Business Model Development
The start of every business involves offering a solution to a recurring problem. However, the key ingredient deciding the sustenance and success of a business apparently depends on the business model.
A business model primarily refers to how a company seeks to make a profit, it applies to both new and established businesses. Such a framework allows new and upcoming companies to attract capital, recruit talent and can help in sustaining high morale equally among management and employees. Likewise, established companies are expected to consistently update their business plane to anticipate trends and challenges in the market.
Popularity of Business Models
Earlier businesses were more focused on corporate-level strategy to remain competitive. However, presently the attention has shifted to business models – there are many factors that can be attributed to this change including sustainability, deregulation, globalization, and technological change.
A study going back a few years points out that 7 out of 10 companies are engaged in some form of business model innovation, which means the concept of business modelling is here to stay. The success of a business model development solely rests on its ability to take on the existing competition. At YRC, we are committed to delivering robust business model consulting that can stand the test of the competition.
In this write-up, we try to enlist key components for developing a business model and key types of business models that are currently in existence.
Business Models Indispensable for these Technical Reasons:
Let’s look at some technical reasons that have made business models getting adopted on a large scale.
- Helps determine the probable success of a business.
- Enables testing of a business idea to see the proof-of-concept.
- Helps in creating a clear set of values for steering a business.
- Creates a clear-cut analysis of the industry to identify opportunities & threats
- Allows the creation of fictional personas of potential customers.
- Well articulated business models can make a business investor friendly.
- Permits the creation of a road map and time frames to achieve goals & objectives.
- Explains the marketing strategies to be executed.
- Describes the product or service that are going to be offered
Key Components of Business Model Development Process
Now that we understand Business Model and what makes it a necessity for the success of a business, let’s understand the components that go into making an effective business model:
I) Key Partnerships:
This pertains to key relationships that a business has with governmental, non-consumers and other external stakeholders. These are mainly the relationships – you have with your suppliers, manufacturers and business partners. Partners are helpful in growing a business by bridging the gap in areas where you do not have the necessary expertise. There are mainly four types of partnerships:
- Alliances with non-competitors: This is about creating partnerships between two companies that are in no way competing against each other. For instance, a product-based business would partner with a packaging unit to fulfil its packaging needs.
- Alliances among competitors: Although it comes out as a little strange, there are competing companies that come together to improve the overall awareness about their industry, attempting to garner new customers.
- Joint Ventures: This is a business model where two or more business parties agree to cooperate in accomplishing a daunting business objective. In a way, this is a partnership in the true sense of the word. According to this arrangement both participating businesses are likely to share the profits generated. A good example of this model was the invention of Blu-ray disc, which was created from a collaboration between competing manufacturing companies in consumer electronics and computer hardware.
- Buyer-Supplier: This pertains to identifying type suppliers and creating relationships based on trust, quality and commitment.
II) Key Activities
This relates to any activity undertaken by a business with the primary motive of making a profit. The key activities tend to vary with the nature of the business. For instance, for a personal life coach, the primary activity would be problem-solving and customer service. While a software company, the key activity would be conceptualizing, coding, testing and delivering.
Some of the most common key-activities for a standard brick-and-mortar business include:
- Designing & Merchandising
- Front-end Store Operations
- Warehousing & Inventory Management
- HR & Admin
- Primary Sales and After Sales Service
III) Key Resources
These are indicative of the necessary resources required by the company for its success. These can also be derived on the basis of the value proposition the company offers and can be influenced by distribution channels, customer relationships and revenue streams. Technically, key-resources can be divided into four distinct categories:
- Material Resources: These consist of physical assets like buildings, furniture/ fixtures, IT Infra, production infrastructure, and the distribution network.
- Intellectual Resources: Includes patents, copyrights, customer database, and trademarks.
- Human Resources: These are particularly vital to companies that depend on knowledge and human creativity to deliver outcomes. An effective business model can bring out a beneficial organizational culture that can foster enduring relationships between the company, employees and other stakeholders
- Financial Resources: Capital availability is fundamental to the growth of a company and is needed at every stage of development. Financial resources include cash-in-hand, bank deposits, securities, receivables, cash credit, availed loans and investments received.
IV) Cost Structure
This concerns all the expenses incurred by the company while operating the business model. Based on the quantum of expenses, there are two broad categories namely value-driven and cost-driven cost structure.
“Value-driven” concerns creating more value in the product without any attempt to cut costs for creating the product, this includes expensive luxury brands and designer goods. While “cost-driven” focus on keeping the production cost to the lowest possible value and selling the product with tight margins, this includes budget airlines and daily essentials.
Besides this, cost structure has two main types of expenses incurred by all companies, these include:
- Fixed Costs: These pertain to the costs a company will incur even when the production is at zero. It includes activities like accounting, rental payments, interest payments, etc.
- Variable Costs: This type of costs tends to vary with the quantity of the goods produced or services provided. It can include labour, raw materials and it can vary based on the demand for goods. Companies try to overcome variable costs with time-bound contracts for raw materials and labour.
V) Customer Relationships
This describes the kind of relationship a company institutes with its specific customer segments. It involves customer acquisition, customer retention and sales growth through customers. There are various categories of customer relationships and each can affect the business model differently. Let’s look at the categories one-by-one:
- Personal Assistance: Face-to-face interaction between the company representative and customer, mainly occurs during or after a sale.
- Dedicated Personal Assistance: This continues over a long period of time and is especially seen in B2B companies, where there would be a key account manager who strikes a rapport and maintains a personal relationship with customers/ clients.
- Self Service: There is minimal interaction with the customer rather tools and means are made available to be made use of. For example McDonalds self-service.
- Automated Services: This is the automation of self-service involving a system that is capable of understanding individual customer preferences.
- Communities: Online communities nurtured by the company enable customers to solve each other’s problems through direct interactions.
- Co-creation: This can involve collaboration between a customer and a company resulting in an outcome which comes from the direct contribution of the customer.
VI) Communication Channels
This is a critical component of a business model and encompasses how a company communicates with its specific customer segments. This again falls into two categories: direct and indirect channels of communication. Direct involves communication through the web or CRM tools, while indirect will involve communication through stores, partner stores or wholesalers.
A right mix of channels can be instrumental in improving the bottom line because it enables communication of the unique value proposition into the market. Communication channels can involve five separate stages and includes:
- Awareness: Activities that can be incorporated to raise the awareness of the product or service.
- Evaluation: Helping customers to evaluate the value proposition offered by the company.
- Purchase: Activities that would encourage customers to buy the company’s brand.
- Delivery: Communicating the value proposition offered by the company
- After-Sales: Includes all activities related to providing after-sales customer support.
VII) Revenue Streams
This pertains to the earnings a company generates while subtracting costs from the revenue generated from each customer segment. It is vital that the company remains aware about their sources of revenue coming from various channels and sources. This is important because it helps a company to evaluate profitability and take a decision on continuing with a specific revenue stream.
Now let’s take a look at the various types of possible revenue streams:
- Asset Sale: Transfer of ownership of a physical product from the seller to the buyer.
- Usage Fee: An amount charged by a service provider for the usage of a service. For example, a doctor charging a fee based on the seriousness of the ailment.
- Subscription Fees: This enables user access to a service on a long-term basis with a subscription fee. For instance, a yearly subscription to Netflix
- Lending/ Renting: A company provides a user exclusive access to a product or service for a limited time period based on a set fee. Upon completion of the time period, the company regains the ownership back. The company enjoys recurring revenue and the user is saved from a hefty investment on the product or service.
- Licensing: This comes in the realm of intellectual property, wherein an inventor or patent holder licenses the use of the patent to other companies while charging a licensing fee.
- Brokerage Fee: A company becomes intermediary between two parties to ease the communication and transaction. The company, in turn, would charge a brokerage fee when the deal goes through. For instance, head hunters charge a percentage fee from the company for whom they are recruiting candidates.
- Advertising: Companies that earn a fee by promoting an organization, product or service. This kind of revenue was restricted to advertising companies but with the advent of the internet and ecommerce, many websites earn through this revenue stream.
- Service Fee: There are companies that charge a customer, service fee based on the usage of a service in regard to time/ resources utilised.
- Commission Fee: Some companies majorly among service based companies take a commission for the service offered. A good example is PayPal that takes a cut on the money transferred.
VIII) Value Proposition
This relates to the benefits a customer can expect from a company’s product or service. A product or service can offer a single or multiple value propositions. Entrepreneurs keen on starting a venture must pay special attention to the value proposition because it determines how the product will perform in the market as opposed to giving credence only to the ‘idea’.
A value proposition may include the following elements:
- Newness: This refers to the newness or the novelty factor a product provides. This is especially relevant in the IT and telecommunication industry. Example: Smartphone manufacturers.
- Performance: Some companies are known by the performance of their products and continue to grow based only on the improving performance of the same products. For example, chipset companies through improving processing speed.
- Customization: Today’s customer expects companies to deliver on personalization. This allows their product choices to become extensions of their personality and lifestyle. Thus adding value to the customer. While earlier customization came with hefty costs, today it is possible to create it for economies of scale.
- Design: Most designer labels are able to earn top dollar because design tends to be a subjective element difficult to measure. And because they come with a legacy for superior design, it becomes an accepted value proposition, enabling them to charge extravagantly.
- Perceived Value: Customers are known to show loyalty to the brand because of the perceived value or status it accords to the owner. A prime example can be Swiss watches, which are priced exorbitantly because the owner becomes synonymous with expensive taste.
- Price: This is one of the most common elements in value proposition. Many time companies enter the market with the premise that they are offering a cheaper option to the choices available. Such companies which compete on price will appeal to specific untapped price-sensitive customer segments. For instance, budget airlines that opened flying to a whole new segment of customers.
- Cost Reduction: Products or services that enhance customer experience and reduce the cost of usage are known for this value proposition. For instance, most companies that offer Software as a Service (SaaS) are allowing the usage of the software for a small fee eliminating the need for the customer to buy and install the software.
- Risk Reduction: Customer looks forward to any mechanism that helps in reducing the risk associated with the purchase of a product. This automatically provides enhanced value and peace of mind to the customer from a recurring time-bound problem. For example, a one-year service guarantee reduces the risk of post-purchase breakdowns and repairs associated with a new home gadget.
- Convenience of Usage: Any product that improves convenience and enhances the ease of use showcases a strong value proposition. For instance, how Apple changed the way people listened to music with iPods (easy usage) and iTunes (easy access).
Types of Business Models
Now that we understand the business development process and the creation of a business model for sustainable development. We are enlisting the most prominent business models that exist in the business space:
- Advertising: This revolves around creating content which people want to read or watch and then inserting advertising into the content for viewers or readers to consume.
- Affiliate: It is an online business model, where links from the advertiser are embedded into the content of a website and the website owner is paid a commission on a sale originating from the advertisement displayed on the website.
- Brokerage: A company functions as a middle-man and charges a fee for the transaction between a buyer and seller contingent upon both parties striking a deal. Example real estate agencies
- Customization: A company introduces a custom element into existing products or services to make every product unique for the customer. For example Custom shoes.
- Crowdsourcing: This involves enticing a large number of people to a common platform in order to solve a difficult problem for a business. People are mostly drawn by the reward on offer. At times, it is also used in bringing awareness to social causes and raising funds.
- Disintermediation: A company incorporates this model when it chooses to sidestep middlemen and directly sell the product to the customer at lower costs. Example, Dell
- Fractionalization: Instead of selling the entire product, a company chooses to sell only a part of it. An example could be people owning part of vacation homes in exotic locations to be used only for a few weeks.
- Franchise: This involves giving entrepreneur access to a successful business model for a franchise/ royalty fee, thereby allowing him to share your brand name along with other support services. It is commonly seen in the fast-food business and restaurant businesses.
- Freemium: A company gives out a product for free but charges only for premium features and services. This model allows the user access to the service for an unlimited period and only charges the user when they opt for advanced functionalities. Example Mail Chimp.
- Low Touch: The product or service is offered at a low price with few features. Examples include budget airlines with their ‘no-frills’ approach as the customer is expected to buy additional services (if needed) enabling them to keep costs down.
- Marketplace: This model allows sellers to list items on a platform and provides tools to customers to easily connect with the seller. It generates revenue based on a commission from the seller for every successful transaction. Additional revenue is generated through advertising seller’s products. Example Amazon.com
- Pay-As-you-Go: This model is applicable when the customer is charged for the quantum of usage. It includes utility companies that charge you based on usage of common utilities like water.
- Saas (Software as Service): This is a licensing and delivery model in which software is licensed on a subscription basis,wherein the software is centrally hosted.
- Paas (Platform as Service): This is a platform based service and a category in cloud computing where customers are allowed to develop, manage and run applications without having to spend on developing complex IT infrastructure usually associated with the development of software or App.
- Razor Blade: This involves selling a product for a low price, maybe even at a loss in order to sell a related product for a profit. It was started by the Gillette company that pioneered the model by selling razors for cheap and capitalizing on the repeat business of replaceable blades.
- Reverse Razor Blade: A company offers a high-margin product and promotes the sale of a low margin companion product. An example includes buying a laptop along with a bag to carry it.
- Reverse Auction: This happens when there are one buyer and many sellers. The seller with the lowest price succeeds in completing the transaction. An example includes the e-procurement process in public sector companies.
Why – Your Retail Coach (YRC) for developing an effective business model ?
YRC has been in operation for close to a decade now, and we have successfully developed and implemented a retail business model and ecommerce business model for various businesses across geographies and verticals. Our in-house experts consist of business model consultants who come with hands-on experience in conceptualizing, developing and implementing business models. Moreover, we are well versed with all aspects of business strategy planning to give the business a competitive edge in the red-ocean market.
YRC is completely equipped at providing services to develop business models from start to finish and come with the expertise to develop an appropriate model as per the needs of the investors. Overall, you will receive unmatched service and cost-effective solutions from one of the leading retail consulting companies in India.
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