Establishing a business model
Selecting a clear business model is an essential part of
business planning. Whether you're launching an online business, a
retail business or even a consultancy, get the business model
right, and the rest will follow.
What is a business model?
- Put simply, the business model is how your business makes
its money. You may have one business model - for example,
selling products - or you may have a few, such as direct sales and
- If you get it right, a solid business model will mean you can
react quickly to adverse market conditions or
competition and prevent your business from being overtaken
by newer businesses.
- Your business model will help you to think more clearly
about how the business itself is structured. Ask yourself
what you want to sell and how you want to sell it: King Gillette,
the inventor of the Gillette razor, famously gave away razors to
sell the blade. How do you plan to make your money?
- With the internet providing new scope for innovation,
entrepreneurs are constantly coming up with new ways of making
money and new business models. Reassess your business
model on a regular basis to ensure it stays fresh.
- Be as detailed as possible to avoid any confusion
when it comes to how you make money. If you are clear on your
business model, it should be easy to pursue possible revenue
How to work out your business model
A business model can be divided up into four separate
- Your business' infrastructure: this not only looks
at the internal structure of your company - who is employed by the
business, what their capabilities are, and how the management team
is structured - but also at your allegiances with other businesses
and how your business and its customers benefit one other.
- Your offering: it may seem obvious, but the
products or services your business offers demonstrate how it
distinguishes itself from competitors and businesses in the same
space. If you can't differentiate your business, there is no reason
customers should buy from you.
- Your customers: your customers' habits, level of
income, age and gender will be a huge determining factor in your
model. If they are creatures of habit, they will be more likely to
return to your business again and again - whereas if they are more
experimental, you will need a strong channel to draw them back to
the business. The relationship you have with your customers will
determine your distribution channels, marketing strategy and
ultimately, your proposition.
- Your finances: look at the different revenue
streams available to you. How will you make your money? Think back
to the razors vs razor blades model - how you structure your costs
will be an important determinant in how much money you make.
- Ad-supported - web- or media-based businesses give
away their product for free in return for revenue generated by
advertisers who pay based on the size of the audience.
- Bait and hook - the best known example of this is
King Gillette's method of giving away razors to sell the
- Barter - businesses which swap their products or
services for products or services from their customer. Most
businesses use barter as a way to supplement another business
- Broker - businesses which bring together buyers
and sellers and take a commission or fee. Banks, insurance
companies and estate agents fall into this category.
- Charity - charities are generally non-profit
organisations which give all their money to a good cause. The model
works by the customer giving money to the charity, which then sends
- Experience sales - businesses which sell
experiences, such as theme parks or holiday companies.
- Franchise - businesses such as McDonalds, Subway
and even Bang & Olufsen all sell franchises: franchisees pay to
use the branding, products, and the reputation the company has
- Pay-what-you-want - only tried out occasionally,
pay-what-you-want businesses allow customers to pay based on how
much they think a product or service is worth. This has worked in
both the restaurant and music industries.
- Product sales - businesses which produce goods and
sell them to customers, such as agricultural businesses, artists
- Retail - businesses which buy goods and sell them
on for a profit. Retailers and online shops fall into this
- Service sales - businesses which sell their
services - cleaning businesses, beauty salons, IT outsourcing
- Social enterprise - social enterprises work by
selling goods or services, the profits of which then go to
supporting a good cause. Don't confuse this with charity - the
founders of social enterprises draw salaries and profits go back
into the business as well as to good causes.
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