It Is the Starting Point for Developing Your Business Idea
A business model spells out the specifics of how your business will make money. Once the complete process has been modeled thus, you can flesh out each component of the model with practical details.
First, let us see what we mean by business model.
The Business Model
The business model strips the details and looks at the basic core. How do you make money in a particular business?
Suppose you are a retailer. How do you make money in a retail business? You buy merchandise in bulk at wholesale rates and sell them at higher retail rates. You can make a profit in the business if you:
- Have a sufficiently high profit margin between wholesale and retail prices,
- Can sell a sufficiently high volume of merchandise, and
- Can generate a total margin that covers all your operating expenses
The model becomes more complex as the business becomes more complex. For example, a manufacturing business involves:
- Setting up production facilities that enable cost-efficient production,
- Procuring raw materials at economic rates,
- Producing at a cost that can generate a sufficient profit margin at current selling prices,
- Finding distributors or setting up a marketing organization that can sell sufficient volumes, and
- Generate a total margin that covers all your operating expenses
The above cores are only starting points. You have to take each element of the core and come up with core solutions for achieving the desired results. You proceed with this process till you have a complete model that tells you how you will operate at economic costs, sell sufficient volumes and make money in the business.
What Is the Significance of the Business Model?
The business model forces you to look at all the essential requirements involved in making money with a business. You are not allowed to assume that things will “turn out alright”. Instead, you have to work out how exactly you will make money.
You will have to explain the core model, and then go into each key element of this model and explain how you will get desired results in that area. For example, you can show how you will be using a new patented process that enables lower cost production, allowing you to compete on selling price and achieve high enough sales volumes.
Key Elements of the Business Model
We can see the key elements of a business model as below:
- The essence of the business, i.e, the basic process involved in carrying out the business
- Your marketing strategy, i.e., the factors that will allow you to compete successfully and achieve desired sales volumes
- Your cost strategy, i.e., how you will ensure operations at a cost that will generate desired gross margins and net profits
- Your resources strategy, i.e., how you will organize all the needed resources, including money, technical know-how and skilled people
There is one final element, your management strategy, i.e., how you will keep the business model going at a motivated level to achieve the potential of the model. The model only provides the potential; it is for you to realize the potential. That is the domain of business management, which takes the business model and makes it work.