Everything with a structure is based on a model. This includes your business. Have you thought about your business model? Is it the right one?
Some business models work better than others, depending on the situation. For example, some online businesses have succeeded with a generous free product — Evernote (a note-taking product) and MailChimp (an email service). I wrote about MailChimp here.
How do you decide what your business model should be? You might have many options.
For example, if you’re a coach, you could:
- Coach individuals or corporate teams
- Hold classes where you are or travel to where your clients are. Or coach online
- Teach others how to coach. If you teach others, you could coach them live or create products to let people learn on their own
If you sell an environmentally friendly product, you could:
- Create a website and sell it directly
- Try to get a major retailer to sell it for you
- Sell as a retailer or wholesaler. You could recruit affiliates to sell for you.
- Act as a broker between manufacturers and sellers
Do you see how many options there are?
Who is your target market?
One component of your business model is the type of customer you have. You can sell to individuals (called B2C, or business to consumer) or companies (called B2B, or business to business).
You can focus on a specific group of people, such as speakers, coaches, mothers, or students. Major brands like car companies and big retailers, however, focus on the larger market.
What are the components of a business model?
Let’s make this more systematic. Different researchers have come up with varying lists of the components of a business model. I like the list in this article because it’s fairly simple.
Value proposition: Describes your customers’ problem, how your product or service solves that problem and the value of the product to your customers.
For example, your value proposition could be, “Our customers want solar energy in their homes but can’t afford it. Our service solves that problem by providing financing for people who want to install solar panels on their home. This is valuable to the customer because they can’t easily find financing anywhere else and because we can work out a payment plan that uses energy savings to pay for the cost.:
Market segment: Who are your target customers? Different market segments have different needs.
For example, your market segment might be young couples who are just starting a family.
Value chain structure: Your position and activities in the value chain, that is, where you fit in the process from source to customer. You also need to consider how your organization will profit from its position in the chain.
For example, you might sell directly to homeowners but could instead work with solar panel installers.
Revenue generation and margins: How will you create revenue? What prices will you charge? What is your target profit margin?
For example, you could generate income from sales, leasing, or subscriptions. In the solar panel financing example, you would generate income from the interest on what is essentially a loan.
Position in value network: Who are your competitors? Which businesses are complementary?
In our example, solar installation companies are complementary to you. Banks might be your competitors.
Competitive strategy: What is your competitive advantage?
For example, some companies compete by cost, that is, having a less expensive product or service. Others compete by having a better product or better service. Others compete by focusing on a specific niche that isn’t being well served by others.
How do I know which model is right for me?
There is no one right business model, but some models do work better than others. Here are some guidelines:
- Look for other successful businesses that use the model you are considering. Although we hear of companies coming up with new models, that’s rare.
- Consider trying more than one model and seeing which works best. Don’t limit yourself.
- Some businesses succeed based on connections and business relationships. So be sure to network. You never know who can create a valuable situation for you!
Write down your business model in the above categories. It’s a great exercise!
What’s your business model? Is it working for you? What other options have you considered? Have questions or comments? Leave a comment!