Business Model Innovation: Why is the Business Model Important?

What is a Business Model?

A business model thoroughly explains the process of creation, delivery, & capturing of entire organizational values in both social and economic aspects. The core aspects of a business which include purpose, strategies, organizational structure, operational processes, infrastructure, policies, and business practices are precisely represented by a business model. The functioning of a business, as a whole, is based on the business model as it offers a guideline to the organization in order to carry out all of its activities.

The Business model has a direct focus over customer needs because it is this particular aspect together with a product differentiation strategy (introduce new product) that ensures that a company is able to acquire optimum market share. It also denotes customer groups through market segmentation in order to directly focus on the market sectors that may provide maximum return to the related product.

The Business model can be held responsible for clearly defining unique competencies of the company that will keep a check that the company is placed at a highly appropriate & differentiated position in the market. The Broad differentiator is actually the Unique Selling Proposition (USP) that enables a company to differentiate its products from the products of its competitors.

The essence of a business model is that it precisely defines a myriad of ways through which an organization delivers values to its customers, attracts them to pay for value, and finally converts that payment into profit. It actually reflects the intention of the management on what customers want and how they want it.

It clearly defines how the organization can best meet those needs, get paid for the same, and also make a profit. All this is critical because the future of a business completely lies in the values they deliver to their customers. The role of a business model is to describe & classify a business and also to explore opportunities for any future development.

Most Common Types of Business Model :

1. Subscription Model:

Here the customer pays a recurring fee on a monthly basis in order to access a product or service.

2. Bundling Model:

This business model involves a company selling two or more products together as one unit mostly for a lower price.

3. Freemium Model:

Here the user gets free access with certain limitations on key features and over a period of time, the user may want to use those features and for which they have to pay for a subscription.

4. Razor Blades Model:

Here the company will offer a high-margin product & then promotes low-margin products that will accompany the initial product. Eg: Razor blades.

5. Product to Service Model:

Here the company may avail the service of another company to make its product complete. It allows its customers to buy a result rather than the product that delivers that result.

6. Leasing Model:

Under this model, the company may buy a product from a seller for a periodic fee. This model works well with manufacturing & medical equipment.

7. Crowdsourcing Model:

This model involves collecting information or opinions from different people by using social media or the internet. This enables a company to get access to a vast network of talent with no in-house employees.

8. One-for-One Model:

Here the company will donate one item to a charitable trust for every product that is purchased. This is to encourage customers to purchase their / service.

9. Franchise Model:

This is indeed a familiar model where an established business blueprint is purchased & reproduced by a buyer who is the franchisee. The franchiser will help them with marketing, financing, & other business operations to ensure a proper business function.

Read here: Best Franchise Opportunities

10. Distribution Model:

Here the company which acts as a distributor takes the manufactured goods and sells them to a retailer.

Read here: Strategies for Product Distribution Business

11. Manufacturer Model:

In this model, the manufacturer will convert the raw material into a product.

12. Retailer Model:

Here goods are purchased from distributors and sold to customers with a profit.

Importance of Business Model

The business model will help in targeting the customer base of a company. It also helps in making a projection of revenues, strategies, and expenses based on the type of business models & clienteles. In order to gain a thorough understanding of the company’s competitive edge, every investor should review its business model.

By understanding the business model, investors tend to get a grip of the financial data. By evaluating the business model, investors will get an overall view of the products & services of a company, its business strategies & future prospects.