Have you ever wondered how you can grow your own ideas into a successful business? Do you ask yourself how other businesses get up and running, and how they manage to grow?
While many factors go into a successful business, one that will carry a business through its infancy is a good business model. Even for established businesses, good business models are essential and should evolve with your business. But, the question is where to begin?
To help you draft your business plan and what you need to address in it, we’ve gathered the insights of Gregory Asiegbu, a current Program Manager at the Entrepreneurship Innovation Centre in Lagos Business School, founding team member of Leadership Challenge Foundation, and one of our very own EWOR Academy members.
What is the Purpose of a Business Model?
Business models are put in place to answer essential questions in your business journey. It is at the foundation of your business success or failure. It’s a framework that defines and articulates your strategic intent. Over time, it becomes the focus and driver of your organisational strategy.
In short, business model is your profit formula, it’s your method of acquiring customers, service them and make money doing so peculiar to your organization. There are four main pillars, or areas, to address within your business plan.
At its core, a business model answers:
- Who do you want to target with your product?
- What will your customers gain from you?
- How do you deliver your product or service to your customers?
- Is your business sustainable and able to turn a profit?
If you are unable to answer who your customers are, and how they benefit from your business, and in turn contribute to it, then you will not have a successful business.
Likewise, if you know who your customers are while knowing which product or service you will market and can achieve this, yet it doesn’t result in a profit, your business will suffer.
By knowing who your customers are, you can create value because you will know what your customers are looking for and what they want. This in turn provides direction for your business while giving reason to produce what you are producing.
How to Ensure a Successful Business Models
There are many types of business models, with some better suited to your needs than others. However, what is universal among all successful business models are these key points:
Like life, the business world is not stagnant. New types of customers enter the market, and what was once desired is now a fad of the past. The only factor that erodes your business model is time, a winning business model must pay attention to change. Every organization must have this reflected in their business model.
Using an outdated model won’t yield the results you are hoping to achieve as an organization. We live in a day and age where our customers want to be heard and co-create our businesses with us. Not paying attention to their wants and needs or changes going on within their space will only penalise your business.
Creating a winning business model entails a clear focus on customers and what they perceive as value. Business model erosion is a reality organisations must learn to accept. They should use innovation to not only rectify current problems in their model, but capture new value for the organisation should be the strategy organisations should adopt.
Assess Your Model to Avoid Failure
As mentioned, times change. This means your business model should also change. To know if your model is appropriately adapting or is instead at risk, watch out for these tell-tale signs:
- Customers are complaining: If many people are complaining about the lack of service or functionality in your product, this is a sign something in your model needs to change. As a company, you should interact with your customers to see what it is that needs changing.
- Profits: Is your business turning a profit? If so, is it sustainable? Should you find that your company is barely scraping by or not able to support itself, this is yet another sign to address your business model and see where there is room for improvement.
- Marketing and Delivery: If you struggle to mark or deliver your products and services to your customers, this is also problematic.
Kodak – An Example of Business Model Erosion
A classic example of an ill-adapted model can be drawn from the photography company, Kodak. When starting out, Kodak’s business model focused on the revenue from the film they sold, rather than cameras. They enjoyed much of the market share margin and were just about everywhere for film and photography.
However, over time, new technology was developed and the demand from customers changed. Digital cameras were in, and film-based photography phased out. Yet, Kodak resisted this change and ignored the shift in what this market desired.
As a result, companies such as Sony surpassed Kodak by responding to the demand for digital cameras. What we can learn from this anecdote provided by Gregory, is that resisting change in customers needs will hurt your business, it was not wise nor strategic to disregard the shift in customer demand. Instead, learn from it and see which direction you can take your business as a response.
How to Find an Appropriate Business Model
Successful business models often owe their success to the fact they simply are well-suited to the type of company they are employed by. There are many templates for business models, and each has its differences.
It’s important to find a model that works for your company. To assess if the business model makes sense before you start your company, ask:
- Who needs this product or wants it? You should try to understand potential customer
- If a good or service is produced, is it profitable? It doesn’t make sense to pursue an idea that will essentially rob you.
These questions apply to all businesses, regardless of their mission.
Who Needs Business Models?
Every organization needs a business model, Whether you’re an army general, a grocery store, or a donut shop owner, you need a business model for effective execution. Schools have business models. Not-for-profit organizations have business models, even governments have business models.
An interesting illustration that proves the value of a good business model for everyone is a shoe making business. If charging a dollar from sales of shoes made directly to customers, the business would obviously make profit. However, it doesn’t employ a strong business model.
The potential to scale and make much more profit is limited by the current model adopted. Instead, to improve, you could add experience, working smart, and even write a business plan to the existing equation to profit a bit more.
But this business model is limited and can hinder the organisation’s strategic abilities. When introduced, the business mode should have a multiplier effect across other factors and improve the profit potential of a business.
Types of Business Models
There are many options to choose from when it comes to business models. The most common are listed below:
1. Subscription Model – In this model, customers pay a recurring fee to have access to a product or service. This method is utilised by both online and physical companies.
An example of this would be Netflix or Hulu.
2. Bundling Model – For this model, the goal is to put multiple products together and sell them for a price that would be lower if an individual were to just buy each product separately.
This model is often employed by fast-food chains and mobile phone companies.
3. Freemium Model – Particularly popular with online businesses, freemiums offer customers various levels of access to their product or service depending on if customers use it freely or pay a certain fee.
As observed in streaming apps such as Spotify or communication-based tools such as Skype.
4. Facebook Model – This model offers its services and products for free and instead receives profits from the advertisements made within a business’ platform. This is challenging for a company at first because gaining viable amounts of advertisements doesn’t initially happen and will typically occur after you invest a bit into having users first.
As the name indicates, Facebook is well-known for implementing this model type.
5. Leasing Model – Under this model, a company buys products from another seller, and then allows others to use this product for a period of paid time.
Examples of this model include U-Haul and Enterprise.
These are just some examples of the many types of business models. A great way to know which models best suit your needs, visit Business Model Navigator. Here, you can find practical templates to use.
Before exploring all possible business models, be sure you take the time to sit down and really think about:
- Who are your customers?
- What it is you are trying to provide as a company?
- How should you market and reach your customers?
- How do you make predictions about changes in the market and how you can respond?
By doing so, you can narrow down viable options and pick one that takes your company to the next level.
Using Innovative Business Models to Make Your Company Stand Out
While there is comfort in using sure-fire business models to succeed, you can always attract customers and stand out from the crowd by being unique.
To do this, first know how to better serve your customers. You can do this by making critical touchpoints. Once you know this, it’s time to take one of two approaches to innovate your business model.
Disruption in the Model
This method of altering your business model means that you check on what already exists in terms of model templates or what you’ve already implemented.
Then consider what your company is doing, how you deliver your products and services, and what presently makes your company money. By doing so, you can use the pre-existing models as a base for what would apply to your company and then modify them to be unique and fitted to what you’re doing.
To tailor a template to your business, implement new ideas, bring in new ones from other tangible areas that do not yet exist in your company’s field, or adopt technology. Of course, these are just some recommendations, and the possibilities are quite numerous.
In short, a disruptive model aims to create a new niche in the market and meet ignored customer demands. While it requires a lot of research, learning new, more efficient ways to address customer’s wishes will help you grow immensely.
Going back to the Kodak example, if Kodak listened to its customers instead of ignoring their demands, we would probably not have seen the decline of this company.
Revolutionise Your Model
Unlike disruptive business models, when you revolutionise your model, you are breaking out of pre-existing templates and starting anew.
This can be daunting as you are pioneering your own model. Yet, with the right research and insights, this is exactly what some businesses need.
To excel in this method, consider using design thinking to aid in developing something new with value, that takes care of your customers. If you are not sure what design thinking is or entails, check out our article on it!
Business models are critical to the success of our business because they help us understand how our company is performing and what our customers like or don’t like. A company without a business model will be severely crippled in the market. The same is true for one that uses a dated model or refuses to adapt.
There are many business model templates out there to get you started. Naturally, you can also break the mould by adapting those that already exist or by pioneering your own.
What’s important, is that you look at the future of your business and ask, what will the customers be doing? Make some predictions, research, and prepare yourself to be flexible and adaptable to a changing market. After all, we live in a day where we have the tools to continuously learn. Use this to your advantage and as Gregory says, “stay open to new things.”