it loses value is greater than the purchase price. This requires you to price the rental of the item strategically and potentially not lease to those who may not return it in good condition. This is why many rentals of high-value items require references, credit checks, or other background information that can predict how someone may return the leased item.

  • Pros: You don’t have to have a novel idea to make money using a lease business model. You can purchase assets and rent them to others who wouldn’t buy them for full value and earn a premium.
  • Cons: You need to protect yourself from unexpected damage to your assets. One way to do so is through insurance.

6. Insurance

Insurance entails the transfer of risk from a customer to a seller of an insurance policy. In exchange for the insurance company (the seller of the policy) taking on the risk of a specified event occurring, they receive periodic payments ("premiums" in insurance lingo) from the policyholder. If the specified event doesn’t happen, the insurance company keeps the money, but if it does, the company has to pay the policyholder.

In a sense, insurance is the sale of safety—it provides value by protecting people from unlikely, but catastrophic, risks. Policyholders can take insurance out on almost anything: life, health, house, car, boat, and more. To run a successful insurance company, you have to accurately estimate the likelihood of bad events occurring and charge higher premiums than the claims you pay out to your customers.

  • Pros: If you calculate risk accurately, you’re guaranteed to make money using the insurance business model.
  • Cons: It can be difficult to accurately calculate the likelihood of specific events occurring. Insurance only works because it spreads risk over large numbers of policyholders. Insurance companies can fail if a large portion of policyholders is impacted by a widespread, negative event they didn’t see coming (for example, the Global financial crisis in 2007 and 2008).

Related: 5 Steps to Validate Your Business Idea

7. Reselling

Reselling is the purchasing of an asset from one seller and the subsequent sale of that asset to an end buyer at a premium price. Reselling is the process through which most major retailers purchase the products they then sell to buyers. For example, think of farmers supplying fruits and vegetables to a grocery store or manufacturers selling goods to a hardware store.

Companies make money through resale by purchasing large quantities of items (usually at a bulk discount) from wholesalers and selling single items for a higher price to individuals. This price raise is called a markup.

  • Pros: Markups can often be high for retail sales, enabling you to earn a profit on the items you resell. For example, a bottle of water might cost 10 cents to produce, whereas a customer may be willing to pay $1.50 or more for the same bottle.
  • Cons: You need to be able to gain access to quality products at low costs for the reselling business model to work. You’ll also need the physical space to store inventory to manage sales cycles.

8. Agency/Promotion

Agents create value by marketing an asset, which they don’t own, to an interested buyer. They then earn a fee or a commission for bringing the buyer and seller together. Thus, instead of using their own assets to create value, they team up with others to help promote them to the world.

Running a successful agency requires good connections, excellent negotiation skills , and a willingness to work with a diverse set of individuals. One example is a sports agent who promotes players to teams and negotiates on their behalf to get the best deal. In return, they typically receive compensation equal to a certain percentage of the contract.

  • Pros: You can highly profit from expertise and connections in your industry, be it publishing, acting, advertising, or something else.
  • Cons: You only get paid if you seal the deal, so you have to be able to live with some uncertainty.

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Setting Your Business Up for Success

These eight types of business models each have pros and cons and deliver value in their own ways. If you’re looking to start a business and need a place to start, one of these could be the best fit for your venture and entrepreneurial skill set .

Interested in honing your entrepreneurial skills? Explore our four-week online course Entrepreneurship Essentials and our other entrepreneurship and innovation courses to learn the language of the business world.

This post was updated on February 19, 2021, and is a compilation of two posts, previously published on May 26, 2016, and June 2, 2016.

eight key elements of business model

About the Author

The 10 Main Components of a Business Model

The 10 Main Components of a Business Model

I learned how to write business models in graduate school. Although, it really felt more like writing long and complicated novels. I once spent three months working on one for a hypothetical home services referral website. I even conjured up crowd-sourced reviews for my would-be business. The process revealed a depressing plot twist.

In the time I worked on this detailed plan, I could have actually built a meaningful version of the product (with technical help, of course). This is why people are often told to avoid business models altogether. But I think that advice is misguided.

When done right, a business model lays out a clear path for building something meaningful. It distills the potential for a business down to its essence. 

This is because it answers the most important questions about your business: What problem are you going to solve for whom? How will you solve it? How will customers pay for the solution? And how profitable will it be?

Your business model is the foundation for your strategy , setting the direction for success. And whether you are just starting a business or you are moving into a new market with an existing offering, you need a plan to guide you — a model for your emerging business or product.

Our team at Aha! has always taken this strategic approach. From day one, we laid out a strong vision for the business and made sure everyone on the team understood it.

But we did not write a long, comprehensive document. We focused on the specifics of the business that we needed to better understand.

Our business model has never been overly complicated, and yours does not have to be either. You can start with a single piece of paper or by using a tool like the Aha! Business Model Builder .

stack of books

There are a number of approaches you can take, but here is our approach and what we believe to be the 10 main components of a business model:

1. High-level vision: A basic description of your business model — two or three sentences that are your true north.

2. Key objectives: The top goals and how you plan to measure them.

3. Customer targets and challenges: The types of customers who will purchase your solution, along with their exact pain points.

4. Solution: The primary way that you solve your customer’s problems.

5. Value: The core elements of your solution that make it unique and differentiated (and ultimately valuable).

6. Pricing: How you will package your solution and what it will cost.

7. Messaging: A clear and compelling message that explains why your solution is worth buying.

8. Go-to-Market: The channels that you will use to market and sell to your customers.

9. Investment required: The costs required to make the solution a success.

10. Growth opportunity: The ways that you will grow the business, including key partnerships if you need them.

A good business model is simple and easy to understand. It answers the key questions about what you are trying to achieve and for whom.

Once you distill the elements down to their essence, it is important to get feedback and uncover any incorrect assumptions or biases. The hard part is understanding what feedback to listen to and what to ignore because everyone has an opinion on the viability of a new business or product extension. And often those opinions are just that or even misguided.

But a strong business model will protect against this. It forces deep analysis and removes anxiety from your work by providing a framework for progress. And this is the ultimate benefit of a business model. It requires you to make assumptions and decisions, and it encourages you to check your progress against pre-defined success metrics.

How have you approached building a business model?

Brian de Haaff

Brian de Haaff

Brian seeks business and wilderness adventure. He is the co-founder and CEO of Aha! — the world’s #1 product development software — and the author of the bestseller Lovability and The Startup Adventure newsletter. Brian writes and speaks about product and company growth and the journey of pursuing a meaningful life.

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Business Model Canvas: The 9 Elements Explained

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This article is an excerpt from the Shortform book guide to "Business Model Generation" by Alexander Osterwalder and Yves Pigneur. Shortform has the world's best summaries and analyses of books you should be reading.

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What are the nine elements of the Business Model Canvas? How are the elements related?

There are nine elements in the Business Model Canvas: 1) customer groups, 2) customer touchpoints, 3) customer interactions, 4) value proposition, 5) key resources, 6) network, 7) key activities, 8) revenue streams, 9) expenses. These elements are interdependent components that impact the effectiveness of the other elements. So, changes to one element can reduce or amplify the effects of other elements.

In this article, we’ll first briefly define what the Business Model Canvas is. Next, we’ll explore each of the nine overarching elements that you need to consider to create a successful business model.

What Is the Business Model Canvas?

Osterwalder and Pigneur developed a flexible template that they refer to as the “ Business Model Canvas ” to help you understand and focus on the nine overarching elements that they believe make up any successful business model. The template offers a visual framework to describe, assess, update, or design business models. You can use it to analyze the strategies of your competitors, to evaluate or to create new strategies for your existing business, or to design an entirely new business.

(Shortform note: The Lean Canvas is a popular adaptation of the Business Model Canvas. Developed by Ash Maurya, the author of Running Lean , it’s designed specifically for action-orientated start-up companies that rely on continuous experimentation to develop their products and services. Consequently, it places more emphasis on defining customer problems and identifying competitive solutions .)

The 9 Elements of the Business Model Template

Osterwalder and Pigneur encourage you to consider each of the nine Business Model Canvas elements as interdependent components that impact the effectiveness of the other elements. In other words, changes to one element can impose constraints or amplify the effects of other elements. Therefore, as you work on your business models, consider how you can leverage all of your elements to work together.

As you work on your business models, consider how you can leverage all of your elements to work together.

Element 1: Define Your Customer Groups

Define the different groups of customers your business intends to target—Osterwalder and Pigneur refer to this element as “Customer Segments.” You may serve one group of customers or several groups of customers depending on the needs you intend to fulfill. The authors state that your customers represent different groups if you need to:

  • Create different products and services to meet their needs
  • Reach them through different channels of distribution
  • Develop different types of relationships with them
  • Adapt your pricing structures to accommodate their needs

Once you’ve categorized your customers into distinct groups based on their needs or the way they interact with you, you can target these groups by designing your business model around their specific customer needs.

(Shortform note: The Four Steps to the Epiphany , by Steve Blank, emphasizes the importance of identifying and validating your customer groups before you develop your business model. The book includes a four-step customer development process to help businesses effectively define and target customer groups: 1) discover customers for your product or service, 2) validate your product and touchpoints, 3) create demand for your product or service, and 4) build strategies focused on customer management.)

Osterwalder and Pigneur argue that you need to approach each of your customer groups in specific ways when planning your business model. They provide the following examples of different types of customer groups:

Mass Market

For Mass Markets, the focus is on one large customer base with similar needs. Therefore, it isn’t necessary to distinguish between different customer groups when planning each of the other elements in your business model. For example, Colgate doesn’t need to differentiate its customers since toothpaste is an essential, widely-used personal care product. Therefore, Colgate can align all of its business model elements towards appealing to and engaging as many people as possible.

Niche Market

For Niche Markets, business models need to cater to specific customer groups and tailor each of the other elements to effectively target these specialized needs. For example, Lush targets customers who care about vegetarian products (no animal testing) and eco-friendly practices. Therefore, they align all of their business model elements to ensure the business focuses on environmentally friendly methods.

Subdivided Market

For Subdivided Markets, business models offer slightly different products and services to accommodate the needs of each of their customers. The way that they position each different product and service defines how they approach each of the elements. For example, an estate agent’s customers all want to buy or rent property. The estate agent can segment these customers into groups based on their income and on whether they wish to buy or rent. The higher the customer is willing to pay, the more emphasis the estate agent may have to put on developing customer relationships. This in turn affects the overall costs involved in targeting individual customer groups.

Diversified Market

Businesses that cater to two or more unrelated customer groups with different needs, have to base their business models around distinct products and services. All of the elements need to accommodate these distinct products and services. For example, Johnson & Johnson provides healthcare products and services to consumers. However, they also provide medical devices and equipment for hospitals. Johnson & Johnson has to target both of these customer groups separately to effectively cater to them.

Multi-Sided Market

Businesses that serve interdependent customer groups need to create products and services of equal value for each customer group. For the business model to function, each element needs to accommodate the full range of products and services on offer to both parties . For example, online marketplaces need to accommodate both buyers and sellers to operate efficiently—they can’t serve one group without the other group’s active participation.

Element 2: Define Your Touchpoints

Define your touchpoints, how you’ll communicate with your customers and deliver your products and services—Osterwalder and Pigneur refer to touchpoints as “Channels.” For your communication, sales, and distribution touchpoints, you have the option of using your own touchpoints (assets under your direct control such as your website or your store), or partner-owned touchpoints (external touchpoints that result from cooperation with marketing agencies or distribution partners), or a mix of both. In addition, the authors also make a distinction between direct touchpoints (communication you control such as your blog), and indirect touchpoints (communication you can’t control such as user reviews). 

The authors state that there are five distinct stages to consider when defining your touchpoints:

  • Advertise your products and services to customers
  • Differentiate the value your products and services offer to customers
  • Enable transaction processes so customers can buy your products and services
  • Distribute your products and services to your customers
  • Support customers after they’ve bought your products and services

Touchpoints and Interactions (Element 3) are closely linked—consider the level of interaction you want to have with your customers when defining your touchpoints.

Element 3: Define Your Interactions 

Define the type of interactions you want to establish for each of your customer groups—Osterwalder and Pigneur refer to this element as “Customer Relationships.” The authors advise that you consider what your motivations are for communicating with your customers as your approach will differ depending on whether you intend to acquire new customers, retain existing customers, or upsell to existing customers. 

It’s important to note that the interactions customers have with your business deeply influence how they experience your products and services, so you need to carefully consider how you can meet their needs and create the right balance. The authors provide a list of ways to interact with your customers:

  • Dedicated customer representatives for specific customers
  • Customer representatives
  • Self-service
  • Automated services
  • Communities and Forums
  • Content co-creation

Element 4: Define Your Value Offer

Define how you intend to offer value to these customers—Osterwalder and Pigneur refer to this element as “Value Propositions.” Your value offer outlines the benefits you intend to provide in the form of products and services. The authors state that successful value offers align with the needs of your customers and differentiate themselves from existing solutions.

When creating your value offer, consider these questions:

  • Do you intend to disrupt the market with an innovative value offer, or do you intend to improve upon what’s already out there?
  • What specific value do you intend to deliver to the customer?
  • How will you adapt your value offer for each of your customer groups?
  • What makes your value offer more appealing than that of your competitors?

(Shortform note: Osterwalder and Pigneur’s Value Proposition Design delves further into the topic of creating, testing, and improving your value offer.)

Element 5: Define Your Resources

Define what resources you need to create and deliver your products and services to your customer—Osterwalder and Pigneur refer to this element as “Key Resources.” According to the authors, you can own, lease, or acquire the resources you need. All resources fall into the following categories:

  • Material: raw materials, buildings, factories, vehicles, and machinery
  • Monetary: cash, credit, and stock options
  • Intellectual: brand equity, copyrights, patents, and knowledge databases
  • Human: experienced staff members and specialists

Element 6: Define Your Network

Define the alliances you need to form to optimize your business model and increase market share, acquire resources, or reduce risk—Osterwalder and Pigneur refer to this element as “Key Partnerships.” In other words, what alliances will provide you with a sustainable competitive advantage and help you to grow quickly? The authors distinguish between four different types of alliances:

  • Alliances between non-competitors (eBay and Paypal)
  • Alliances between competitors (Apple and Microsoft’s patent-licensing agreement)
  • Joint Alliances to develop new products and services (Ford and Toyota develop hybrid trucks)
  • Buyer-supplier Alliances (Samsung supplies Apple)

(Shortform note: Innovation expert, Rosabeth Moss Kanter, author of Think Outside the Building , compares strategic alliance relationships to marriage—like marriage, many strategic alliances fail to live up to expectations. In other words, both suffer from a high failure rate. However, Kanter argues that strategic alliances are more likely to succeed if businesses focus on creating strong foundations built on shared values and mutual benefits .)

Element 7: Define Your Critical Actions

Define the core actions you need to take to operate successfully and meet customer demands—Osterwalder and Pigneur refer to this element as “Key Activities.” The authors state that your actions will fall into the following categories:

  • Production: designing, manufacturing, and delivering products
  • Troubleshooting: finding solutions to problems
  • Infrastructure management: managing interactions between multiple applications and parties

(Shortform note: Osterwalder and Pigneur don’t provide practical advice here since different business models rely on different activities to operate successfully. Measure What Matters provides an effective goal-setting process that you can use to define the objectives (your end goal) and key results (how you will achieve your end goal) for each of your business model elements. For example, if you intend to manage platform interactions between different customer groups, your objective could be to acquire X number of customers in each group. Your key results could be: grow platform visitors by 5% every month, increase organic traffic by 10% every six weeks, and so on.)

Element 8: Define Your Profit Sources

Define how you intend to profit from the value you provide to your customers—Osterwalder and Pigneur refer to this element as “Revenue Streams.” The authors state that there are two types of income streams to consider, profits from single transactions , and profits from ongoing payments such as subscriptions . You may have multiple income streams for each of your customer groups. Further, each of these income streams may involve different pricing mechanisms depending on whether you choose to set a fixed or variable price for your products and services.

The authors include the following ways to generate profits:

  • Selling physical products
  • Charging a usage fee for a product or service
  • Supplying services for subscription
  • Leasing products and assets
  • Licensing intellectual property 
  • Providing an intermediation or brokerage service

Element 9: Define Your Expenses

Define the expenses of operating all of the elements you’ve defined in your business model—Osterwalder and Pigneur refer to this element as “Cost Structure.” Your expenses will vary depending on whether you choose to minimize costs and offer an inexpensive product or service, or if you choose to create premium-priced products and services. The authors state that your costs structures will include at least one of the following characteristics:

  • Fixed costs: salaries, rents
  • Variable costs: costs vary in proportion to the volume of goods or services produced
  • Economies of Scale: bulk purchase rates lessen cost per unit rates
  • Economies of Scope: a single resource or activity supports multiple operations or services

———End of Preview———

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Here's what you'll find in our full Business Model Generation summary :

  • The nine elements that make up any successful business model
  • Different ways you can combine these elements to create business model patterns
  • Techniques you can use to generate innovative ideas
  • ← 5 Sales Management Tips: Help Your Reps Succeed
  • Empowering Leaders Enable Others to Act →

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Darya’s love for reading started with fantasy novels (The LOTR trilogy is still her all-time-favorite). Growing up, however, she found herself transitioning to non-fiction, psychological, and self-help books. She has a degree in Psychology and a deep passion for the subject. She likes reading research-informed books that distill the workings of the human brain/mind/consciousness and thinking of ways to apply the insights to her own life. Some of her favorites include Thinking, Fast and Slow, How We Decide, and The Wisdom of the Enneagram.

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Understanding a Company’s Business Model

Understanding a Company’s Business Model

Understanding a company’s business model is the first step in conducting an industry and company analysis. This process is crucial as it helps in summarizing the key drivers of a company’s financial results and position. It also assists in focusing on areas that require further investigation and sets the analyst’s expectations for the issuer.

For instance, if we consider a company like Apple Inc., understanding its business model would involve understanding its revenue streams, key products and services, its target market, and its competitive advantage in the technology industry.

Key Elements of a Business Model

A business model describes a company’s operations and includes several elements. Analysts investigate these elements by answering key questions. The answers to these questions are company-specific, but the key questions are common across industries and companies. Some companies have a conventional business model, such as a retailer like Walmart or a natural resource producer like ExxonMobil, which simplifies business model identification. Analysts often focus their analysis on the differences in a company’s business model from a conventional model or those of its competitors.

Detailed Business Model Analysis for Analysts

$$\begin{array}{l|l|l} \textbf{Business Model} & \textbf{Key Questions} & \textbf{Explanation} \\ \textbf{Element} & \textbf{for Analysts} & \\ \hline \textbf{Goods or} & \text{What offerings does} & \text{Core of any} \\ \textbf{Services offered} & \text{the company bring} & \text{business. Analysts assess} \\ & \text{to the market?} & \text{offering nature,} \\ & & \text{features, benefits,} \\ & & \text{and uniqueness.} \\ \hline \textbf{Primary customers} & \text{Who is the} & \text{Crucial for determining} \\ \textbf{and customer} & \text{company’s target} & \text{scale, pricing,} \\ \textbf{Segments} & \text{demographic?} & \text{and marketing.} \\ & & \text{Identify main} \\ & & \text{customer segments.} \\ \hline \textbf{Sales channels,} & \text{How does the} & \text{Effective ways to} \\ \textbf{including customer} & \text{company reach potential} & \text{get product to} \\ \textbf{acquisition and} & \text{and current customers} & \text{the customer.} \\ \textbf{product/service} & \text{and deliver products?} & \text{Understand distribution,} \\ \textbf{delivery mechanisms} & & \text{retail, online} \\ & & \text{platforms. Evaluate} \\ & & \text{product/service} \\ & & \text{delivery.} \\ \hline \textbf{Pricing Model} & \text{How does the} & \text{Influence on} \\ \textbf{and Payment} & \text{enterprise set its} & \text{company’s revenue.} \\ \textbf{Conditions} & \text{pricing, and what} & \text{Analyze pricing} \\ & \text{are the payment} & \text{strategy and} \\ & \text{conditions?} & \text{payment terms.} \\ \hline \textbf{Dependencies:} & \text{Which external entities} & \text{Gauge company’s} \\ \textbf{Suppliers and} & \text{does the company} & \text{dependency, risks,} \\ \textbf{Collaborative Entities} & \text{depend upon, and} & \text{and bargaining power.} \\ & \text{how does it} & \text{Understand relationships} \\ & \text{manage relationships?} & \text{with external} \\ & & \text{entities.} \\ \end{array}$$ $$

Sources of Information for Determining a Business Model

To analyze and understand a company’s business model, analysts require various information sources. These sources provide insights into a company’s operations, financial performance, strategies, and market positioning. Let’s delve deeper into these sources and understand their significance and utility.

1. Issuer Sources

Issuer sources are directly provided by the company and tend to be the most reliable for understanding company-specific operations and strategies.

  • Regulatory filings : These, especially annual (10-K) and quarterly reports (10-Q), contain a wealth of information about a company’s financial performance, risk factors, strategies, and more.
  • Earnings calls : Management discusses recent performance and future outlooks, and analysts can ask questions directly.
  • Investor events : These provide deeper insights into specific segments or strategies of the company.
  • Press releases : Offer timely updates on recent developments, product launches, or mergers and acquisitions.
  • Direct communications : Conversations with company personnel can provide nuanced insights.
  • Company website : A hub of information, including company history, product details, and more.

2. Public Third-party Sources

These are external sources that provide a broader perspective on industry trends, economic factors, and more.

  • Industry reports : Offer a comprehensive view of industry trends, challenges, and opportunities.
  • Economic indicators : Help in understanding the macroeconomic environment in which the company operates.
  • News outlets : Provide current events and developments that might impact the company.
  • Social media : Offers real-time insights and public perception about the company and its products.
  • Search engines : A vast resource for miscellaneous information, from customer reviews to academic papers.

3. Proprietary Third-party Sources

These are specialized sources that provide in-depth, often paid, insights and analyses.

  • Analyst reports : Detailed reports by experts on company performance, industry comparison, and forecasts.
  • Data platforms : Platforms like Bloomberg and FactSet offer real-time data, analytics, news, and more.
  • Consultancy reports : In-depth industry insights, such as Rystad in energy, Gartner, and IDC in information technology, are often based on proprietary research methodologies.

4. Proprietary Primary Research

This involves firsthand research conducted or commissioned by the analyst. It’s tailored to the analyst’s specific requirements.

  • Surveys : Gather data directly from customers, suppliers, or other stakeholders.
  • Product comparisons : In-depth analyses of how a company’s product stands against competitors.
  • Interviews : Conversations with industry experts, former employees, or others can provide unique insights.

A blend of these information sources provides a comprehensive understanding of a company’s business model, its competitive positioning, and potential future performance.

Question  What is most likely the role of issuer sources in determining a company’s business model? They provide information about the company’s competitors. They provide information about the company’s stock price. They provide information through regulatory filings, especially the annual and quarterly reports, and other issuer-related sources. The correct answer is C . Issuer sources are vital for understanding a company’s business model, and they do this by sharing information in regulatory filings, particularly in the annual and quarterly reports and other documents related to the company. These sources are a goldmine of information about the company’s activities, financial health, future plans, and the risks it faces. They offer a glimpse into the company’s business model, including how it makes money, manages costs, targets specific customer groups, defines its unique value, and competes in the market. Regulatory filings, such as the annual report (Form 10-K) and quarterly report (Form 10-Q), are required by securities regulators and are publicly available. They contain audited financial statements, management’s discussion and analysis (MD&A), disclosures about market risk, and other important information. Other issuer-related sources may include press releases, investor presentations, conference call transcripts, and corporate websites. These sources can provide timely and detailed information about the company’s recent developments, management’s outlook, and other relevant issues. A is incorrect . While issuer sources may contain some information about a company’s competitors, their primary role is not to provide information about the competition. Information about competitors is typically obtained from industry reports, market research, news articles, and other external sources. B is incorrect . Issuer sources do not directly provide information about the company’s stock price. The stock price is determined by the market and can be influenced by a variety of factors, including the company’s financial performance, market conditions, investor sentiment, and other factors. While issuer sources can provide information that may affect the stock price, they do not provide the stock price itself.

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 FourWeekMBA

The Leading Source of Insights On Business Model Strategy & Tech Business Models

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What Are The Key Components Of Any Business Model?

The key components of any business model are: 

  • A compelling value proposition :  How do you want your people to think about your brand?
  • A unique brand positioning:  What do you offer to your people that make them want more?
  • A 10x goal setting:  Can you offer a 10X better product or service? (compared to existing solutions)
  • Customer segments:  Who is your customer? (to notice here we’re not talking anymore about people but customers, those willing to pay for your product or service)
  • Distribution channels:  How do you get your product or service to your customer?
  • Profit formula:  Is the business financially sustainable?

Table of Contents

A glance at the business model tools available

With FourWeekMBA I’ve been researching into over a hundred  business models at the time of this writing. From tech to luxury, from innovative to more traditional.

I’ve been in search of a framework, recipe or something that could help me dissect any company. As I came from a financial background the most logical thing for me was to look at these companies by analyzing their numbers.

However, I soon realized that approach was too reductive. So I started to look at other frameworks that could be used to find the simplest parts of a business model and its key components.

In this article, I’ll show you a few approaches and how they come down to similar vital components.

A recap of key components according to several business model tools and frameworks

A business model is a representation of a company in the real world (this is a definition that works for practitioners, not necessarily for academics).

Business modeling for entrepreneurs might be a useful tool to gain insights about competitors, better understand your organization or design toolbox to grow your business.

From that standpoint, over the years a few tools came handy . Some of them have been discussed at great length on this blog:

  • business model canvas
  • lean startup canvas
  • blitzscaling canvas
  • sales navigator framework 
  • and many others

Each of those frameworks assumes a business model has several key components. For instance, the business model canvas tells you that a business model has nine key components:

  • Key partners
  • Key activities
  • Value proposition
  • Customer relationship
  • Customer segment
  • Key resource
  • Distribution channel
  • Cost structure
  • Revenue stream

While a lean startup canvas tells you there are still nine key elements, but it substitutes key partners, key activities, key resources, and customer relationships, with a problem, solution, key metrics, and unfair advantage. Therefore, the lean startup canvas will look like that :

  • key metrics
  • value proposition
  • unfair advantage
  • customer segments
  • cost structure
  • revenue streams

The lean startup canvas as an adaptation from the business model canvas might be better suited for startup organizations, which need to scale quickly while gathering feedback from customers.

The blitzscaling business model innovation canvas instead, looks at a business model as primarily skewed toward massive growth .

In that instance, what identifies a business model is its ability to leverage on growth , or to limit its growth .

Thus it is comprised of four growth levers and two growth limiters:

  • Market size
  • Distribution
  • High gross margins
  • Network effects
  • Lack of product/market fit
  • Operational scalability

Another framework from BMI Lab put together in the sales navigator assumes that a business model key components are three:

  • value chain
  • revenue model

Those elements come together when a business owner answers to a few key questions, such as, “what do you offer to the customer?” or “how is the value proposition created?” or yet “why is it profitable?”

Another tool called four box business model framework by Innosight  breaks down the business model in four key components:

  • customer value proposition
  • key resources and processes
  • and the profit formula

Each of those elements feeds into each other to create a feedback loop of business model innovation. Those tools are quite useful, and it tackles how you can assess your business at each stage.

The FourWeekMBA business model framework

After looking at the key components of a business model based on a few toolboxes; based on the analyses performed over the years, for the business model boils down to three key elements, those are tied up by another ingredient.

This framework by FourWeekMBA has three aims:

  • noise reduction
  • and profitability

In short, I believe that a great business model toolbox has to have a super simple set up. It has to be based on very few elements. And it needs to focus on its long term financial sustainability.

However, what the toolboxes I’ve been looking at mostly miss is the branding of each business model success .

In short, for me there are two dimensions of a business:

  • The people dimension
  • The financial dimension

These two dimensions walk hand in hand. Yet the people side is what also makes the business thick from the economic standpoint.

The people side comprises the following elements:

This people dimension will help you build a solid brand. A solid brand builds up a tribe, a group of people that can follow you anywhere. Once you have a solid brand, you can focus on the second dimension: the financial dimension.

The three elements of the financial dimensions are:

Key takeaway

To recap an effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand.

The financial dimension will help you build proper distribution channels by identifying the people that are willing to pay for your product or service.

Other resources for your business:

  • Successful Types of Business Models You Need to Know
  • Blitzscaling
  • What Is a Value Proposition?
  • How to Write a One-Page Business Plan
  • How to Build a Great Business Plan According to Peter Thiel
  • What Is The Most Profitable Business Model?
  • The Era Of Paywalls: How To Build A Subscription Business For Your Media Outlet
  • How To Create A Business Model
  • What Is Business Model Innovation And Why It Matters
  • What Is Blitzscaling And Why It Matters
  • Marketing vs. Sales: How to Use Sales Processes to Grow Your Business

Handpicked business models:

  • How Does PayPal Make Money? The PayPal Mafia Business Model Explained
  • How Does WhatsApp Make Money? WhatsApp Business Model Explained
  • How Does Google Make Money? It’s Not Just Advertising! 
  • How Does Facebook Make Money? Facebook Hidden Revenue Business Model Explained
  • The Google of China: Baidu Business Model In A Nutshell
  • How Does Twitter Make Money? Twitter Business Model In A Nutshell
  • How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
  • How Amazon Makes Money: Amazon Business Model in a Nutshell
  • How Does Netflix Make Money? Netflix Business Model Explained

Key Highlights of Components of a Business Model:

  • Compelling Value Proposition: This is how you want your audience to perceive your brand. It’s the unique value or benefit your product or service offers to your customers.
  • Unique Brand Positioning: This involves identifying what sets your brand apart from competitors. It’s about defining the aspects that make customers want more from your brand.
  • 10x Goal Setting: This principle suggests aiming to offer a product or service that is significantly better (10 times better) than existing solutions. This drives innovation and differentiation.
  • Customer Segments: Identifying who your paying customers are, which segments of the population are interested in and willing to pay for your product or service.
  • Distribution Channels: Determining how you will deliver your product or service to your customers. This could include online platforms, retail stores, partnerships, etc.
  • Profit Formula: Ensuring the financial sustainability of your business. This involves analyzing costs, revenue streams, and ensuring that your business model is economically viable.

Business Model Tools and Frameworks Highlights:

  • Business Model Canvas: This tool breaks down a business model into nine key components, including customer segments, value proposition , distribution channels , cost structure, and revenue streams.
  • Lean Startup Canvas: Adapted from the Business Model Canvas, this framework focuses on problem-solution fit, key metrics, and unfair advantage, among other elements.
  • Blitzscaling Canvas: Geared towards rapid growth , this framework emphasizes key growth factors like market size, distribution , and network effects , along with growth limiters such as lack of product/market fit.
  • Sales Navigator Framework: Simplifies the business model into three elements: value proposition , value chain, and revenue model. It emphasizes creating value and understanding profitability.
  • Four Box Business Model Framework: This framework highlights customer value proposition , key resources and processes, and the profit formula as key components that interact to drive business model innovation.
  • FourWeekMBA Framework: This framework focuses on simplicity, noise reduction, branding, and profitability. It divides the business model into the people dimension (value proposition, brand positioning, 10x goal) and the financial dimension (customer segments, distribution channels , profit formula).

People Dimension and Financial Dimension Highlights:

  • People Dimension: This aspect focuses on building a compelling value proposition that resonates with customers, creating a unique brand positioning to attract a loyal following, and setting ambitious 10x goals to drive innovation.
  • Financial Dimension: In this dimension, identifying customer segments willing to pay for your product or service becomes crucial. Additionally, determining effective distribution channels and ensuring a sustainable profit formula are vital for business success.

Key Takeaway:

An effective business model incorporates both the people dimension (value proposition, brand, goals) and the financial dimension (customer segments, distribution , profitability). Balancing these dimensions helps create a strong brand, innovative product or service, and a viable economic structure for long-term success.

FourWeekMBA Business Toolbox

Business Engineering

business-engineering-manifesto

Tech Business Model Template

business-model-template

Web3 Business Model Template

vbde-framework

Asymmetric Business Models

asymmetric-business-models

Business Competition

business-competition

Technological Modeling

technological-modeling

Transitional Business Models

transitional-business-models

Minimum Viable Audience

minimum-viable-audience

Business Scaling

business-scaling

Market Expansion Theory

market-expansion

Speed-Reversibility

decision-making-matrix

Asymmetric Betting

asymmetric-bets

Growth Matrix

growth-strategies

Revenue Streams Matrix

revenue-streams-model-matrix

Revenue Modeling

revenue-model-patterns

Pricing Strategies

pricing-strategies

Connected Business Model Types

asymmetric-business-models

Attention Merchant Business Model

attention-business-models-compared

Marketplace Business Models

marketplace-business-models

Wholesale Business Model

wholesale-business-model

Retail Business Model

retail-business-model

Crowdsourcing Business Model

crowdsourcing

Open-Core Business Model

open-core

Open Source vs. Freemium

open-source-business-model

Freemium Business Model

freemium-business-model

Freeterprise Business Model

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Franchising Business Model

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More Resources

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About The Author

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Gennaro Cuofano

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Section Navigation

8. Models and Strategy 8.1 eBusiness in Context: US Scene 8.2 Strategic Management 8.3 Grouping by Strategy 8.4 Business Models 8.5 Customer Segments 8.6 Customer Channels 8.7 Customer Relationships 8.8 Key Resources 8.9 Key Partnerships 8.10 Key Activities 8.11 Value Propositions 8.12 Cost Structure 8.13 Revenue Streams 8.14 Internet Revenue Models 8.15 Strategy 8.16 Company Valuation 8.17 Measures & Ratios 8.18 Fundamental Analysis 8.19 Efficient Markets 8.20 Neoclassical Economics

Control Panel

8.4 business models.

1. Value proposition: benefits the customer enjoys when buying from a company. 2. Revenue model. how the money is made. 3. Market opportunity: the nature and size of a company's marketplace. 4. Competitive environment: other companies occupying the same marketplace. 5. Competitive advantage: advantages a company enjoys over its competitors. 6. Market strategy: how a company will target its customers and promote its products. 7. Organizational development: a company's management structure. 8. Management team: experience and skills of a company's leaders.

Another is the contemporary focus on value: businesses must generate value in some way, to: {2} {3}

1. Owners, whether proprietor, partners or share holders, in the form of dividends, a stronger balance sheet and/or share value. 2. Customers in better goods and services: more choice, value for money, help and after-sales service. 3. Employees as salaries and more worthwhile jobs. 4. Communities as better public or charitable services, and more prosperous environments. 5. Trades and professions as increased skills, techniques and public standing. 6. Host nation as prestige, competitiveness and trade balances.

A business model describes the rationale of how an organization captures, creates and delivers value. Such a model has to be intuitive and cover all matters of interest, i.e. encompass the necessary and sufficient conditions of company operation. The concept should be simple, complete and relevant, without oversimplifying the complexities of how enterprises actually function.

Osterwalder and Pigneur's Model

A successful concept creates a shared language by which existing businesses can be fully understood, evaluated and strategic alternatives devised. The Osterwalder and Pigneur model {4} recognizes nine basic elements or building blocks: these are:

eight key elements of business model

Osterwalder and Pigneur's concept, which is adopted in this book, has been applied and tested around the world and is already used in organizations such as IBM, Ericsson, Deloitte, the Public Works and Government Services of Canada. Their business model identifies and examines nine key elements where problems and opportunities may lie.

All companies must conform to the model, but some of the more noteworthy examples of its elements are:

Customer Segments

Google makes money from one customer segment ( Google Ads ) while subsidizing another two segments ( Google search and AdSense ).

Apple evolved into a company selling PCs, tablets, phones, music and software, all to different customer segments.

Seascape e-Art misinterpreted keyword research and supposed customer segments that did not exist.

Wal-mart aims its products at the price-conscious customer.

GlaxoSmithKline repositioned its Ropinirole drug for treatment of Parkinson's disease as an effective treatment for Restless Leg Sydrome.

Liquidation found customers for items surplus to demand.

Dell lost market share to HP and Apple by not finding new market segments.

Proctor & Gamble found new market segments with its Tremor and Vocalpoint services.

Zappos targeted customers wanting quality shoes at a reasonable price.

Netflix focused on very small sector of the entertainment market.

Customer Channels

Commerce Bancorp reached out-of-hours customers and busy mums by keeping retail rather than banking hours.

Craigslist expanded from an email listing to an Internet-based classified ads.

Amazon expanded from selling books to general retail and other services.

Andhra Pradesh bypassed centuries of corruption to open free channels between government and citizens.

Intel marketed its chip to PC purchasers.

Ipswich Seeds eventually found new customer channels (online catalog).

OpenTable used the Internet for its restaurant reservation booking service.

Proctor & Gamble marketed Chlorox as a 'green' product.

Fine Arts Ceramics found new customer channels through third-party auction sites.

Customer Relationships

Tesco succeeded with a 'customer first' policy.

Cisco collaborated with customers to see off the competition with innovative technology.

Lulu's PoD services empowered authors.

Lotus Notes was continually re-engineered to maintain its customer base.

Fiat canvassed car buyers and built what was wanted.

Eneco sold a commodity as a premium service to flower-growing companies.

Easy Diagnosis provided a free expert system as a loss-leader for its IT services.

Small, personal companies may weaken their customer relationships by going online.

Key Resources

Google used customer data collected from search engines and its Analytics program to develop its Ad service.

SIS Datenverarbeitung employed its programming expertise to re-engineer an ERP system.

GlaxoSmithKline monetized unused internal assets as a patents pool on neglected tropical diseases.

Amazon developed sophisticated technology which it then offered in cloud services.

Skype employed largely free resources to undercut telecom prices.

EasyDiagnosis employed its medical knowledge to create an online medical diagnosis expert system.

Aurora Health Care analyzed its medical records with business intelligence systems to offer a superior service.

Key Activities

Apple makes tablet computers and smart phones.

Commerce Bancorp provided banking services.

Lotus makes software.

Fiat makes motor cars.

Dell makes computers.

GlaxoSmithKline makes drugs.

Cisco makes routers and other IT equipment.

Liquidation auctions excess supplies.

SIS Datenverarbeitung provides information technology products and services.

Key Partnerships

eBay forged relationships with 60 website, including AOL and PayPal .

Proctor & Gamble 'Connect & Develop' policy expanded internal research through outside partnerships.

GlaxoSmithKline operates closely with the FDA.

Fiat links to key suppliers through private industrial networks.

Wal-mart has key partnerships with suppliers.

PayPal has a key partner in eBay .

Dutch flower growers have a key partner in Eneco .

Zipcar has key partnerships with environmentally-conscious city authorities.

By using a business model, Ronald Chan identified three new key partners.

Value Proposition

Amazon retails books and other products at competitive prices, all with purchaser reviews.

Netscape made the first browser and opened up the Internet.

Nespresso developed coffee machines for the mass market.

Netflix provides on-demand Internet streaming video.

Microsoft developed Visual Basic for fast and accurate program coding.

Eneco moved from being a fixed cost gas supplier to providing a service for commercial greenhouses.

Nitendo offered its wii game controller.

By trial testing, Harold Ingleton identified new value propositions for his customers.

Cost Structure

Skype uses the Internet and does not have to manage its own network.

Early dotcom companies spent more on advertising than profits warranted.

OpenTable used the Internet to bring preexisting services together.

Apple adjusted its prices for the iPod as new models were made available.

Halberd Engineering divided into two companies with different cost structures.

Netscape was an innovative company but its cost structure soon became unviable.

Revenue Streams

Nitendo reinvested its revenue streams in low-tech games.

Amazon reinvested book sale revenues into general retail and then computing services.

Dale Abrahams had no significant advantages in any business element, and so lost money.

Intel spent billions of its revenues on marketing its logo to PC purchasers, but got the money back through premium-priced chips.

PayPal had to spend lavishly on marketing a 'sure fire thing'.

Other Models

Business models are not exclusive. Much can also be learned from other models and analyses.

SWOT refers to factors external to the company by which its strategic outlook may be assessed: strengths (S), weaknesses (W), opportunities (O) and threats (T). {9}

Examples: Amazon, Inc ., Craigslist, Tesco plc, and PayPal ,

Pestel Analysis

Similar to the SWOT analysis, but here the factors assessed are political (P), economic (E), social (S), technological (T), environmental (E) and legal (L). {10}

Examples: Amazon and Tesco plc .

Value Vectors

When able to do so, customers opt for better value, but that better value can be price, performance, or relational value. {11}

Price value covers: 1. Best price for a standard product, and 2. Acceptable quality.

Performance value covers: 1. Better functionality, 2. Innovative features, 3. Improved quality, 4. Superior design.

Relational value covers: 1. Personalized treatment, 2. Products tailored to the customer's needs, 3. Integrated solutions, 4. All-round service excellence.

Value vectors change as a market matures, the relational value often becoming more important.

Example: Commerce Bancorp .

Value Chain Analysis

To assess its competitive advantage, a company can be modeled as a chain of value-creating activities, typically input logistics > operations > outbound logistics > marketing & sales >.services. {12}

Example: Tesco plc .

Porter's Five Force Analysis

Porter's Five Forces is a business strategy framework developed by Michael E. Porter of the Harvard Business School in 1979. Since 'pure competition' in an ideal market would drive the profits of all participating companies down to zero, the model identifies five forces that prevent this undesirable result: supplier power, threat of new entrants, threat of substitutes, buyer power and rivalry. {13}

Example: Apple iPod .

1. What are business models? What are their strengths and weaknesses? 2. Compare and contrast three business models. 3. Describe Osterwalder and Pigneur's business model. 4. Briefly illustrate five applications of Osterwalder and Pigneur's business model. 5. What is SWOT analysis?. Give an example of its use. 6. Describe a practical application of Pestel analysis. 7. Explain why vector values change as a market matures. 8. Describe the value business model, and its application in value chain analysis. 9. Examine the Apple iPod product with Porter's Five Force Analysis.

Sources and Further Reading

1 . Making business sense of the Internet by Shikar Ghosh. Harvard Business Review (March April 1998). 2. Understanding the Concept of Value by Mark Holleman. A Business Blog . Febrary 2011. 3. The Concept of value by Kevin Vincent. MLMKnowHow . 1998. 4. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers . by Alexander Osterwalder and Yves Pigneur. Wiley 2010. 5. E-Commerce 2010 by Kenneth C. Laudon and Carol Guercio Traver. Pearson 2010. Section 2. 6. Research on Internet business models . Internet Business Models . Good listing of books and academic papers on Internet business models. 7. Business Models by Design . DMI.Org . 8. Terrific survey of free business models online . Chris Anderson's Blog . March 2009. 9. SWOT Analysis . QuickMBA . 2010. Handy introduction. 10. PESTEL analysis of the macro-environment . Oxford Univ. Press . 2007. Straightforward account. 11. Creating value from the inside out by John Guaspari. Quality Digest . 2001. An application to the 'internal customer.' 12. The Value Chain . QuickMBA . Simple introduction. 13. Porter's Five Forces: a Model for Industry Analysis . QuickMBA . 2010. Reasonably detailed treatment.

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8 key elements of business model

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