Starting a startup is both an exciting and challenging journey. If executed properly, you’ll be on the crest of a wave, if not, then you’ll face lots of setbacks.
To ensure your business doesn’t face any setbacks, you need a solid business model.
In this post, you are going to learn what a business model is including everything else you need to know about it.
- What is a business model?
- Why is a business model important?
- Business plan vs business model
- Types of business model
- How to develop a business model
- Business model tips
What is a business model?
Before we dive deep into developing a business model, first let’s learn what it actually is.
Well, there’s no complexity in this, a business model is simply a plan for how your business is going to work. It tells how a company is going to sell its products or services, to whom it will sell, and how much it will charge.
It is a blueprint that answers all the questions related to the business’s operations and how it will perform.
Why is a business model important?
There are several reasons why a business model can be important for your startup. Here are a few:
1. Gives clarity
When you run a business, you need clarity! Clarity about what? Clarity about the audience, their needs, your offerings, your revenue, and every other aspect of your company.
Well, there are several ways a business model provides clarity to the employees, stakeholders, and other parties of the company.
- It tells what the target market is, how it works, who the audience is, and what they need
- It tells how and when should a company improve its products or services
- It gives you an idea of how can make more money
- It gives you clarity on the unique features and benefits your company provides
2. Easy decision-making
Decisions are important in business life. One wrong decision and whoosh! Your entire business breaks down. That’s why you must take proper decisions at every stage of your business, right from the start to the end.
Well, your business model can help you with that as well.
So what is a business model? It is a blueprint of how a company will work, right? Yes. So for you to create that model, you need to understand everything about your business. This gives you full learning of what your business has, what it doesn’t, where it rocks, where it fails, and so on.
This overall helps you make a proper decision in your business.
3. Identify opportunities and threat
Never miss an opportunity and never ignore a threat, that’s what they say… Who are they? That’s me.
Jokes apart, your business must always be aware of all the opportunities and threats it is surrounded with. No worries again, the business model you create is there to help you.
So while creating a business model, you will come to know about lots of opportunities open for your business. This can be anything such as the gaps left in the market, unmet needs of the customers, and so on. Not just opportunities, but you’ll also come to realize all the threats you are surrounded with.
All of this will help you take proactive actions to stay alive in the game.
4. Competitive advantage
When you sit with your team and discuss how you are going to run your business effectively, you take your business to the next level.
The careful analysis made by your team results in the creation of an effective business model. The business model explains how exactly your business is going to work. If done properly, it can easily get you one step ahead of your competitors.
You understand things your competitors don’t and develop a model that gives you a competitive advantage.
5. Financial growth
Money saves, grows, and destroys. This is why you need to be careful in making financial decisions.
When you create an efficient business model, you achieve increased financial performance for your business. It tells you what expense plan you should use and how to use it to reduce unnecessary expenses.
Moreover, it gives you an idea of how to make more money and also where you can get out of it.
All of this helps the company take the right steps financially.
Business plan vs business model
I know a lot of people get confused when it comes to business plans and business models, and you might be confused too!
Like, aren’t both of them the same thing?… Well, the answer is – a simple “no”.
Let me explain the difference between a business plan and a business model.
See, a business plan is simply a document outlining the goals, strategies, and requirements of your business.
It is created at the time of starting your business or when you launch a new product or service.
What is included? Well, it includes your mission, vision, strategies, marketing, budget, and more.
This will give you a plan on how to run your business successfully and what steps to take.
In short, you create your business plan to communicate your business to others and attract investors.
➡️ Here is the ultimate business plan guide including a business template that can help you in building your business plan.
Well, a business model is simply the “how” of your business.
It tells you how you can operate your business and make money. It also figures out the ways to deliver your products or services to the customers.
One thing to remember is to always create a model that is sustainable and scalable.
So what’s the difference?
Yup, it’s true. Both business plans and business models are correlated and somewhat similar to each other, but they are not the same.
In short, the easiest way to understand the difference between a business plan and a business model is the “what” and the “how”.
A business plan explains the “what” of a business, which includes its goals, purposes, tactics, etc. On the other hand, a business model explains the “how” of a business which tells how you are going to work.
Types of business model
Well, business models aren’t only of one type, there are many types of business models that you can choose for your business. Here are some of them.
1. Retailer model
You probably know by the name what kind of model it is. In this, you buy products from manufacturers and sell them directly to the consumers. In a retailer model, your business can have products from one niche or even carry different products from different niches.
Example – Grocery stores in your area
2. Manufacturer model
Now, in this type of business model, you convert raw materials into products and sell them to distributors, retailers, or consumers directly.
Example – Apple Inc.
3. Distribution model
Well, in this type of business model, you take goods from your manufacturers and bring them to the market. You buy products in bulk for a discounted price and sell them to retailers at a higher price.
Example – Sysco
4. Advertising model
In this type of business model, you generate revenue by running advertisements on your platform. Usually, you do this by offering a product or service for free or at a lower cost and attracting the audience. Once you’ve attracted some audience, you then let other businesses run ads on your platform.
Example – Facebook
5. Freemium model
Well, a lot of businesses use this model. In this, you offer a basic version of your product or service for free and charge a fee for its premium version. The best thing about this is that you first attract the audience with your free plan, and then persuade them to pay for the advanced features.
Example – LinkedIn/ SAAS businesses
6. Franchise model
In this type of model, one business gets the right to use another business’s brand and model in exchange for a fee. The original owner helps the other business with its financing, marketing, and operations.
Example – McDonald’s
7. Subscription model
Nowadays a lot of companies have started using a subscription model for their business. In this, you charge a recurring fee to the customers in exchange for a product or service.
Example – Netflix/ SAAS businesses
8. On-demand model
Unlike other business models where you have to produce or store goods, in an on-demand business model you produce goods only when you receive an order. You have to be quick and be able to provide the ordered goods within a short timeframe.
Example – Redbubble
9. Fee-for-service model
Well, this type of business model is getting popular lately. In this, you provide a specific service to another business and charge a fee for it. You can either charge on an hourly basis, a commission basis or set a fixed rate.
Example – Real Estate agents
10. Product-as-a-service model
In this business model, you charge a fee to the customers for using your products. The fee can be charged in any form such as per-use, subscription, etc.
Example – Bike rental company
How to develop a business model
Ok… You’ve properly created your base. You now have a basic understanding of a business model.
What next? Now let’s get to the actual game – learn how to develop a business model.
1. Define your problem
See it is obvious that before you do anything, you must first get the basics right. The same applies to developing a business model.
So what should you do before creating a business model? Well, you must define your problem.
Answer a few questions like:
✅ What’s the problem you are going to solve?
Start by thinking of a problem that you’ve recently identified and want to solve.
✅ Is it an actual problem?
Then, try to figure out if the problem that you identified is an actual problem.
✅ How are you going to solve it?
Next, think about how you are going to solve that problem.
✅ What kind of problem is it?
Finally, analyze what kind of problem it is. It can be either a functional problem or an emotional problem.
After you answer all the questions, move on to the next step.
2. Identify your audience
Who is your audience? Well, they are simply the people who will buy your products or services. Nice.
So when you understand your audience, you easily improve your products or services. How? Let me explain – your audience are the ones who are going to buy your products or services. So when you understand what they want and like, you realize the flaws in your products or services and improve as per their needs.
Start by analyzing the problem your product or service solves. Then, research demographics, psychopathology, and behavior. This gives you a complete picture of who you should be targeting.
Once you have identified your target market, then learn about their problems and try to relate them to the problem you are solving. This helps you create a product or service that solves your audience’s problems.
Just remember that you only see your audience once. As your business grows, you’ll need to continually get to know your audience in order to notice changes
3. Understand your offerings
What’s next? Well, now you need to properly understand your offerings.
This is all about the product or service you intend to offer your customers.
Why this post? Well, simply because you can never build a business model if you don’t know what you’re offering. So yes, this is an important step.
Start asking yourself: “Why should I prefer my product or service over my competitors?”. This will help you understand your unique goals. If there is nothing special about your product or service, ask yourself: “How can I make my product or service different?”. This makes it easier to stand apart from your competitors.
Next, think about why your product or service is being demanded by the audience. This will help you understand the benefits and features it provides.
Furthermore, once you understand the problem you want to solve and the needs of your audience, you can easily improve your offerings.
Then try to think of the period till which your product or service is going to stay relevant. Some products or services are made for a short period while others are made for a longer one.
4. Plan your resources and activities
Ok… Now that you know what you are going to offer, it’s time to plan what you need to make it happen.
In this step, you will be learning about all the resources you need and the activities required to run your business.
What can be included in the resource? Well, your “resources” can be anything such as machines, equipment, technology, staff, etc.
Activities can include manufacturing, marketing, customer service, etc.
Start by understanding the capacity. It means you’ll analyze the number of products or services your resources can produce within a time frame.
Next, try to learn about human resources. How much stuff do you need? What skills are required? How will you hire them?
Then, figure out how you are going to produce your products or services.
Finally, understand your distribution method, marketing techniques, and how you are going to handle your customers.
5. Determine key partners
Next, your job is to determine the key partners of your business.
Who are your business partners? Well, some examples of your partners can be your suppliers, distributors, and manufacturers.
By understanding your key partners, you can easily access new markets and make use of additional expertise.
So how can you identify your key partners?
First, be clear about your goals. why? Because your goals will tell you what you need to achieve and what you can do.
For example, if your goal is to sell organic food, your key partner could be someone like a local farmer.
Once you identify your key partners, next try to set your correct expectations.
Understand what you need from your partners and match it with what your partners can deliver, to set clear expectations.
6. Determine your revenue streams
Ok.. so you’ve now successfully cleared all the basic steps of a business model. What’s next? Well, now let’s talk about money.
In this step, you’ll be figuring out how your business will make money.
Start by analyzing your product or service. Ask questions like:
- What product or service am I selling?
- Can they be sold on online platforms?
- Can it generate revenue from multiple sources?
- Is it easy to scale with this product or service?
Then, try to understand your customers. The questions could be:
- Who are my customers?
- How often do they buy the same products or services?
- How much money can they spend on my product or service?
- Where do you buy such products or services?
Next, analyze your competitors and ask questions like:
- Who are my competitors?
- How much revenue do they generate?
- Which revenue stream works best for them?
Finally, after you answer all these questions, it’s time to determine your revenue streams. Some of the most common sources are:
- Product sales – Selling products or services at a profit
- Subscription fees – Charging fee to access your products or services
- Advertising revenue – Making money through advertising
- Commission – Earning a commission on sales made
- Licensing fees – charging businesses for allowing them to use your intellectual property
7. Test and refine
Congratulations! You’ve completed all the steps of developing a business model. Now let’s take a final test and check if it is effective or not.
You can test your model by launching a prototype, conducting a pilot program, or creating a minimum viable product (MVP).
Then ask your customers what they feel about your business. This can be done by conducting surveys, checking customer reviews, etc.
By this, you will understand what customers feel about it.
Then, you can refine your model and make adjustments to match it with what your customers like. Changes can be made in the revenue streams, offerings, strategies, etc.
Furthermore, by this, you can also Identify the opportunities and challenges of your business.
Business model tips
Ok now you know what to do for developing a business model, that’s excellent! However, to ensure you don’t make any mistakes, let me share some additional tips for you.
1. Focus on your unique value proposition
It’s hard to survive in the market when your business is surrounded by strong competitors.
The best way to do this is to identify your unique value.
Try to understand and focus on the features that set you apart from your competition.
2. Choose the right revenue stream
Well, you can make money from various sources. Be it product sales, commission-based, or subscription-based, any method can generate income.
However, not everything is the best for you. You must choose only the revenue streams that are right for your business.
3. Business model must be scalable
Ok, so you have created your business model based on your current situation, right? Yes. But what about the future?
Well, you must develop a model that is made for the long term and is easily scalable at the time of expansion or any other business changes.
4. Keep your costs under control
For running your business effectively, you need profit. And to earn a profit, you need to control your costs.
Just try to analyze all the factors that incur expenses for your business and find out ways to minimize them.
5. Stay flexible
Who knows, you might make changes to your business in the future. Therefore, you must develop a business model that can be easily pivoted and adapt to changes.
How do I create a scalable business model?
This can be done by planning for future growth and expansion, in advance, and developing a model accordingly.
What are the most popular types of business models?
Here are some of the most popular types of business models:
How can you ensure that your business model is sustainable?
In order to ensure you have a sustainable business model, you need to focus on managing your expenses and choosing the best financing options. You also need to stay aware of the market and adjust if necessary.
So, this was the complete guide to creating a business model for your startup. I hope it helped you clearly understand what a business model is and how to create it.
Now it’s your turn to take a step and create one with all the stuff you’ve learned here. good luck!
Have some doubts? Well, feel free to ask your questions in the comments.