what is business model

Joan Magretta in “Why Business Models Matter,” defines business model as partly as “at heart, stories — stories that explain how enterprises work. A good business model answers Peter Drucker’s age-old questions, ‘Who is the customer? And what does the customer value?’ It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?”

However, on a lighter note, business model gives description of means and methods a firm employs to earn the revenue projected in its plans. It views the business as a system and answers the question, “How are we going to make money to survive and grow?

People often throw around the term business model in discussing startups. … A business model explains which consumer pain your startup chooses to relieve, why your solution works better than competing ones and how big a wedge a company can drive between what customers are willing to pay and the costs. (Sourced)

So do you need a business model for your startup business?


Components of business model

There are 8 components which make up Business Model:

1) Value Proposition

Define how a company’s product or service fulfills the need of customers.

2) Revenue Model

Define how the firm will earn revenue generates profits and produce a superior return on invested capital

3) Market Opportunity

Refers to a company’s intended market space and the overall potential financial opportunities available to the firm in that market space

4) Competitive Environment

Refers to the other competition selling similar products and operating in the same market space

5) Competitive Advantage

Achieved when a firm can produce a superior product and/or bring a product to market, at a lower price than most, or all, of their competitors.

6) Market Strategy

Plan that details how a company intends to enter a new market and attract strategy

7) Organizational Development

Describes how the company will organize the work that needs to be accomplished

8) Management Team

Employees of the company responsible for making the business model work

What else do I need to know about business model?

3 C ‘s Model

Business model developed by business and corporate strategist, Kenichi Ohmae, which indicates three key factors for success: corporation, customer, competitors.

Business Architecture

Graphical representation of a business model, showing the networks through which authority, information, and work flows in a firm. It serves as the blueprint of a firm’s business structure, and clarifies how the firm’s activities and policies will affect its defined objectives.

Proof of Concept

Evidence which establishes that an idea, invention, process, or business model is feasible.

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