A Business Model Describes How a Business Provides Value

The following is a post to from Patrick Mackaronis. Patrick is the Director of Business Development for New York City-based social network Brabble. In this post , Patrick talks about how business provides value. Patrick can be best reached on Twitter at @patty__mack.

A model is a representation of the original. Practical business models outline a complete and specific plan that spells out how a business will make money. It must be complete in that all the major issues involved are identified and specific in that the ways of tackling these issues in a feasible manner are clearly spelled out.

If a key issue is missed, or if the proposed way of tackling an issue is not spelled out, the businessperson will be jumping into something without a clear idea of what he or she is getting into.

Strategic Plans Start with a Business Model

Businesses start out as general business ideas. Translating an idea into a viably operating business is typically a complex exercise. Viable means that the value delivered will be more than the costs incurred for both the making and delivering of that value, including the incidentals.

 

It is through developing and implementing appropriate business strategies that businesses achieve viability. To develop such strategies, one must have a complete and clear idea of all the processes involved. With such an idea, it will be possible to examine how to execute the processes in an optimal and integrated fashion, which is essentially what business strategy means.

Creating a model of the business is thus a critical task when starting a business.

Components of a Business Model

“If you work just for money, you’ll never make it. But if you love what you are doing, and always put the customer first, success will be yours,” Ray Kroc, McDonald Fast Food Restaurant Entrepreneur. “We provide food that customers love, day after day after day. People just want more of it.”

Food people love is the value provided by McDonalds. Business models explain the specifics of creating and delivering customer value. Creating the model involves answering some key questions. These questions must be answered irrespective of whether your business is selling a physical product or some kind of service.

  • What value will the business deliver? A business must be quite clear exactly what value it will be delivering to its customers. This value need not be the final consumer value. It can be a business to business value that supports another business to deliver its own B2B or B2C value.
  • How will the business create this value? Creating the value typically involves organizing needed technology, assembling facilities and manpower, and setting up an organization that can attend to all the processes involved.
  • How will the business deliver this value? Delivering the value involves identifying the specific channels you will use to reach and communicate with the customers, and also for actually delivering the value to them. Spell these out in clear detail as your success depends on delivering value to your customers in a way that delights them.
  • How will the business make money? Businesses can survive only if they can generate revenues that are in excess of their costs. Profits depend not only on sales margins, i.e. the excess of selling price over the costs of making and delivering the value but also on sales volumes that can generate an aggregate of margins to cover the indirect costs of running the business, such as administration and financial expenses. Spell out everything – selling prices, operating costs and sales volumes that you can achieve.
  • How will the business compete in the market? Competing typically involves identifying a segment of the market whose unique needs you can meet better, organizing to do this in an effective way and communicating your distinctiveness convincingly to your prospects.
  • How will the business grow? A sound business model will also look at the issue of business growth and describe how it will be achieved. A business can grow through entering new markets, expanding its range of offerings and taking over existing businesses. What will be your approach and how will you go about it?

What Goes into the Business Model?

A business model must be based on ground realities, which means that it must be based on the resources available to the business and its capabilities. The resources might be financial resources, technical know-how, physical facilities, location advantages, strong marketing setup, established brand or something else of business value.

In an intensely competitive market, with many players who all have the needed resources and capabilities, it is innovation that can come give an advantage to a business. Innovation can take many forms and need not be confined to technological innovation. Instead, it could be an innovative marketing strategy, a new revenue model, or even a new way of financing the operations.

The scope for innovations is immense and it is innovations that lie behind the dramatic growth stories of many businesses. Think of assembly line, mail order, Amazon, eBay and Google and you will be able to appreciate the significance of innovation.

Business Plan Guides

There are plenty of resources on the Web that go into the details of developing a business plan. One particularly useful resource is the Interactive Business Planner provided by Canada Business.

Business models add specifics to business ideas and start the strategic planning process. They are complete models for running the business and making money from it. They spell out how the major business processes will be attended to and will be based on available resources including capabilities. Innovative business strategies can be visualized in advance through the construction of business models and applying your creative imagination to these.

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