What is a Business Model? Everything You Wanted to Know but Were Afraid to Ask.
When creating a startup, there are some steps that you can’t skip. Knowing your problem, your target audience, and market are some of the important topics to cover, but they’re not everything. You can have an amazing startup idea and know exactly what you want, however, if you don’t know how you’re going to make money you’re back to step zero.
A successful startup has to be profitable—or at least needs to have a strategy on how it’s going to be profitable—so you need to design a plan that will help you achieve your goals. The business model is a key ingredient in the startup design process. It’s the guideline for you and your team on how your business is going to make money.
We know it sounds a bit scary, but we’re here to make your life easier. In this article, you’ll learn everything you need to know about the business model topic. Ready to take some notes?
What is a Business Model?
Let’s start from the beginning. Like any other topic in the startup universe, you need to understand the concept in order to take the next steps.
If you do some quick research, you’ll find some different definitions for “business model”. Alexander Osterwalder, creator of the Business Model Canvas—we’ll talk about this later—believes that a business model “describes the rationale of how an organization creates, delivers, and captures value.”
According to the Cambridge Dictionary, a business model is:
“a description of the different parts of a business or organization showing how they will work together successfully to make money”
In other words, a business model is an explanation of how you’re going to make money.
How to Create a Business Model
Creating a business model is not an easy task, but it’s not rocket science. The first thing you need to have in mind is the ongoing value you will create for your customers. So, identifying your audience is the key to having a successful business model. You will also need to consider:
- Key activities and resources
- Value propositions
In addition, you need to know your milestones; they are vital in understanding if you’re on the path to success.
Identifying all of the items in the list is a challenge. Luckily, there are numerous business model guides and examples that you can use to create your own.
Let’s explore one that is simple to use and great for those who are starting their entrepreneurial journey.
The Business Model Canvas
The Business Model Canvas (BMC), a strategic management tool, was released in 2008 by Alexander Osterwalder. This visual chart allows entrepreneurs to describe the value proposition, infrastructure, customer, and financial aspects of a business.
The BMC allows you to gain an understanding of your startup idea and what you’ll need to turn it into a real business. This tool focuses on the customer (right side) and the internal part of the business (left side).
Using the BMC is easier than you think. Below, we have explained what you need to answer in each topic.
This is step one. The value proposition is when you ask what the problem is that your business is solving. It’s about understanding why someone would spend money in exchange for your product or service.
Finding the value proposition will also help you understand who and where is your customer. It will allow you to define if you’re creating a business focused on B2C or B2B customers.
Knowing about your audience is the key to success. Who are you selling your product to? You need to go deeper to find the answer. Is it only for a specific gender? Age? Region? Is it only for one type of customer or different groups? These are just a few answers you need to know when filling out your BMC.
In order to create a customer persona and segments, you need to know your value and market.
How are you going to interact with your customers? Online, in person, or at events? Each startup idea can have different ways to interact with its customers.
Creating a customer journey will help you define the points of interaction between your company and customers. List all of the possibilities so you can plan future campaigns for your company.
If you have started creating your marketing plan, you probably have discussed which channels you will be on.
Social media, websites, blogs, TV advertisements, and events are some of the channels you can explore in your business model canvas.
What are the main actions your business will undertake to achieve the value proposition for your customers? By answering this question, you’ll find what your key activities will be.
In order to achieve your key activities, you’ll need resources. This means answering what your business will need to be in the game.
Office spaces, computers, staff, internet, and electricity are just some basic examples of key resources your startup might need.
Apart from your staff, you will also need to rely on external partners. It’s vital to understand who your key partners are in order to give the proposed value to your clients. Suppliers, for example, are among the key partners you need to list on your business model canvas.
Every activity and resource has a cost, right? So, how much money do you need to cover each of your business activities, resources, and key partnerships?
You need to plan for every possible fix and additional cost that may come up. After all, they have a total impact on the cost of delivering the proposed value to your customers.
How will convert your value proposition into financial gain? How do you gain revenue?
There are many different revenue models, such as pay per product, subscription, and fee for service.
As we said before, the Business Model Canvas is just one of the tools you can use, however, it’s an easy way to start designing your idea.
Ready to create your startup? Find out more insightful articles on our blog!
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