Do you often wonder why some of the startups like OYO are extremely successful? At some point in time, we all wonder about what the secret behind these businesses and startups is. It might be the team’s unmatched passion and desire to succeed. But when it comes to business, a solid technical foundation goes a long way when integrated with some other major factors.
Today, business models and strategies are often used interchangeably. But these are separate concepts with enormous practical value. And when it comes to a concept fundamental to success, no organization can afford confusion in the concepts. So, understanding and building a clear distinguishing line between the two becomes important.
What is a Business Model?
A business model is basically how a company creates value for itself while delivering products and services for its customers. A business model is often represented in the form of a canvas that has 9 elements or components.
These are:
Value proposition
The customers
Channels (to get to your customers)
Customer relationships
Revenue streams (value paid by the customers and strategies to capture the value)
Resources (finance, intellect, physical, human capital)
Partners (strategic alliances, joint ventures, suppliers, etc.)
Key activities (production, problem-solving, managing supply chain, etc.)
Costs and expenses
The point to note here is that you might have some of these elements scribbled on a piece of paper. But that alone won’t do. Preparing a full-proof business model requires a lot more time and research than what is generally anticipated.
For more insights, watch this amazing video which is a step-by-step beginners’ guide for making a business model canvas
A Brief History of Business Model
The term emerged when personal computers and spreadsheets became popular. So, managers could use these tools to deal with numbers and statistics. This was also accompanied by easier decision making as it was easy to calculate the impact of certain decisions on the business, in terms of numbers.
A new business model might either hinge on a different way to make something or a different way to sell something. We can take an example of discount retailers like Walmart or Kmart. These pioneers apply supermarket logic to the conventional departmental store. Hence, they run on the discount retail model which involves slashing costs by eliminating various goods and services.
Business Model V/S Business Strategy
The business model is essentially the description of how your business runs. But, a competitive strategy is equally important for the success of your business. It determines how you will do in the market, as compared to your competitors.
We can take the example of Walmart again. Their strategy was to prioritize rural customers. So, the put small stores in many of the smaller towns. And interestingly, it worked. Focusing on the rural areas also helped them in buying land for cheap and also prevented competitors from entering those areas.
In contrast, Kmart tried to appeal to everyone but that is not a competitive strategy. Although they have an intelligently frames business model, their competitive strategy is not up to the mark. Hence, they have struggled in staying competitive.
So, to stay ahead of your competitors, you need a good business model, a brilliant competitive strategy, and foremost understanding of the difference between the two.
Most Important Types of Business Models for an Entrepreneur
There are numerous types of business models. But some are specifically suitable for entrepreneurs or people who aspire to build their own business dynasty, right from the scratch.
Product=Free Model
In this model, you give away the product for free. You may wonder, why give away the product for free? This is because revenue is generated at the back end through advertising. The biggest example is YouTube.
Premium Model
This involves free usage along with payment for up-gradation. For example, LinkedIn is free but if you want to upgrade, you’ll have to subscribe and pay.
Pricing based on Average Value Model
This model involves calculating the average cost of the products and services which each customer has to pay. This is especially popular among insurance-based companies. Even the young and healthy customers pay high insurance amounts, the same as the diseased or elderly customers. This is because the cost is calculated as an average value.
Price based on Product Cost Plus Margin Model
This is one of the traditional types of business models. You buy the products at a lower price and sell them for a slightly higher price and keep the margin for yourself.
Price with Recurring Low Subscription Payments
Netflix is the most common example. The payments received are low initially, but as the number of customers increases, you can make a lot of money.
Tiered Pricing based on a Volume Model
It is most commonly observed in Real Estate. The more you buy, the less you pay. This is the thumb rule in this type of business model.
Revenue as a Percentage of Every Transaction Model
This type of business model captures the revenue majorly from commissions.
Low Product Price but Extra Support Model
This model is observed in firms that make heavy investments in customer support systems.
Conclusion
These models are not the only types of business models. You can weave your new business model using these twigs or you can use these to re-vamp your existing one. Whatever the type is, building your business model is like laying the bricks and mortar for your business. An intelligent business model, coupled with some competitive strategies, can take you a long way.
Read more: Importance of Startup Incubators
Written By - Neha Kundu
Edited By - Kashish Chadha
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