How to build an effective business model for startups ?

Basically, a business model describes how your company makes money.

It’s a series of strategic decisions about how to deliver value for money to your customers. A deep understanding of customer needs and the company’s value proposition, value chain, and cost structure helps develop successful business models to make the company profitable in the long term. Experts define business models by identifying key characteristics of a good model. 

For example, Clay Christensen of his Harvard Business School, suggests that a business model should consist of four elements. It’s your value proposition for your customers, your winning formula, your key resources, and your key processes. While such statements can undoubtedly help management evaluate business models, they can enforce prejudices about what business models should look like and prevent the development of radically different models. I have. 

Our research shows that her one component of the business model should be the decisions executives make about how the organization should function. This includes decisions such as compensation practices, procurement agreements, facility locations, vertical integration scope, and sales and marketing initiatives. Management decisions naturally have consequences. 

For example, pricing (choice) affects sales, which shapes a firm’s economies of scale and bargaining power (both outcomes). These outcomes impact the value creation and value capture logic of the firm, so they must also be included in the definition. Thus, in its simplest conceptualization, a business model consists of a set of management decisions and the consequences of those decisions.

Companies make three kinds of decisions when creating their business model. 

• Policy decisions determine the actions an organization takes in all its operations (for example, use nonunion workers, locate facilities in rural areas, encourage employees to skip travel classes). 

• Asset selection refers to the physical resources that your company uses, such as production equipment and satellite communication systems. 

• Governance decisions are also related to how one company manages her decision-making power over her other two companies (whether to own or lease the machine). Seemingly innocuous differences in how policies and assets are managed can have a big impact on their effectiveness.

 

Difference between business model and business plan

 

Business models and business plans are important tools that help create and refine your strategy. We often use both when pursuing a new business initiative, but each serves a different purpose.

A business model is the foundation of a company and its products. It captures the main ideas of how your business generates revenue. A business plan is a document that describes how your business model will work. A business plan may also include the company’s goals, the resources and methods it will use to reach those goals, as well as the expected timeline and financial results. Together, the business model and business plan describe the intended value of your product and how you will deliver that value to your customers.

 

7 business models for our company

 

There are many business models today. Here are the most popular ones that are especially useful for startups.

• Freemium model: The freemium model is a popular form of monetization among subscription-based services. In this model, customers have free access to the basic functionality of the app and pay to access the full version. The freemium model is intended to demonstrate the capabilities of the product to the customer. It also attracts the largest number of users, the majority of whom purchase the premium version. For example: Spotify, Netflix. For more information on the freemium model, see the article How do free apps make money?

• Lump-sum payment (pay as you go): This is the simplest model imaginable. You buy a product or service and pay only once for it. This type of business model, by its very nature, relates to services or products that do not need to be used more than once a year or every six months. For example, legal advice, psychological support, car rental, etc. Example: STUDENTEN – A job search platform for Dutch students.

• SaaS-based model: Slack, Zoho, Microsoft Office – these are all examples of SaaS-based business models. If you’ve ever worked in an office, you might be familiar with it. In this model, a company can purchase software from another company for long-term use. In addition to the product or service itself, consumers also receive technical support and customized services as needed. SaaS (Software as a Service) is a business model associated with the B2B market.

• Subscription model: When was the last time you paid for a Netflix subscription? Well, you must have a hard time remembering. The problem is that we don’t even pay attention to the monthly payments from our bank account. But that’s how Netflix makes money. Through a subscription. Such services typically offer customers various subscription options, such as annual, half-yearly, and monthly. Subscriptions are more common in the B2C space, as opposed to the SaaS model.

• Transactional Model: Transactional models are typical of products and services integrated with payment systems. This relates to companies that act as a chain between sellers and buyers. They charge fees for transactions with buyers, sellers, or both. Examples: real estate companies, PR companies, event companies, recruitment agencies, financial and banking products.

• Marketplace: Marketplaces allow retailers to sell products and provide customers with simple tools to communicate with retailers. Additionally, this business model offers monetization from various channels, such as purchase fees and additional services. Examples: iHerb, Amazon, Ebay.

• Advertisement Business Model: The advertising business model has been around for years, but it’s becoming more unique as the world goes digital. You should use this model to create content that people want to read and watch, while still showing ads to your readers and viewers. This model allows you to monetize your business with ads while providing free content to your users. This model can be closely related to the crowdsourcing model, where users create their own content. Examples: The New York Times, YouTube.

 

How Business Models Create the Master Cycle:

 

 Of course, not all business models work equally well. Good things have common characteristics. It fits company goals, is self-reinforcing and robust. Most importantly, successful business models create self-reinforcing virtuous circles or feedback loops. This is the most powerful and most neglected aspect of the business model.

 

Research shows that the competitive advantage of tech companies such as Apple, Microsoft, and Intel relies heavily on their accumulated assets, such as their installed base of iPods, Xboxes, or PCs. Management did not accumulate these assets by purchasing them, but by making smart decisions about prices, royalties, product ranges, etc. In other words, they are the result of business model choices. . Any company can make decisions that enable them to build the assets and resources that make a difference in their industry: project management skills, production experience, reputation, resource utilization, trust and bargaining power.

 

The results allow further decisions, etc. This process creates a virtuous cycle that continuously strengthens the business model and creates dynamics similar to network effects. As the cycle changes, the company’s most important assets (or resources) become more inventoried, increasing the company’s competitive advantage. Smart companies design business models that create a virtuous cycle that expands both value creation and capture over time.

For example, Ryanair’s business model creates multiple positive cycles that maximize profits by driving ever lower costs and prices. Every cycle leads to cost savings, which in turn lowers prices, increases sales, and ultimately increases profits. As long as the virtuous cycle created by that business model continues, its competitive advantage will increase. A well-functioning positive cycle is hard to stop, just as a fast-moving body is hard to stop because of its kinetic energy.