What is a Business Model?
A business model is a description of how your business makes money within a given market, through a particular product or service.
At a deeper level, a business model is just a “theory” of how your company transforms (or plans to transform) customer value into profits, interlinking your value proposition, value network
The classic example of a company’s business model is Gillette’s razor and blade. Under this model, Gillette offers a razor handle at no margin but makes its money from selling the disposable razor blades that are needed to use the handle.
A business model results from asking questions about the type of value that your products will offer (its value proposition), how that value will be created (its value chain) and how your company will retain a piece of that value for itself (its profit model). For example:
- Who are the target customers?
- What buyer needs will the product offer to serve?
- At what price or pricing models will the product be available to the chosen buyers?
- What other pricing alternatives are available to the selected target customers?
- What are the purchase terms?
- What kind of assets, people and processes do we need in-house to deliver this value proposition?
- What partnerships and supply agreements do we need to deliver this value proposition?
- What is the cost of delivering this value proposition?
A company’s business model interacts with the business’s customer base on the one side and with its operations on the other, becoming the linchpin that delineates how profits are created.
When we talk about pricing, we are referring to more than just a tag with a number. What we really mean is different ways in which customers could afford a particular product.
For example, a few years ago Rolls-Royce launched a program for its jet engine products called TotalCare where customers would pay for every hour of uptime delivered by the engines, rather than paying an upfront fee. Rolls-Royce collects extensive operational data and performs proactive maintenance on the units to maximize uptime and minimize disruptions.
Through this program, Rolls-Royce expanded its business model to accommodate the needs of a segment of customers that could not afford hefty acquisition fees, but that can manage reasonable operational costs.
The program was a big success, helping Rolls-Royce increase its bottom line from a market that would be otherwise buying from other vendors.
Membership options, all-you-can-use, take-or-pay, freemium (a free basic version to promote a paid upgrade) and a no-question return policy are all forms of pricing that seek to accommodate your company’s offering to the particular needs of a number of customer segments.
Disciplined experimentation in this area can help you uncover latent sources of demand that may exist in your market.
Wu, Sun. Strategy for Executives, this book can now be downloaded for free here.
Johnson, Mark W.. Seizing the White Space: Business Model Innovation for Growth and Renewal. Harvard Business Review Press. Kindle Edition.
Rolls-Royce website. URL: https://www.rolls-royce.com/media/our-stories/discover/2017/totalcare.aspx