One of the world’s top video streaming providers replaced physical media by offering a subscription to stream content online in 2007. In 2021 the company had 209 million subscribers. As of 2022, it has a net worth of $20 billion. This company is Netflix.
Netflix is successful due to its unique business model. It shifted its model several times to adapt to the constantly changing market, incorporating a long-term vision. Without focusing on this, the company wouldn’t be where it is today.
So, what is a business model? How do you create one?
Business Model Definition
A business model is the conceptual framework of an organisation. It describes the organisation’s key activities and how it generates value. It should outline how a company works, from the allocation of resources and funding to defining expenses and revenue sources.
Since the ancient past, a basic business model has been the “shopkeeper model” – opening a store at a strategic location. The main question it addressed was how a business generates profit. With technological breakthroughs and the rapid growth of the Internet in the 90s, business models shifted to digital platforms. The concept evolved to encompass competitive strategy and value proposition.
Netflix reshaped its model to online subscription services because executives evaluated digital transformation years ahead while prioritising customer needs. This is why defining long-term goals and the possibility to change an existing model are essential.
Being an umbrella term that covers a myriad of functions, it’s easy to confuse with business strategy:
- A business model determines the courses of action an organisation undertakes to operate and compete in the market. It depicts the organisation’s purpose and defines structural processes and business relationships.
- A business strategy refers to a detailed plan of how the company’s goals will be achieved once determined by the business model. The strategy draws attention to the future of the organisation and depicts different scenarios into which companies can fall on to.
In essence, a business model is part of a business strategy and the strategy comes into effect according to an existing business model. They are interrelated and you need both to successfully run an enterprise.
Now that we have defined the concept and its distinction from business strategy, we will dive into the process of developing an effective business model.
How to Develop a Business Model?
Define the following key elements:
Suppose two companies sell the same product. How do they differentiate? What value does your business generate? This key step refers to the value of your services’ features, benefits, and experiences for the customers. The stronger your value proposition is, the more distinguished your business is from your competitors.
Identify and describe particular customer segments. These are the groups of people your value proposition is targeted to. The segmentation is based on potential customers’ needs, demographics, and behaviours. In that way, you can focus on the groups that are most likely to search for and benefit from your products or services.
Think about how you will market your business. What methods are you going to use to communicate your value to your stakeholders? Here you need to consider the distribution channels and marketing activities to reach your customers. After having identified customer segments, you can design specific marketing strategies. Using customer journey mapping as part of your marketing strategy is an effective way to visualise user experience.
The key resources can be categorised as human, financial, physical, and intellectual resources. What are the necessary roles and skills for your business? Are you going to raise capital through crowdfunding or a government loan? Next, do you need a physical space or can your startup operate entirely online? What kind of equipment makes sense for your project? Finally, intellectual resources include your brand, customer databases, copyrights and patterns, and more.
In this section, you assess how to drive your value. Who are the people or organisations that can support you? You might need to outsource certain activities with a third-party provider, establish a buyer-supplier relationship or form a strategic alliance. Take a closer look at key partnerships here.
Profit generation is a result of a carefully considered cost structure and revenue model. Determine the variable and fixed costs involved in building your business. Structure your budget for production, the business infrastructure, recruiting, and daily expenses.
The revenue model outlines how your startup generates income. Is your pricing mechanism fixed or dynamic? Is it based on single transactions or subscription fees?
Use Business Model Tools
These tools can facilitate business model brainstorming and help you communicate your business to others. It’s an easy way to navigate through the business model sections, as they are ready-to-use templates that you can print out and start working on.
Business Model Canvas
This is the most popular tool for entrepreneurs to create their business models. It was presented by Alex Osterwalder in his book “Business Model Generation”. It comprises 9 construction blocks:
- Customer Segments
- Customer Relationships
- Revenue Streams
- Key Activities
- Key Resources
- Key Partners
- Cost Structure
- Value Proposition
The advantage of the business model canvas and what makes it so popular is that it can be used for businesses of different scales and types. Both large corporations and startups can benefit from this template.
The lean canvas is particularly helpful for identifying a problem and brainstorming solutions. It includes the following components:
- Unique Value Proposition
- High-Level Concept
- Unfair Advantage
- Customer Segments
- Existing Alternatives
- Key Metrics
- Early Adopters
- Cost Structure
- Revenue Structure
The lean canvas elaborates the business model by including:
- What element of your business can’t be easily replicated (unfair advantage)
- How do you track and measure success (key metrics)
- How do you pitch your product with reference to other recognisable products (high-level concept)
- The first group of people to provide feedback on your product or service (early adopters)
Blitzscaling Business Model Innovation Canvas
The concept behind this model is massive growth in a short period, hence its name – “Blitz” means lighting in German. The blitzscaling model is designed to help accelerate your startup at a global scale. This is a risky method. Although it can scale up your startup and bring huge success, you should have enough capital to withstand losses.
The template comprises 4 key growth factors and 2 key growth limiters.
Key Growth Factors:
1. Market size
3. High gross margins
4. Network effects
Key Growth Limiters:
1. Lack of product fit: if the market isn’t satisfied with what you’re offering, you’ll need to revise your product.
2. Operational Scalability: is your revenue growth happening at a faster rate than your expenses?
The business model is the core logic of your startup. It articulates your business idea professionally and describes all aspects related to your startup’s purpose, goals, and strategy. Using business model tools is an easy and practical way to define your model. They guide you through the process of creating it, provide clarity and ignite discussion. Remember, the most successful businesses are those who are ready to adjust their initial model as many times as needed for continual growth.