If you are an entrepreneur, business owner or a business enthusiast, you might be very familiar by now with these words “business model”. These words are most likely to be a part of any conversation among investors, entrepreneurs, managers, analyst and so forth yet very few really understand what it means – it has become part of the “business/startup” parlance.
As a business consultant, a business model is one of the things I always bring up in discussions with clients– not because I like how it sounds but rather how vital it is for any organization (non-profit, for profit, start-up, existing business, department and etc.) in its quest to achieve their goal. However, it is very sad to know that very few people really understand what is meant by a business model and how to go about drafting an effective one.
In this article, I will dwell on three key aspect of a business model – definition, frameworks/elements and archetypes/classifications. This does not imply that after reading this article you will be an expert on all things business models but will serve as a foundation for you to gain more insight into the topic and help you start the path to creating an effective model.
What is a business model?
Business models have existed since the first trade took place in history but becoming more sophisticated with technology. Every organization has a way of doing “business” whether it be for profit or not-for profit or whether the business model can explicitly be explained or not. Having a clear understanding of what your organization’s business model is the first step in understanding in general of your industry and how to be better positioned to make greater impact.
Various definitions exist for business models but in this article, we are going to focus on one or two about creating value for customers. The focus on customer value is important in this era as most businesses are now focusing on the customer as the focal point (how to create value for the customer).
In his whitepaper titled “Business Service Management Whitepaper – Volume 3”, Dr. Erwin Fielt summarized that “a business model describes the value logic of an organization in terms of how it creates and captures customer value”. In simple language, a business model should be able to describe how the organization intends to add value to its market (customers), that is:
- What challenges exist in the market?
- How are you planning to solve it?
- What resources will be required to solve it?
- How much will it cost you to solve it?
- How do you intend to finance your cost?
- What are others doing about these challenges?
- How do you intend to let your market know about your solution?
- What makes your solution stand apart from others? and
- Who is mostly affected by these challenges?
These are but just a few questions that a well-structured business model seeks to answer. Business models can be designed at both organizational or unit/departmental level. That is to say, a business model can be designed for a whole organization or for a specific unit/department of that organization or for both. A single organization can also have multiple business models for different product or service offerings or for different markets. Business models can also be designed for diverse organization types (for profit, non-profits, governmental, brick and mortar, internet, product or service among others).
In a nutshell, the concept of a business model is to help an entity capture and communicate effectively how it intends to add value to its market.
Best known business model frameworks and elements
Several frameworks have been developed over the years to capture business models. Here, we will discuss two well known frameworks and their elements.
The Business Model Canvas
Developed by Osterwalder (2004) based on his PhD thesis, the Business Model Canvas presents a single visual platform for describing, visualizing, assessing and modifying business models. The success chalked by the Business Model Canvas is evident by the over 100,00 copies of the book printed and its feature in several best-selling business books. Over 470 practitioners were involved in its creation.
The Business Model Canvas consists of nine building blocks in two variations: The Business Model Canvas and Lean Canvas (by Ash Maurya).
The Business Model Canvas helps create value for your organization and targets existing organizations and startups. The nine elements are Customer Segments, Value Propositions, Channels, Customer Relationships, Revenue Streams, Key Resources, Key Activities, Key Partners and Cost Structure. This model canvas works on the assumption that four focus areas need to be taken into consideration: Market Forces, Key Trends, Industry Forces and Macroeconomic Forces. See an example below:
More details can be found here:
The Lean Business Model Canvas was designed to help entrepreneurs and startups quickly validate their idea following the lean startup principles. The elements included are Customer Segments, Problem, Solution, Unique Value Proposition, Revenue Stream, Channels, Key Metrics, Cost Structure and Unfair/Competitive Advantage. This canvas is a favorite of mine as I work a lot with entrepreneurs and startups and also because it links the problem(s) you are trying to solve all the way to how you intend to get your revenue.
Irrespective of the canvas used, it provides a stunning visual representation of your idea and can be iterated quickly. See an example below:
More details can be found here:
The STOF Model
Designed by Bouwman, De Vos, Haaker et al in 2008 and focuses on Service, Technology, Organization and Finance. This model was designed as a result of research on business models for electronic services, particularly in the mobile sector. This model is well suited for mobile and/service innovation. So for example if you were into developing applications for mobile payments, IPTV, digital music vending, public services, service bundling, mobile ticketing, multimedia among others, then this might be the framework to work with.
The Service Domain identifies value as the core issue in designing a service. In the Technology Domain, consideration should be given to service platforms, access networks, architecture, devices, applications, data and etc. The Organization Domain targets issues around resources, capabilities among others that has to be made available for the service to run effectively and efficiently. Lastly the Finance Domain focuses on financial resources – investment, cost and revenue which are vital for any organization to survive. An example of the STOF framework below:
More details can be found here:
- Johnson’s Four-Box Business Model
- Weill and Vitale’s Business Model Schematics
- Morris, Schindehutte and Allen’s Entrepreneur’s business model
- Gordijn and Akkermans’s e3-value
To summarize, a business model framework seeks to capture in a most often a visual way, how an organization, department, unit or entity will go about doing its business.
Most common types/classifications
Now that we are conversant with what a business model is and some of the frameworks, we will now look at some of the well-known types/classifications in use. As there are several types of business models, what is presented here is some of the well-known types and it is intended as informative only.
|Category||Examples||Examples of businesses using them|
|Free/Nearly Free||· Freemium model
· Tip/Donation model
|· Spotify, Skype, Slack, SurveyMonkey
|Paid/Direct Sales||· Licensing model
· Pay-per-use model
· Premium model
· Subscription model
· In-app/Add-ons model
· Single purchase model
· Pay-as-you-go model
|· Calvin Klein, IBM, Warner Bros
· HBO, Xfinity, Sky Sports Pass
· Gucci, Specialist consultants, Patek Philippe watches
· Netflix, Kwese iflix, Doorsteps, Magazines
· Duolingo, Candy Crush, Evernote, LinkedIn
· AliveCor, Jawbone
· Utility, Airtime, HP instant ink
|Third Party||· Referral/Affiliate model
· Franchise model
· Get-1-Give-1 model
· Advertisement model
|· Kaggle, Imoney
· KFC, McDonald’s, Dunkin’ Donuts
· TOMS shoes, Warby Parker
· Facebook, Youtube, Google Ads
|Broker/Matchmaking||· Commission-based model
· Auction model
|· 3D Hubs, Shiply, Uber, Taxify, AirBnB
· Ebay, Webstore, Listia
|Mixed||· Razor & Blade Model
· Open Source Model
· No Frills/Budget/Discount Model
|· Gillette, Xbox, Amazon’s Kindle
· Mozilla Firefox, VLC media player
· WeFunder, SeedEngine, Peerform
· Fastjet, Southwest Airlines, Easyjet, IKEA
So who needs a business model?
Every organization, whether government, for profit or not for profit will always have a way of doing their business but few take the time to document it. It is worth noting that a single entity can have multiple business models depending on the markets they are serving or products and/ or services.
Take the time today to ponder on what business model your organization has and if it is not clearly documented, now is the time to start working on it. If any help is required, do not hesitate to reach the author on email@example.com for a free consult.