Business Model and Markets
A sound business model should present a new or better way than existing options. It should offer value to a defined set of customers. It can even create a new standard and replace antiquated, outdated and inefficient ways of accessing information, assets or carrying out tasks. Does anyone remember traveler’s checks? A business model should create new demand, a new customer experience and new value.
What is a Business Model?
A business model has two parts: a description of the making of the thing (design, purchase, manufacturing) and a description of the selling (pricing, finding customers, marketing to customers, distributing and delivering to customers) of that thing. Ideally, it presents variations on established methods to present why it is worthwhile to pursue this business and communicates how it will make a profit.
Historically, business models were not a product of planning, analysis and forethought. With the development of pro forma P&L calculations, companies could create new models, products and services and tie them to financial analytics.
This business model can integrate a number of assumptions about markets, economics, pricing and adoption and continually test and refine its model.
Assumptions about markets and revenue are subjected to constant tweaking and refinements which are analogous to the creation of hypotheses and application of scientific method in testing.
Business Models: New Business
The plan is crucial for new businesses since it is a way for them to attract more investments and bring in additional talents to work for the company. Investors will want to read through the entire business model before they decide on investing. In a way, it also motivates the already existing employees since they are sure that the company has a concrete plan to make everything work and operate for an extended period.
New enterprises need to determine the anticipated start-up costs and capital sources in their business models. They also have to include the target market, marketing strategy, review and analysis of competitors, and forecasts of revenues and expenses.
Business Models: Established Businesses
For already established companies, it is still vital for them to revisit, review, and make necessary changes to their plan according to the current trends and possible obstacles that may come their way. By employing a capital allocation and efficiency strategy against a business model, for example, companies can make go/no go decisions at each milestone of their plan based on analytics. They can dynamically reallocate capital to its most promising initiatives and defund flagging projects.
Business owners need to be careful when they make business models since it is quite easy for them to miscalculate the capital that they need to cover all the costs until the company starts making a profit. It isn’t as simple as earning money once customers buy the products or acquire the services. They need to reach a point where the company’s revenues exceed the expenses.
However, they need to correctly calculate how much they will need to operate the business until that time.
Some companies can include details on the possible partnerships with established businesses to increase sales and profit.
Types of Business Models
There are several types of business models, including:
1. Direct Sales
This is the type of business model whereby manufacturers, retailers, and other companies sell directly to the public.
Distributors buy products from manufacturers and sell these items to retailers.
This is for companies that do not create new products but instead use the parent business’ model in exchange for royalties and profit sharing.
4. Brick and Mortar
Companies that have direct contact with their customers in a physical store, shop, or office can make use of this business model.
5. Advertising / eCommerce / Platform
Businesses that operate online are increasing in number very quickly these days and they most frequently monetize their business via advertising or taking a percentage of the purchase price for themselves. An example is Facebook which creates a platform by which users upload content and the company leverages the platform to sell advertising.
6. Subscription / Service
Subscription or service models look to create ongoing relationships with customers by creating regular purchase intervals. It create more predictable revenue and regular cash flow. One example is Apple which began as a hardware products company and has migrated to services such as Apple TV, Apple Music and other services.
As new companies have been built and have established a customer base, business leaders are seeing that they have amassed data assets as a byproduct of their core operations.
For example, an ecommerce business may have insights about what a consumer buys that is valuable to advertisers or to investors deciding what retail stocks to buy or sell.
A consumer technology company may have geo-location data that can help a bank decide where to open a new branch, or a restaurant to open a new location, or for a municipality to improve public transportation.
A B2B supply chain company could have data on large ticket business purchases which may be useful to economists to guide government monetary policies.
A mining company may have data on raw material production that could serve as a leading indicator of housing starts, manufacturing growth, etc.
8. Hybrid Business Model
Because of this application of technology, companies make use of hybrid business models to support the unique companies they operate.
One example of such hybrids is the Bricks-and-clicks model, which is for companies that operate both online and offline.
Customers can buy the products online or visit their physical store to get the items they need. This business model gives people who live in areas without many brick-and-mortar stores the opportunity to shop conveniently. Amazon and its partnership with Whole Foods is one example.
Subscription business models may be layered onto hybrid approaches, such as upgraded annual services Amazon Prime, for example.
Each company makes use of its own unique business model since it depends on their products, services, and offers to the public.
Business Model vs. Revenue Generation
Another essential term that needs to be discussed is a company’s Revenue Generation. It is the process of how the company will market and sell its products or services for them to gain income. To create the best Revenue Generation plan, one must:
- Establish specific goals and financial targets for the year
- Align both the sales and marketing strategies to achieve the revenue target
- Create a proper organizational structure that will implement the revenue generation strategy smoothly and successfully.
- Make sure that all related departments are using the best sales and marketing procedures.
- Use the correct metrics to measure and analyze the growth of revenue generation.
- Correct or make necessary changes to the strategy according to the progress made.
- Ensure that all members of the staff undergo all the essential training.
Business models and revenue generation models are often used interchangeably because of its similarity. However, the most significant difference between the two terms is that the latter focuses more on how the company can generate income, while the former is more holistic.
Business models cover all aspects that can ensure that the firm can make create value for its customers. Therefore, the revenue generation model is an essential component of a business model.
A company’s revenue generation strategies are dynamic. To ensure that the revenue growth methods are still appropriate for the business, employees need to analyze the model using the correct metrics. Each firm needs to find out the areas that they need to improve on and which parts need to be maintained.
Here are a few of the key metrics that business owners need to use to create, track, and analyze the plans:
These are only some examples of metrics that could help the business track their sales design and revenue generation efforts. Once the company develops, they can start looking at other complicated metrics.
Metrics for Software-as-a-Service company can be different. It may include items such as:
- Monthly Recurring Revenue (MRR) – A calculation of normalised (amotized) monthly subscription revenue
- Customer Churn Rate – The rate at which customers are cancelling their subscriptions.
- Customer Lifetime Value (LTV) – An estimate of the total subscription value of an average customer. This is useful for determining how much to spend on customer acquisition (CAC).
Revenue Generation Tactics
- Integrated Goals – Instead of setting lead generation goals solely for the marketing team, the company must align revenue goals for both the sales and marketing groups. It would be better to give revenue-based incentives to both sides.
- Freemium – A Freemium business model, popular with apps, platforms and software, is where customers can download essential services for free and only pay for extra add-ons.
- Recurring Revenue – This trades access to products or services for regularly scheduled payments. This can include:
- Usage-based billing. This is ideal for businesses that can easily track the number of emails, messages, invoices sent.
- User-based billing – Companies or teams pay for number of seats using a product each month or year. Good for team collaboration tools and software.
- Tiered billing – Each tier is for specific buyers and capped at different price points. Once a user hits a ceiling they are upgraded to the next tier.