components of a business model example

When done right, a business model lays out a clear path for building something meaningful. It distills the potential for a business down to its essence.

This is because it answers the most important questions about your business: What problem are you going to solve for whom? How will you solve it? How will customers pay for the solution? And how profitable will it be?

Your business model is the foundation for your strategy , setting the direction for success. And whether you are just starting a business or you are moving into a new market with an existing offering, you need a plan to guide you — a model for your emerging business or product.

Our team at Aha! has always taken this strategic approach. From day one, we laid out a strong vision for the business and made sure everyone on the team understood it.

But we did not write a long, comprehensive document. We focused on the specifics of the business that we needed to better understand.

Our business model has never been overly complicated, and yours does not have to be either. You can start with a single piece of paper or by using a tool like the Aha! Business Model Builder .

There are a number of approaches you can take, but here is our approach and what we believe to be the 10 main components of a business model:

1. High-level vision: A basic description of your business model — two or three sentences that are your true north.

2. Key objectives: The top goals and how you plan to measure them.

3. Customer targets and challenges: The types of customers who will purchase your solution, along with their exact pain points.

4. Solution: The primary way that you solve your customer’s problems.

5. Value: The core elements of your solution that make it unique and differentiated (and ultimately valuable).

6. Pricing: How you will package your solution and what it will cost.

7. Messaging: A clear and compelling message that explains why your solution is worth buying.

8. Go-to-Market: The channels that you will use to market and sell to your customers.

9. Investment required: The costs required to make the solution a success.

10. Growth opportunity: The ways that you will grow the business, including key partnerships if you need them.

A good business model is simple and easy to understand. It answers the key questions about what you are trying to achieve and for whom.

Once you distill the elements down to their essence, it is important to get feedback and uncover any incorrect assumptions or biases. The hard part is understanding what feedback to listen to and what to ignore because everyone has an opinion on the viability of a new business or product extension. And often those opinions are just that or even misguided.

But a strong business model will protect against this. It forces deep analysis and removes anxiety from your work by providing a framework for progress. And this is the ultimate benefit of a business model. It requires you to make assumptions and decisions, and it encourages you to check your progress against pre-defined success metrics.

How have you approached building a business model?

Brian de Haaff

Brian seeks business and wilderness adventure. He is the co-founder and CEO of Aha! — the world’s #1 product development software — and the author of the bestseller Lovability . Brian writes and speaks about product and company growth and the journey of pursuing a meaningful life.

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4.1 Components of a Business Model

A company’s value proposition Consists of the full range of tangible and intangible benefits that a company provides to its customers (stakeholders). composes the core of its business model; it includes everything it offers its customers in a specific market or segment. This comprises not only the company’s bundles of products and services but also how the company differentiates itself from its competitors. A value proposition therefore consists of the full range of tangible and intangible benefits a company provides to its customers (stakeholders).

The market participation dimension Dimension of a firm’s business model that describes the markets it serves; its distribution methods; and how it promotes and advertises its value proposition to customers. of a business model has three components. It describes what specific markets or segments a company chooses to serve, domestically or abroad; what methods of distribution it uses to reach its customers; and how it promotes and advertises its value proposition to its target customers.

The value chain infrastructure dimension Dimension of a firm’s business that deals with how a firm uses its internal resources and capabilities and partner network to support the market delivery of its value proposition. of the business model deals with such questions as, what key internal resources and capabilities has the company created to support the chosen value proposition and target markets; what partner network has it assembled to support the business model; and how are these activities organized into an overall, coherent value creation and delivery model?

The global management submodel Summarizes a firm’s choices about a suitable global organizational structure and management policies. summarizes a company’s choices about a suitable global organizational structure and management policies. Global organization and management style are closely linked. In companies that are organized primarily around global product divisions, management is often highly centralized. In contrast, companies operating with a more geographic organizational structure are usually managed on a more decentralized basis.

It used to be that each industry was characterized by a single dominant business model. In such a landscape, competitive advantage was won mainly through better execution, more efficient processes, lean organizations, and product innovation. While execution and product innovation obviously still matter, they are no longer sufficient today.

Companies are now operating in industries that are characterized by multiple and coexisting business models The conceptual framework that summarizes how a firm creates, delivers, and extracts value while doing business. . Competitive advantage is increasingly achieved through focused and innovative business models. Consider the airline, music, telecommunications, or banking industries. In each one, there are different business models competing against each other. In the airline industry, for example, there are the traditional flag carriers, the low-cost airlines, the business-class-only airlines, and the fractional private-jet-ownership companies. Each business model embodies a different approach to achieving a competitive advantage.

Southwest Airlines’ business model, for example, can be described as offering customers an alternative to traveling by car, bus, or train by giving them a no-frills flight service, enhanced through complementary activities. Southwest’s business model differs from those of other major U.S. airlines along several dimensions. It is about more than low fares, point-to-point connections, and the use of a standardized fleet of aircraft. A key differentiating factor is the way Southwest treats its employees—putting them first with profit-sharing and empowerment programs. Another is the fun experience Southwest creates on board and in the terminal, with jokes, quizzes, and the relaxed behavior of the cabin crew and ground staff. Yet another is the legendary care and attention Southwest puts into its customer service. Not surprisingly, Southwest’s demonstrably successful business model has spawned numerous imitators around the world, including Ryanair, EasyJet, JetBlue, and Air Arabia.

Apple provides an example of why it is useful to focus on a company’s overall business model rather than individual components such as products, markets, or suppliers. While it is tempting to think of the iPod as a successful product, it is, in fact, much more. Less visible than redefining the size, look, and functionality of an MP3 player, Apple’s real innovation was creating a digital rights management system that could satisfy the intellectual property concerns of the music industry while simultaneously creating a legal music download service that would satisfy consumers. Thus, Apple’s real breakthrough was not good product design, it was the creation of a revolutionary business model—one that allowed people to find and legally download high-quality music files extremely easily but that would not allow the pirating of entire albums. Put differently, the iPod was the front-end of a very smart and highly differentiated platform that worked for both the music industry and the consumer. That platform, the iTunes Music Store—which now also offers digital music videos, television shows, iPod games, and feature-length movies—is at the very heart of Apple’s strategic move into consumer electronics, allowing more recent Apple products like the iPhone and Apple TV to sync with PCs as easily as the iPod. In fact, iTunes is the trojan horse with which Apple plans to capture a significant share of the home entertainment market.

Describing a company’s business strategy in terms of its business model allows explicit consideration of the logic or architecture of each component and its relationship to others as a set of designed choices that can be changed. Thus, thinking holistically about every component of the business model—and systematically challenging orthodoxies within these components—significantly extends the scope for innovation and improves the chances of building a sustainable competitive advantage.

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6 Components of a Strong Business Model

In a recent survey conducted by a software company on how useful it is to write a business plan, it was concluded that of those who invested time and resources to write a business plan , 64% were able to grow their businesses, compared to 43 percent of the companies that didn’t. Additionally, entrepreneurs with a professionally written strong business model were more likely to secure the funding they needed.

We spend a lot of time talking about our business ideas but if your fundamentals are out of whack, then so is your “great” idea! This usually happens when we are not clear about the goals and visions of our business model and how it is going to impact the lives of millions. An online business plan can take ideas from the entrepreneur, but the related facts on paper and provide a roadmap to take action .

When it comes to explaining your business model to a potential investor or even to your family and friends to test the waters, it is important to connect your product story with the problems of your target audience that you are going to solve. It is important to ensure that at every level of growth planned for the next five years or so, the experience and quality that you offer to your customers is at par. Only then you will be able to not just write an impressive business plan, but also be able to establish a successful business.

Let’s discuss 6 critical elements of building a strong business model and how you can include these in your pitch deck.

1. Where will your business idea start?

This section of the business model should be a concise overview of your business idea . How did it start? What made you come up with this idea? How passionate are you about this new venture? This is where you are required to step into the shoes of a storyteller and speak about your product and your goals succinctly and accurately. The objective is to draw readers’ attention so they want to learn more about your plan.

2. How will business model progress?

This is your chance to look into your competition , showcase your industry knowledge and summarize the sales and marketing strategy. Your progress graph should place a detailed analysis of how you plan to grow your business , promote products and enter the market. An explanation of operational plans and SWOT analysis will show that you have considered opportunities and contingencies at all levels.

3. What metrics will help you track the growth?

How do you measure your company’s growth? Running a successful business requires you to develop business metrics, also known as KPIs (Key Performance Indicators) . These metrics display a measurable value that indicates the overall success of a company or its business goals. In this section, you’re required to bullet down business metrics that you will track to show how your business is performing in various departments. Since there are hundreds of KPIs to track performance, sticking to the right ones, the ones that suit your business goals , will help add value to your company’s development.

4. How will you create value for customers?

This section of the business model can be summed up in three simple words – What you’re selling?

Include a detailed description of how your product or service is designed to benefit customers. What is the life cycle of your product, how is it different from that of competitors in the market , and how will you acquire your products? Keep in mind that when it comes to writing the product section in the business plan, the focus should be on the benefits that your product or service will be providing and how it will fix a problem of your customers . Be clear and concise. Avoid being too technical while explaining the functionalities of your product. Write as if you are talking to a layman. It should be customer-oriented and service-driven.

5. What channels do you plan to use to market and sell to your customers.

Business is all about bringing a steady stream of customers through various channels that in return allow you to plan and invest better. Depending upon the size of your business, it is important to find the right channels to reach out to your potential customers and that’s exactly what you are required to cover in this section. While creating a marketing plan focus on your target market and answer questions like who your customers are? Who are your competitors? What strategies are you likely to implement to set yourself apart from your competitor? Your marketing strategies should propel a direct and dramatic impact on sales, bringing in a healthy stream of traction, as well as revenue. This is where you can win or lose your potential investors while pitching a business idea . So make sure that you highlight all the advantages of pursuing particular activities in this domain.

6. What will be the revenue stream of the business?

This particular section of your business model answers the most important questions – how capable is your business idea to earn its mazuma? In simple terms, how will you make money? This might feel like a game of maze when you are first starting out, but with a bit of brainstorming, you can easily find alternate ways to bring some money into the system to at least keep the business bootstrapped. The revenue model will also help you make the necessary adjustments in strategies and sources of income that work best for your business and industry type.

When done right, a business model lays out clear directions for building a meaningful and profit-generating business. With the right tool, you can easily create a business plan that covers all the essential elements of an effective, investor-worthy business plan.

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Business Model – What is it and How it works

The term business model has gained incredible popularity in the last decade as one of the most important ways of approaching business innovation and business strategy .

If you’re like most people, you probably define business model as a company’s plan for making money. And you’re not the only one. Probably 80 to 90% of people think like that. This article will show you that the business model is not just that. It is much more.

The term is still relatively new and still raises a lot of doubts about its definition and how it works. In fact, an efficient business model is much more comprehensive and deeper than how a company charges its customers. It involves identifying customer segments , delivery channels , key-partners , among other things. It is much more than simply establishing how a company makes money. It’s about explaining how it can create and deliver value to consumers .

Part of a business model includes the activities associated with production: design, supplies, raw materials, manufacturing (backstage). But there is a second part that involves other essential activities when selling a product: finding your audience, closing a sale, distributing a product, delivering a service (stage). This is known as the two sides of a Business Model .

The customer-facing part is the stage and the behind-the-curtains part is the backstage. Most of the time, we only see strategies of what’s “visible” to us, but there are many innovations that happen and we don’t notice.

Business Model - Two Sides - Backstage Stage

Check out our super guide about business models sides with 6 mental models explained to help you interpret and design business model strategies:

Check it out by clicking here .

The essence of a business model is that it deﬁnes the manner by which the business enterprise delivers value to customers, entices customers to pay for value, and converts those payments to proﬁt: it thus reﬂects management’s hypothesis about what customers want, how they want it, and how an enterprise can organize to best meet those needs, get paid for doing so, and make a proﬁt.

Any business, therefore, depends on a well-designed and thoughtful business model, which covers all these aspects, so that this company is set on a strong base. So let’s start with the basics.

What is a business model?

By definition, a business model describes the logic of how a company creates, delivers, and capture value.

There are three key components within a business model: creating value, delivering value, and capturing value. This shows that the business model doesn’t revolve around money. It revolves around value.

This Business Model definition was created by the Swiss Consultant Alexander Osterwalder as a result of his PhD thesis, entitled The Business Model Ontology, in which he researched different business model definitions to create a single one. It was this document that later gave birth to the popular Business Model Canvas tool .

Business Model Ontology by Alexander Osterwalder

How a business model works

To better understand how a business model works let’s look at an example. If we look at the news industry in the 20th century, how the three main components of a business model worked? How would the news industry, or a news company, created value? They would have journalists write articles and produce newspapers. How would they deliver this value? They would have paperboys that would go around delivering newspapers around neighborhoods. And how would they capture value? They would have companies that would advertise, place ads in these newspapers

Business Model Press Industry in the Past

Now, what about in the 21st century? How does the industry news look like today? It’s the exact same three pillars, creating, delivering, and capturing value. But it’s done in a different way. so, rather than having journalists create value today, we create value, we the people who use platforms like Google and Facebook. We are the ones creating content. It’s being delivered on these social platforms, like Google, Facebook, Twitter, Instagram, or Youtube. These are all platforms that are delivering the content that we create. And is the value of that delivered content being captured? It’s being captured through advertisements, Google Ads, Facebook Ads, Youtube Ads. So, the process still the same, but obviously has been updated and innovated in a different way to fit in with the technology of the 21st century.

Business Model Press Industry Actual Days

Again, if we look at an example of a grocery store from the 20th century, they would create value by accumulating all the goods and products from farmers, from butchers into one location. They would deliver value by basically allowing people to come into that location and buy whatever they would want in the quantity they needed. And they would capture that value in the cash register.

Today, in the 21st century, again, still the same process, but done in a different way. So companies like HelloFresh and Deliveroo are pretty much revolutionizing the way we get groceries and the way we eat. So, for example, HelloFresh, the way they create value by creating recipes, and they deliver those recipes to you so you don’t have to actually go to a store or physical location. How do they capture that value? You subscribe online for a monthly fee on their website with your credit card.

So again, the process still the same, creating, delivering, and capturing value, but we can innovate the way it’s being done. That’s how business model innovation works. So again, to really emphasize, it’s all about value. It’s not about money, it’s about value.

Check out our super guide about business models in the 20th vs 21st centuries with 13 differents industries business models and how they have evolved through time:

Business Models in 20th vs 21st centuries - cover

Business Model Objectives

A business model is a high-level plan of how your company sells and operates. In practice, it includes baseline aspects of each and every business, such as value proposition, processes, target audience, offers, strategies, organizational structure, operational and political processes.

The objective is to identify the product and/or service to be sold, as well as the public to whom it will be offered, while anticipating the expenses involved in the entire production and sale process, in pursuit of the established goals. According to management guru Peter Drucker, “a business model is supposed to answer who your customer is, what value you can create/add for the customer and how you can do that at reasonable costs”.

In general, in addition to offering a direction for the enterprise, the business model also serves to attract investors, recruit talent, and motivate the team. A business model is an important tool in today’s corporate world.

Is Business Model the same as Revenue Model?

The vast majority think that a business model is the same thing as a revenue model. A revenue model describes how a company makes money through its various revenue streams and that’s not the business model. A revenue model is part of the business model, but it’s not the entire thing. There’s much more to the business model and that’s what we are going to cover next.

Check out our super guide about revenue models with 21 models explained to help you choose the best revenue model for your company:

Check it out by clicking here

When is a business model sustainable?

When it comes to business modeling, the following equation is extremely important: Created Value > Captured Value > Cost of Delivery

We have to create more value than we capture and we have to capture more value than it costs to deliver that value. A business model will only be sustainable if this equation holds true.

In order to create a sustainable business model you need to ask yourself the following questions:

What’s interesting is that when we look at business model innovation, we can innovate in each of these aspects.

What are business model components?

The business model has components related to marketing/sales (create value), operations (deliver value), and finance (capture value). Although the Business Model conceptually has three main components, the business model canvas , which is the most popular tool for business modeling , has a more detailed approach based on 9 construction blocks .

The 9 blocks of construction are:

To better understand each of these blocks you can click on the links above to read more in-depth.

What is the business model process?

The process is known as business modeling or business model design has essentially two parts:

The business model development can be better achieved by using the business model canvas. There’s a specific order to develop a business model using the canvas.

The order considers that a business model must approach first the desirability of the business. Does the customer want it? Can we create this? Second, you must approach the feasibility of the business. Can we operationalize this? Can we deliver this? And last, you need to prove the economic viability of the business. Can we capture profits?

Business Model Desirability Feasibility Viability

This is already part of the validation process, which is the second part of the business model development process. You need to assume that every part of your business model is a hypothesis that needs to be validated. The only way to validate your business model is by testing your assumptions. A more detailed approach to the business model testing cycle can be seen below.

Only after you have tested every single strategy for every single construction block you can have a better chance of a successful business model.

Check out our super guide about business testing with different tools and approaches to test your business model hypothesis and help its development.

How to develop a business model

The best way to put in practice the business model development process is by gathering people of different expertise into a visual workshop. The development of a business model involves the use of visual tools, such as the business model canvas, which works as a common language between participants.

What is business model transformation?

New business models emerge or transform base on shifts in technology and consequently in customer behavior. New technologies force us to experience things in a completely new way. From car ownership to mobility apps, from in-class education to online education, from commercial hours malls to 24/7 online shopping.

Customers’ needs are still the same, but their behavior has changed. So the question you need to make is How does my business adds value in the new consumption era?

What is a business model example ?

A good example of a business model can be seen in the business model canvas of the Netflix

What is business model analysis?

There are different ways of analyzing and assessing a business model. A very common approach is using the SWOT Analysis to understand the strengths, weaknesses, opportunities, and threats.

You Can do the SWOT Analysis of your Business Model using our Business Model Assessment Spreadsheet

Business Model Canvas SWOT Analysis Assessment Excel Spreadsheet

Types of business models

In fact, there are as many business models as there are types of business developed. Some of the most common are:

Which business model is best?

There’s no such thing as the best business model. There are plenty of successful company cases in many different business model types. But business models that use recurring revenue models such as subscription or SaaS or that uses network effects such as marketplaces and platforms are powering the most successful businesses.

Can you copy a business mod el?

Yes, you can. The essence of creating, delivering, and captures can be

Can you protect a business model?

Business models can’t be patented but the technology that supports them can. This has been increasingly more difficult as technology becomes more and more accessible and diversified.

Just ask yourself: Can Google’s business model be patented? Can Netflix’s business model be patented? Can Facebook’s business model be patented? Can Amazon’s business model be patented? No, it can’t. But the reason you just don’t create another Facebook by creating another company with the same business model is because of how hard it is to create similar technologies or execute similar strategies.

Can you license a business model?

You can’t license business models, but you can license brands, processes, and other business model parts. This is usually done in the form of franchises. Companies like McDonald’s, Subway, and Pizza Hut all use the franchise business model.

Business model advantages

As a general rule, business models often include everything related to the creation, production, and sale of the product or service, information about the target audience and distribution of the product, as well as what the company’s revenue source will be, that is, how the consumer will pay for that good.

It is, after all, a “recipe” to be followed by the project team. This recipe usually starts with the value proposition – a description of the products and/or services that will be offered, by demonstrating what differentiates them from other competitors in the market.

Besides, it contains the costs involved, sources of financing, a definition of the target audience and the marketing strategy to reach it, projections of revenues and expenses, an analysis, even if brief, of the competitors, and a description of possible partnership opportunities.

The main purpose of a business model, therefore, is to allow the company to deliver value to the customer at a sustainable cost. As the business model is able to analyze all the details of the enterprise even before it is put into practice, the chance that this objective doesn’t get reached is very remote.

business model canvas template

You can download a business model template in PDF here

You can download a business model template in Powerpoint (PPT) here

Why Business Model Maters

Business model matters because they allow you to create business strategy and innovations in a more holistic way, going beyond revenue models or technology innovation.

Bottom line

Surely, there are many more business models other than those above. And, as market demands change, new models are created. Besides, it is worth remembering that most companies today don’t operate under a single business model. It is quite common to see a combination of several.

The business model you choose depends on your company’s needs and the value you want to create for the stakeholders involved, especially for your target customer.

Finally, don’t forget that any business, no matter how successful and established it may be on the market, need to revisit and update its business model and strategies in order to understand and get prepared for changes and trends. Any failure in this assessment can threaten the future of the company and its investors.

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What Are The Key Components Of Any Business Model?

The key components of any business model are:

A glance at the business model tools available

With FourWeekMBA I’ve been researching into over a hundred business models at the time of this writing. From tech to luxury, from innovative to more traditional.

I’ve been in search of a framework, recipe or something that could help me dissect any company. As I came from a financial background the most logical thing for me was to look at these companies by analyzing their numbers.

However, I soon realized that approach was too reductive. So I started to look at other frameworks that could be used to find the simplest parts of a business model and its key components.

In this article, I’ll show you a few approaches and how they come down to similar vital components.

A recap of key components according to several business model tools and frameworks

A business model is a representation of a company in the real world (this is a definition that works for practitioners, not necessarily for academics).

Business modeling for entrepreneurs might be a useful tool to gain insights about competitors, better understand your organization or design toolbox to grow your business.

From that standpoint, over the years a few tools came handy . Some of them have been discussed at great length on this blog:

Each of those frameworks assumes a business model has several key components. For instance, the business model canvas tells you that a business model has nine key components:

While a lean startup canvas tells you there are still nine key elements, but it substitutes key partners, key activities, key resources, and customer relationships, with a problem, solution, key metrics, and unfair advantage. Therefore, the lean startup canvas will look like that :

The lean startup canvas as an adaptation from the business model canvas might be better suited for startup organizations, which need to scale quickly while gathering feedback from customers.

The blitzscaling business model innovation canvas instead, looks at a business model as primarily skewed toward massive growth .

In that instance, what identifies a business model is its ability to leverage on growth , or to limit its growth .

Thus it is comprised of four growth levers and two growth limiters:

Another framework from BMI Lab put together in the sales navigator assumes that a business model key components are three:

Those elements come together when a business owner answers to a few key questions, such as, “what do you offer to the customer?” or “how is the value proposition created?” or yet “why is it profitable?”

Another tool called four box business model framework by Innosight breaks down the business model in four key components:

Each of those elements feeds into each other to create a feedback loop of business model innovation. Those tools are quite useful, and it tackles how you can assess your business at each stage.

The FourWeekMBA business model framework

After looking at the key components of a business model based on a few toolboxes; based on the analyses performed over the years, for the business model boils down to three key elements, those are tied up by another ingredient.

This framework by FourWeekMBA has three aims:

In short, I believe that a great business model toolbox has to have a super simple set up. It has to be based on very few elements. And it needs to focus on its long term financial sustainability.

However, what the toolboxes I’ve been looking at mostly miss is the branding of each business model success .

In short, for me there are two dimensions of a business:

These two dimensions walk hand in hand. Yet the people side is what also makes the business thick from the economic standpoint.

The people side comprises the following elements:

This people dimension will help you build a solid brand . A solid brand builds up a tribe, a group of people that can follow you anywhere. Once you have a solid brand , you can focus on the second dimension: the financial dimension.

The three elements of the financial dimensions are:

Key takeaway

To recap an effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand .

The financial dimension will help you build proper distribution channels by identifying the people that are willing to pay for your product or service.

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Business Model Innovations: Components and Types with Examples

When reading the success story of any business, the core is the business model. Let us break the term and understand, business model and innovation. A business model is a framework for making money, creating, and capturing value. Innovation is performing tasks differently from the norms. Combined together, a business model innovation is a framework to capture or create value by doing something differently.

Business model innovation does not mean the business has to leapfrog the competition by the product characteristics compared to competitors. A winner in business model innovation is the firm that moved first to change the rules of the game or the firm that came later and pursued a better business model.

To understand business model innovation, it is important to understand the five building blocks of any business model and the type of business model innovation. For better understanding, we have supported each point with relevant examples.

Components of Business Model

Entrepreneurs are well-rehearsed with the components of the business model but do not understand the relevance of the business model analysis . Before we explore each of these components, let us first understand the rationale of each component and the linkage between each of them. To drive customers to the firm, they must provide something worthy to their customer or address the pain points of the customer. The business must provide the customer with a unique value proposition to earn revenue. However, the right value proposition to the wrong customer will not be beneficial, which is why the market segment should be clear.

A revenue model is a structured way to monetize the value proposition. So for the firm to earn high revenue the firm needs to provide the right value proposition to the right market segment. This will intimate the competitors, to prevail during this stage, the firm needs a growth model. The growth model outnumbers competitors and grows profitability. Finally, to deliver the right value proposition, a firm requires the right capabilities i.e. resources, assets, property, human resources, etc.

Customer Value Proposition

A firm’s customer value proposition is the value it can provide the customer through the product/service. It also depends on which aspect solves a problem and/or satisfies the needs of the customer better than the competitors. A value proposition must answer the most asked questions of the target customers: What is so compelling, engaging, rewarding or delightful in a product which will make customers shift from the competitors?

Customers do not always know what they need in a product/service.

For example – customers didn’t know they needed a touch screen and internet connectivity in their mobile phones until the iPhone was launched. The value proposition will also introduce customers to their own latent needs from the product/ service.

The value proposition depends on the reputation, image, assets the firm control, and the relationship with customers.

For Example – A car enthusiast would buy a car not only because of its features and engine capacity but also because it is a BMW or a Ferrari. A brand-focused customer may buy a product because it is sold in a particular store rather than any other store.

Market Segment

The primary source of revenue is through customers and the firm needs to know their customers properly to be able to serve them. Some details which are needed of the customers are:

The market segment is the section of people to whom the value proposition is being offered or will be offered. The market segment of a business model is about the quality and quantity of the competitors i.e. suppliers, competitors, customers, complementors and others who have to cooperate to create or capture value.

Segmentation can be the type of customers and their preferences, types of products being offered, willingness to pay, demography, geography, distribution channel, types of relationships with customers. Segmentation creates market segments such as a niche market, mass-market, and multi-sided market.

The multi-sided market is when two or more types of market segments are interrelated and the firm makes money by facilitating the interaction.

For example – a credit card market is a multi-sided market as cardholders are on one side and the merchants on the other. The more the cardholder owns a particular card, the better off will be the merchants who accept that particular card and better off will be the credit card company.

Revenue Model

The revenue model component is to get the maximum number of market segment who like the value proposition to pay for the product as close to their reservation price without driving them away. A customer’s reservation price is the highest price a customer is ready to pay for the product. These are some of the types of revenue model:

For example – traditionally Kodak used this technique to sell its film-based camera. They kept the camera cost low whereas the cost of each film was high. This made Kodak popular and they reached record-breaking profits. However, the firm failed miserably when it applied the same model in digital photography.

The price is such an important factor for the revenue model, the entrepreneurs must keep in mind to set the price right. Too high a price will drive the customers away to the competitors or too low a price (without any strategic motive) will lave unnecessary money on the table.

Growth Model

The growth component of a business model is to analyze the following questions and plan them to create the best strategy to grow profitably:

As the firms start providing value for money and making revenue, the competitors increase the prices. The supplier will charge extra money for the commodity or the delivery logistics will increase the charges. This forces the firms to decrease the quality of the product to increase the number of delivery.

Even the competitors will want to go ahead of the firm by imitating or will leapfrog the firm for their benefits, forcing the firm to lower the price or raise its costs.

For example, The internet disrupted the business model of many newspapers and other traditional media, killing their revenue model. Similarly, in today’s world, several unique online business ideas are disrupting the offline business models. An important part of the growth model is to find new UVP and revenue models to relative competitors.

Capabilities

Capabilities are the central point for any business model analysis. The biggest entrepreneurial challenge is to build the capability to take advantage of any opportunity by offering the maximum value proposition. Find the market segment whose needs it can satisfy, increase the number of high-willingness to pay customers in the already existing market or move to the new market. Looking for a better revenue model or improve the existing, work on better pricing model or work towards profitable growth.

Capabilities in a business model consist of resources and activities. Resources are the assets that a firm owns or has access to, whereas activities are what it does. Activities transform resources into values created and/or captured. The quality of the resource determines the amount of value created and/or captured.

For example: At the core of Google’s business model are search capabilities that enable it to deliver searches that are perceived as very dependable by many customers, software that enables it to serve the needs of the long tail searches, tools that it offers to app developers, and so on and so forth.

Conceptualize or Evaluate Your Business Model Framework

Business model innovation and its types .

In a regular business model innovation, the new firms use the same/existing capabilities i.e. value chain activities and underpinning resources. The business model is such that the existing firms in the market still remain competitive. Products of the old firm still take up enough market share to be competitive enough.

Example: The strategy pursued by Dell in the 90s when it introduced the built-to-order direct model. Rather than passing their product through distributors, Dell directly sold their products to the customers. The customers could order from Dell, informing them about their specification needed by them. Dell brought something new in the market but the capabilities that it used for this strategy was not radically different from the ones existing in the market. The business model was such that the other computer makers like HP, Compaq who sold through distributors were still in the market and earned profitability.

Capabilities Building

In capabilities building innovation, the capabilities needed in the new business model is radically different from the old business model. The old business is still competitive along with the new one. The capability needed in the new business model has to be created from scratch or acquired in some other way.

Example: A firm that produces renewable resources is an example of capability building innovation. The capabilities of this firm will be highly different from the petroleum-based business model. Creating ethanol from sugar cane, sugar beet, corn and sweet potato which is completely from drills, pump out, refine petrol. Both the fuels co-exist in the market.

Position Building

In Position building business model, the product/service rooted in the new business model overpowers the product/service in the old business model leaving the latter non-competitive. However, the capabilities of both business models are the same.

Example: When Walmart came to a small town in the US, it was a position building business model. The capabilities of Walmart were almost the same as retailers’ business models. Walmart rendered many small businesses out of competition as the old business model could not offer the customer the cost-saving offered by Walmart.

Revolutionary

In the revolutionary business model, the core capabilities that underpin the new and old businesses are completely different. The capabilities used by the old business model is completely useless for the new business. The revolutionary business model redefines the creation and capturing of value by overturning the way value chain activities were performed earlier. The rule of the game is changed both market-wise and capability-wise.

Example: eBay was launched on a revolutionary business model. The online auction required radically different capabilities as compared to an offline auction. For many products, the offline business model is not competitive.

Dynamic and Application

While dividing the business model into different types, we have assumed that the business model is static- that is when a business model is regular it will remain regular always. Nullifying the assumption, many business models may start off as regular but as time goes by many change into position building, capability-building, revolutionary, etc.

Example: Usually, disruptive technologies start off as regular and move on to become revolutionary or position building. Google was neither the first to introduce a search engine nor the first to launch sponsored ads. However, due to its business model innovation, it became revolutionary and monetized more by being a search engine.

To what extent is the game changed by business model innovation? This one question’s answer must be clear in the mind of entrepreneurs after this post. Understand the two variables in the two by two matrix figure(1.1), after deep analysis of your business and the market in which you are entering. Devising a business model must be done after close consideration of all the points mentioned above. Have other queries related to business model Analysis? Talk to our experts.

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