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Business Model

BUSINESS MODEL

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What is the business model?

It is the mechanism by which a business seeks to generate revenue and profit. The model is the way of doing business, by which a company generates revenue in a profitable, recurring and sustainable manner. scalable.

Your business model has to describe the organisation you have designed to create, develop and capture value. Alex Osterwalder is the father of CANVAS, a very helpful tool for generating models in a very simple and generally accepted way.

Types of business models

The first business models, different from the classic ones, were born in the 50s with McDonald's. The Internet has facilitated the creation of models that, for very little cost, make it possible to reach many markets.

Today, new technologies are facilitating the creation of many more models:

  • B2B, B2C (mentorday)…
  • B2A (business to administration). On the Web, the set of relationships established between companies and public administrations. B2A relations are part of the global communication of any company.
  • B2E (business to employees). In the network, the set of relationships established between companies and their employees. It is equivalent to internal marketing and also includes internal communication actions.
  • M2C or M2B (machine to consumer or machine to Business). The most relevant is M2M (machine to machine), which incorporates the exchange of information between machines and reaches its peak when this process is carried out in an intelligent way.
  • Offline and online models.
  • Internet.
  • Franchising.
  • Saas.

Type of business models (see+)

A business model is a plan or outline that describes how a business creates, delivers and captures value. It sets out the different activities that will be carried out in order for a company to generate revenue and stay in business. A business model specifies the value proposition, customer segments, distribution channels, customer relationships, revenue streams, key resources and activities, key partners, costs and sources of financing. It is an important tool for entrepreneurs because it allows them to understand how value will be created and delivered to customers, and how the profitability of the business will be maintained.

As an entrepreneur, there are several key questions you need to be able to answer to ensure that you have a solid and sustainable business model.

SOME OF THESE QUESTIONS INCLUDE:

  • Who are your customers and what are their needs? It is important that you have a clear understanding of who you are trying to serve and what problems you are trying to solve.
  • How will you reach your customers and what marketing channels will you use? You need to know how to reach your potential customers and let them know about your product or service.
  • What is your unique value proposition and what differentiates you from the competition? It is important that you have a strong and unique value proposition that highlights your strengths and differentiates you from the competition.
  • What are your sources of income and how are you going to generate income in the long term? You need to have a clear idea of how you are going to monetise your business and generate income in the long term.
  • What are your costs and how will you minimise them? It is important that you have a good handle on your costs and expenses to ensure that your business is profitable and sustainable.
  • What resources and capabilities do you need to run your business model? You should have a clear idea of the resources you need, such as staff, technology, facilities, etc., to run your business model.
  • What are your key partnerships and how will they help you reach your goals? It is important that you have a good network of key partnerships, such as suppliers, partners, investors, etc., to help you reach your goals.
  • How will you measure the success of your business model? You should have a clear idea of the key performance indicators (KPIs) you will use to measure the success of your business model and make adjustments if necessary.

Type of business models:

There are several types of business models that companies can use to generate revenues and profits.

SOME EXAMPLES ARE GIVEN BELOW:

  • Direct sales business model: the company sells its products or services directly to the final customer.
  • Subscription business model: the company charges a periodic fee to the customer for access to its products or services.
  • Advertising business model: the company offers free content or services to users and generates revenue through advertising.
  • Brokerage business model: the company acts as an intermediary between suppliers and customers, charging a commission for each transaction.
  • Franchise business model: the company transfers its business model and brand to franchisees, who pay an initial fee and periodic royalties.
  • Tailor-made business model: the company manufactures customised products according to the customer's needs.
  • Licensing business model: the company assigns its intellectual property rights to third parties for a fee.

These are just a few examples of business models that exist. Companies can combine several business models to create a model that suits their specific needs.

IN ORDER TO SET UP A SUCCESSFUL BUSINESS MODEL, IT IS IMPORTANT FOR AN ENTREPRENEUR TO CONSIDER THE FOLLOWING ASPECTS:

  • Target market: it is essential to define who the business is targeting. This involves identifying whether it is a mass market or a more specific and narrower group. It is important to choose the first market and adjust the offer and message accordingly.
  • Competitive strategies: analyse how other companies that follow the same business model work and see if their strategy has worked for them. It is important to take into account the data obtained to define the strategy and to stand out among all the companies operating under the same business model.
  • Value provided by the service: the business idea must provide value to the market, for which it is necessary to develop an activity that allows to sound out whether the idea is successful. It is important to use tools that bring the entrepreneur closer to potential customers and help to find out their opinion.
  • Planning: Before starting the business, prior planning must be carried out, including the definition of all aspects of the activity, such as the analysis of available resources, the recruitment of professionals and the search for sources of financing to start the activity.

By following these keys, an entrepreneur can set up his or her business model effectively and have a better chance of success in the market.

TYPES of business models:

  • Open: a model in which information and resources are shared for free in order to generate revenue through other products or services.
  • Affiliation: a model in which a commission is received for promoting third-party products or services through a customised link.
  • Application: a model in which a mobile or desktop application is developed to offer a service or product.
  • B2B: model in which products or services are sold to other companies.
  • B2C: model in which products or services are sold directly to final consumers.
  • B2G: model in which products or services are sold to the government.
  • Value chain: model in which the different processes of production and distribution of a product are controlled.
  • Circular: a model in which a product is designed with the idea of being recycled or reused at the end of its useful life.
  • Collaborative: a model in which resources or knowledge are shared between different companies or individuals.
  • Lean techniques: model in which the aim is to reduce waste and optimise production processes.
  • Free of charge: a model in which products or services are offered free of charge with the aim of attracting more customers and generating revenue in other ways.
  • Infoproduct: model in which information is offered in the form of courses, digital books, etc.
  • Digital: model in which products or services are offered through digital platforms.
  • Manufacturer: model in which products are produced to be sold to third parties.
  • Dropshipping: a model in which a product is sold and shipped directly from the manufacturer to the customer.
  • Ecommerce: a model in which products or services are sold through an online platform.
  • Fintech: model in which financial services are offered using technology.
  • Franchising: model in which the right to use a trademark or business model is sold.
  • Freemium: a model in which basic services are offered free of charge, but access to additional functions is charged for.
  • Gamification: a model in which game mechanics are used to encourage user participation.
  • Brick and Click: a model combining sales in physical shops and online sales.
  • Hybrid: model in which two or more business models are combined.
  • Advertising revenue: model in which revenue is generated through advertising on a digital platform.
  • E-learning: model in which online courses are offered.
  • Cost leadership: a model that seeks to offer products or services at lower prices than the competition.
  • Long tail: model in which niche products or services that are not in high demand are offered.
  • Multilateral: model in which a platform is established that connects different stakeholders.
  • Omnichannel: model in which a seamless shopping experience is offered between online channels and physical shops.
  • P2P: model in which users can buy and sell products or services among themselves.
  • SaaS: model in which software services are offered on a subscription basis.

Most frequent business models:

These are known as e-commerce. The difference with respect to traditional commerce is that these companies offer their products and services through an online shop with an internet presence. It is a booming model with a high growth rate. Ecommerce business examples: Wallapop or Vinted.

  • MANUFACTURER

The aim of this business model is to manufacture its own products and sell them directly to its customers and even to retailers. The great advantage of this business model is that the relationship with the customer is closer and it is easier to get to know their shopping experience or preferences. Example of a Manufacturer's business: Dell.

This type of business costs to make small sales of a large number of different products. The aim of this strategy is that the sum total of all these small sales of different products will eventually generate a high profitability.  Examples of Long Tail businesses: Amazon or Ebay.

Under this model, customers pay a small fee periodically to the supplier. In this way they will have access to the services or products that the company offers. These are common models in companies that offer multimedia content. Examples of Subscription business models: Netflix or Spotify.

This type of business consists of offering entrepreneurs the opportunity to exploit a business that already has an established model that works. In this way, the company is able to expand and multiply its revenues by establishing itself in places where it is not yet known or does not exist. Examples of franchise businesses: McDonald's or Starbucks.

In this business plan, the company that has the product or service offers an incentive or small reward to those suppliers or companies that promote it and attract new customers through their advertising. Examples of affiliate businesses: Amazon Affiliate Program or Google Affiliate Network.

The characteristics of this business model are based on the fact that a company provides users with a service free of charge. However, to make the experience more complete and in addition, it offers complementary services through a Premium licence. This licence allows you to obtain more benefits. Examples of Freemium businesses: LinkedIn or Evernote.

In this model the idea is that two individuals contact each other to offer and receive a service. The company receives income from small commissions and advertising. In this type of business, the company is an intermediary. Examples of Peer to Peer business models: Airbnb or Uber.

  • DROPSHIPPING

To carry out the dropshipping business model, the company makes available to its customers products that it does not have directly in stock, but through a series of agreements, are offered by third parties (manufacturers or wholesalers) so that they can send them directly to end customers. Dropshipping business example: Aliexpress.

This type of business model consists of offering a product at a low cost, sometimes even free of charge. The idea is that this item will need an add-on in order to be used, so it will be this add-on that will have a higher price. This will compensate for the particularly low cost of the initial product and bring in the profits for the company. Example of a Bait and Hook business: Gillette.

  • HYBRID

This business model is one of the newest, and will probably see further development in the coming years due to its characteristics. The key is to maintain a wide catalogue of products or services in order to reach as many customers as possible. Therefore, this type of business must be particularly flexible as its success will depend on its ability to adapt quickly and to coordinate with the different areas of the business. Hybrid business example: Nestlé.

New business models are constantly emerging, and you may even find companies that integrate features of several models at the same time in order to maximise profits. Depending on the product or service, it will be more profitable to opt for one or the other. 

HOW CAN ARTIFICIAL INTELLIGENCE CREATE A BUSINESS MODEL?

As a language model, artificial intelligence can offer some general ideas and suggestions for creating a business model, but it does not have the ability to create one itself. However, to help create a business model, artificial intelligence could ask questions and offer suggestions based on the information provided to it, such as the type of product or service, the target market, available resources and other key factors. It could also provide information on the different existing business models and how they fit the entrepreneur's idea.

APPLY THIS TIP TO YOUR PROJECT

TASK

CASE STUDY

Juan is an entrepreneur who wants to start a business selling organic products online.

TO DEFINE YOUR BUSINESS MODEL, FOLLOW THE STEPS BELOW:
  1. Identify your target market: Juan decides that his target market will be people who are looking for greener and more sustainable consumption options. To do this, he researches people who are interested in these types of products through social networks and online forums.
  2. Analyse the competition: Juan identifies other companies selling similar products online and analyses their pricing strategies, promotions and product offerings.
  3. Define your value proposition: Juan wants to offer high quality products, with competitive prices and an easy, customer-friendly shopping experience.
  4. Define your revenue model: Juan decides that his revenue model will be through the sale of products through his website, also offering discounts and promotions to build customer loyalty.
  5. Define your marketing strategy: Juan wants to use social media and online advertising campaigns to promote his business and attract new customers.
  6. Define your distribution channels: Juan decides that the distribution of his products will be through home delivery companies, and that he will also offer the option of delivery to nearby collection points.
  7. Define your costs: Juan identifies his investment costs in the online sales platform, advertising and shipping logistics. He also takes into account the cost of purchasing the products.
  8. Define your team: John decides that, for the time being, he will manage the online sales platform, advertising and shipping logistics himself.

From these steps, Juan has defined his business model for his company of online sales of organic products. With this, you are ready to start your business and attract your first customers.

QUIZ

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Picture of Jorge Navarrete

Jorge Navarrete

More than 20 years of experience in advertising, direct marketing and mass consumption companies. Expert in advising companies in different sectors.
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