In the fast-paced world of startups, it’s incredibly important to understand how your company is organized and structured. In my experience, your business model acts as the fundamental cornerstone of your startup.
In this article, we’ll dive into the various components that make up a business model, breaking it down step by step.
Before we get started, it’s worth noting that you don’t just need a business model to get started. In addition to the other documents and processes that you need to run a business (you can learn more about these here), it’s important to pair your business model with a solid business strategy.
To help you get started with this, I’d recommend that you read this article on the differences between a business model and strategy.
What Is a Business Model?
I always liken a business model to a roadmap for making money. It shows what your company sells, who they sell it to, and how much it might cost.
Business models are crucial for new and old companies.
- For new ones, they attract money, talent, and inspire the team
- For older ones, they help stay ahead of changes
So, it’s vital for all businesses to keep their business model up-to-date, no matter what stage they’re at.
What’s In a Business Model?
At its core, a business model includes the following 9 components:
- A value proposition
- Customer segments
- Distribution channels
- Customer relationships
- Revenue streams
- Key resources
- Key partners
That’s quite a lot of different parts to consider for your business, so let’s break each section down some more.
At the heart of your business model is the value proposition.
The value proposition answers the question, “What are you building, and for whom?“
Rather than focusing solely on your product idea, emphasize the problem you’re solving or the need you’re addressing for your customers. Identify the pain points you alleviate and the gains you provide. Understanding your target customers is essential, whether you’re solving problems or fulfilling their needs.
While this is important for all entrepreneurs to consider, I’d especially recommend focussing on it for new founders. Focussing on specifically what your customers want and how your product will address your target audience’s pain points is critical to starting a business that succeeds.
I’ve seen time and time again that new founders (myself included back in the day) get so distracted with an idea that they forget to think about the customer and check that it’s something they’d actually want.
Identifying your customer segments is the next critical step.
Your customers are not merely there to buy; your business’ existence revolves around serving them. Develop detailed customer archetypes and personas, considering geographic, social, and demographic characteristics. It’s essential to realize that, initially, you’ll have hypotheses about your customers, and you’ll refine them as you learn more.
It’s no good working out how your product can help customers if you don’t know how to actually reach them! This is where distribution channels come into play.
Traditionally, businesses relied on physical channels like stores and salespeople, but with the rise of the internet, using websites and mobile apps to reach your customers have become equally, if not more, important.
Consider specifically how you’ll reach and distribute your products to your customers, normally focussing on both in-person and virtual channels.
Tinder Distribution Channel Example
Despite being a mobile app, in the early days Tinder used in-person distribution channels to spread the word about the new dating app.
In the interview linked above, Whitney Wolfe Herd describes how she used her connections to sororities and fraternities to promote the app and get people to download it without a huge amount of time and monetary investment.
I’ve always found this interview so inspiring, as it shows the potential of what out-of-the-box thinking can do to your business when it comes to distribution channels.
Building and maintaining relationships with your customers is key.
This process involves acquiring, activating, retaining, and monetizing customers, which often require a double-sided funnel, with different strategies for web/mobile-based businesses compared to those with a physical presence.
Working out how you can monetize your products is vital for any startup. Determining what your customers are willing to pay for your product and devising the optimum strategy to capture that value can be incredibly difficult.
I’d recommend exploring various revenue models, including direct sales, freemium models, licensing, and subscriptions, and then deciding on your pricing tactics.
If this seems really overwhelming like it did to me when I started my first business, I’d recommend reading my complete guide to pricing strategies here.
It’s important to think about the assets your startup needs to succeed, as this can help you plan out your dependencies ahead of time and reduce risk once you start building your MVP.
This normally includes:
- Financial resources
- Physical assets (e.g. manufacturing equipment or vehicles)
- Intellectual property
- Skilled personnel
I’d recommend breaking this list into what’s crucial for your business to run and what’s a nice to have to help you manage spending in your first few months.
Key Partners and Suppliers
I’d recommend that you identify the partners and suppliers that you need to collaborate with early on. You need to understand exactly what you’re acquiring from them, what activities they’ll perform, and when to make sure that you’re getting as much value from them as possible.
It’s important to be flexible with partnerships, as your needs may change as your startup grows.
Your startup’s key activities are the core tasks required for your business to function.
Are you producing something, solving problems, or managing supply chains? Recognize what activities are vital to your business’s success and focus on becoming experts in those areas.
You need to manage the costs associated with running your business model to make sure that you don’t go into the red.
Identify the most significant expenses, such as labor, materials, and operational costs. Distinguish between fixed and variable costs, and explore opportunities for economies of scale.
Business Model Canvas
The Business Model Canvas (also known as the lean canvas business model) is a powerful tool to shape, rethink, and improve business models. It provides a visual chart that outlines a company’s value proposition, infrastructure, customers, and finances (the categories that we discussed in the last section).
The tool helps businesses make informed decisions and find the right balance among which of these elements should be focussed on. Unlike traditional business models, the Lean Canvas adopts a problem-solution-oriented approach, focusing on customer needs and your product’s unique value proposition.
Business Model Canvas Template
If you’re looking to create your own business model canvas, I’d recommend that you use the template linked below.
Types of Business Model
Let’s delve a little deeper into some of the more popular types of business models.
SaaS Business Model
Software-as-a-Service (SaaS) is a modern business model that relies on the internet. It involves hosting software in the cloud, accessible through web browsers, and businesses pay a monthly fee to use it.
Creating a successful SaaS product requires a combination of coding and user interface design skills, but has a lot of great rewards including having loyal customers who pay monthly or yearly for your services. It’s the business model that I’ve used the most for my startups and it’s the one I’d definitely recommend if you’re looking to start a tech business.
Pros of the SaaS Model:
- Loyal Customers: SaaS products that are vital to a business tend to have loyal customers who stay with the service for extended periods.
- Recurring Revenue: SaaS businesses earn consistent income through monthly subscriptions, providing financial stability.
- Flexibility: SaaS businesses can add features and upsells to generate additional revenue streams.
Cons of the SaaS Model:
- High Initial Costs: Starting a SaaS business requires substantial investment in development, design, and infrastructure.
- Complexity: Maintaining SaaS software can be challenging, even for those with technical knowledge.
- Narrow Buyer Market: Selling a SaaS product might be limited to a niche audience with specific skills and interests.
Retail Business Model
If you’re looking to set up a physical store, then the retailer business model might be for you. It involves purchasing goods from suppliers and selling them to consumers in physical stores, online marketplaces, or through a combination of both.
Retailers act as intermediaries between the producers of products and the end consumers.
Pros of the Retailer Business Model:
- Diverse Product Selection: Retailers can offer a wide variety of products, attracting a broad customer base.
- Consumer Convenience: Shoppers can physically examine and purchase products in stores or shop from the comfort of their homes.
- Brand Building: Retailers can build their brands, and customer loyalty can lead to repeat business.
- Physical and Online Presence: Retailers can leverage both physical stores and e-commerce platforms for wider market reach.
- Supply Chain Control: Retailers can manage inventory and logistics to ensure product availability.
Cons of the Retailer Business Model:
- High Operating Costs: Operating physical stores can be expensive due to rent, utilities, and staffing.
- Intense Competition: The retail industry is highly competitive, requiring effective marketing and differentiation.
- Inventory Management: Managing stock levels and handling overstock or understock situations can be challenging.
- Seasonal Fluctuations: Sales may vary with seasonal demand, impacting revenue and profits.
- Economic Sensitivity: Retailers may be sensitive to economic downturns and consumer spending trends.
Franchiser Business Model
If you’ve got a very repeatable business, then the franchiser business model is probably what you’re looking for.
It involves a company, known as the franchiser, granting the right to independent entrepreneurs, known as franchisees, to use its brand, products and business model.
The franchisee operates a business under the franchiser’s established brand, following their guidelines and paying fees or royalties in return.
Pros of the Franchiser Business Model:
- Rapid Expansion: Franchising allows for quick expansion of the brand without the need for significant capital investment by the franchiser.
- Risk Sharing: Franchisees assume a portion of the financial risk, reducing the franchiser’s exposure.
- Local Expertise: Franchisees often have local market knowledge and connections, enhancing business success.
- Consistent Branding: Franchisees must adhere to brand standards, ensuring a uniform customer experience.
- Royalty Income: Franchisers receive ongoing royalty fees from franchisees, creating a recurring revenue stream.
Cons of the Franchiser Business Model:
- Loss of Control: Franchisers may have limited control over franchisee operations and brand reputation.
- Quality Variability: Inconsistent franchisee performance can affect the brand’s reputation and customer satisfaction.
- Upfront Costs: Setting up and supporting franchisees can be costly for the franchiser.
- Legal Complexities: Franchising involves legal agreements, disclosure requirements, and regulatory compliance.
- Training and Support: Franchisers must provide training and ongoing support to maintain brand consistency.
- Importance of Business Models: Understanding your startup’s business model is crucial as it serves as the fundamental cornerstone for your company’s success. It attracts investment, talent, and inspires your team while helping established businesses stay ahead of changes.
- Components of a Business Model: A business model comprises nine key components: value proposition, customer segments, distribution channels, customer relationships, revenue streams, key resources, key partners, activities, and costs.
- Value Proposition: Focus on solving problems or addressing the needs of your target customers, rather than just your product idea. Identifying customer pain points and gains is essential for new founders to build a successful business.
- Customer Segments: Understand your customers by developing detailed archetypes and personas. Initially, your customer hypotheses will refine as you learn more.
- Distribution Channels: Determine how you’ll reach and distribute products to your customers, both in-person and virtually. Innovative distribution strategies can be a game-changer for your business.
- Customer Relationships: Building and maintaining relationships with customers are key for customer acquisition, activation, retention, and monetization. Tailor your strategies for web/mobile-based and physical businesses.
- Revenue Streams: Monetizing your products requires careful consideration of pricing tactics and revenue models, such as direct sales, freemium, licensing, or subscriptions.
- Key Resources: Identify the assets essential for your startup’s success, including financial resources, physical assets, intellectual property, and skilled personnel.
- Key Partners and Suppliers: Collaborate early and remain flexible with your partners and suppliers, understanding what value they bring to your business.
- Key Activities: Recognize the core tasks necessary for your business to function efficiently, whether it involves production, problem-solving, or managing supply chains.
- Costs: Manage your costs effectively by identifying significant expenses, distinguishing between fixed and variable costs, and exploring opportunities for economies of scale.
- Business Model Canvas: The Business Model Canvas is a valuable tool for shaping and improving business models. It emphasizes a problem-solution-oriented approach, focusing on customer needs and a unique value proposition.
If you’re looking to create your own business model, I’d recommend that you also read about the importance of thinking about business strategy at the same time as your business model.