Business Models Explained: How to Create a Business Model

A business model describes how a company plans to become profitable and outlines its goals and objectives. The building blocks of a company’s business model typically include a description of its product, customer base, marketing strategy, anticipated expenses, and how it intends to make money. A business model allows companies (often startups) to attract investors and explain how their enterprise will take them from an organization with no financial backing to a viable, revenue-generating institution.

In a nutshell, a business model is a business plan. It tells you what a business produces (including the basic products and new products down the line), who it plans to sell to, how it intends to sell those products, and what it will cost to do so. Here is an overview of the key components of a business plan:

1. 1. Cost structure and expenses: A business model should always include a breakdown of its cost structure, which defines all of the business’s costs during operation. These costs can consist of variable costs, fixed costs, and supply chain expenses required to produce a good. An effective business model strategy should consider the costs of starting a new business along with the daily costs of maintaining an existing business.
2. 2. Marketing strategy: The marketing strategy component of a business model defines how a business plans to promote its product to its target market. Examples of marketing strategies include word-of-mouth marketing, affiliate marketing, or the classic advertising model. The more specific the target customer demographics, the easier it is to understand the customer journey in order to meet their needs.
3. 3. Revenue model: A company’s revenue streams are the ways that the business makes money, which can be through single transactions, like selling assets, or through recurring sales, such as monthly subscription fees.
4. 4. Value proposition: The value proposition of a business is the unique offering or solution that a business provides its customers, offering it a competitive advantage or filling a white space in the market. A value proposition might be a new product or service that customers can’t get anywhere else or an improved version of an existing product or service.

Developing a new business model is one of the primary challenges of starting a business, since there are so many possible ways to produce and market a good or service. Figuring out the specific business model that works for your product can make things easier. Here are some examples of different types of business models:

1. 1. Brick-and-mortar: This business model entails selling products from physical brick-and-mortar store locations. Common for corporate retail or food business chains, brick-and-mortar businesses can be independent, corporately owned, or function as part of a recognizable corporate franchise. For new or small business owners, a franchise business model requires fewer resources and is generally less risky than opening a new business.
2. 2. Crowdsourcing: A crowdsourcing model aspires to high-margin productivity by relying on the public to populate information and content on a business’s platform. A crowdsourcing platform’s efforts will often depend on network engagement to become more desirable to investors. The more people use the service, the more valuable it becomes. Businesses like this typically generate revenue through advertising partners.
3. 3. Direct-to-consumer: These businesses sell their products straight to consumers using a direct sales platform rather than serving as a wholesaler for other retailers.
4. 4. E-commerce: This business model uses a digital portal or website to sell products. An e-commerce business can either function as an intermediary between potential buyers and an existing business or act as the sales arm for its products.
5. 5. Freemium: Companies employing the freemium business model offer free products, like apps, and then charge users a premium price for more advanced functionality.
6. 6. Software as a service (SaaS): The software as a service business model (or SaaS) is a cloud-based software delivery model in which a service provider licenses software applications to end users who access them over the internet rather than downloading them to their personal computers. Common SaaS business applications include email, calendaring software, customer relationship management (CRM), human resource management (HRM), payroll processing, invoicing, employee communication, enterprise resource planning (ERP), content collaboration, database management, and document management.
7. 7. Subscription services: A subscription business model offers members a digital or in-person service for a monthly or annual subscription fee.

One of the most common templates for making a business model is the business model canvas. Here are the key steps to building a successful business model using this method:

1. 1. Create your template. Printable business model canvas templates are available online, or you can make your own by drawing nine boxes for each of the building blocks on a piece of paper. Alternatively, map out your canvas using some sticky notes on a wall or a whiteboard.
2. 2. Use the left column for key components. Generally, the left side of a business model canvas will outline a venture’s key partners, including stakeholders, joint ventures, and strategic alliances that will help the company carry out its objectives. It may also include key activities (all the business activities making the company work, like the cost structure—or expenses—production, marketing, and problem-solving). You can also include key resources, or the primary assets you will need to complete your key activities. Try to be as specific as possible when describing all of the elements involved in these variables.
3. 3. Define your value proposition in the middle column. Use the middle column of your document to describe the customer value that your product offers. Discuss your product or service in detail, and clearly define how it improves your customers’ lives and stands out from the competition.
4. 4. Describe customer and market information in the right column. The left column of your document should detail how your business interacts with customers and makes money. Detail how your business will develop customer relationships and decide whether your target market’s interaction with your product requires personal assistance or relies on automation. Describe your desired customer segments, or the types of people the company will target. Last, but not least, provide a detailed description of the revenue streams your business will use to make money, whether through single transactions, like selling assets, or through recurring sales, such as monthly subscription fees.

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