What Is a Business Model and How to Create One

What Is a Business Model

The business model and the process of its creation allow you to perceive the business system as a whole and see the main elements, interdependencies between them, and contradictions. So, how to create a good business model?

The purpose of the business model

The success of a company depends on choosing the most appropriate business model. It serves as a logical and visual representation of how the company functions at all levels and creates favorable conditions for customers, ensuring the necessary level of sales and the corresponding profit.

Today, the type of business model can depend on how the technology is used. For example, entrepreneurs on the Internet create completely new models based on existing or emerging technologies. Using such technologies, a company can attract many customers at a minimal cost. The purpose of developing a business model is to create a clear, visual, reliable, and applicable representation of the activities of the business system. The business model can be presented in the form of a drawing, a diagram, or a three-dimensional model.

The business model is needed by potential investors who study it if they want to invest in a particular company. A business model makes a project much easier to launch because its leaders know what needs to be worked on. The business model helps startups see prospects and hidden risks and for existing businesses to find weaknesses and growth points to adjust their work and increase efficiency.

Popular types of business models

The most widely used business models include the following:

  • Brokerage: an entrepreneur brings sellers and buyers together, for which he charges a certain commission or a percentage of the transaction amount. It is how trading exchanges, freelance exchanges, and marketplaces work. Example: eBay.
  • Advertising: when a business makes a profit from advertising on its resource. Example: YouTube.
  • Manufacturer model: when a manufacturer sells its product directly to the consumer, refusing intermediaries. Example: “Kitchen in the area.”
  • Distributor model: an entrepreneur buys goods from manufacturers and sells them at his markup. Example: Etsy.
  • Auction: the cost of a product is determined not only by one seller since the buyers also actively influence the final price of a product or service. Example: Wine Bid.
  • Crowdfunding: financing of a project by a large number of individuals. Example: Peeble.
  • Self-service: some value creation is passed on to customers for a lower price. Example: self-service terminals at McDonald’s.

Basic steps to build a reliable business model

Business model generation is wider than writing a business plan or defining a niche for a product. Developing a business model – a conceptual description of how a particular company makes money – is a long process that inevitably requires constant corrections and adjustments. First of all, you need to think about how exactly you will create sustainable value for customers. 

The structure of the business model consists of the following basic elements:

  • Consumer segments. This section includes groups of people or companies that an organization sees as potential customers. The target audience is at the center of any business model.
  • The value of the offer. This section consists of a set of products or services of interest to each consumer. Customers prefer a particular company, focusing on its value or benefit.
  • Sales channels. This block contains information on how the enterprise establishes communication with a potential audience and distributes, delivers, and sells products or services to each group of consumers. 
  • Relationships with clients. The enterprise should determine which methods of interaction are most effective in communicating with these categories of consumers. 
  • Income streams. This section shows what cash flows are involved in the formation of the enterprise’s total income. 
  • Key resources are needed to create a value proposition and deliver it to the customer, connect with the target audience, complete the sales process, etc.