Strategic Tools-Bizstarters

danie@bizstarters.co.za

Business Models and Value Propositions

Business Model
 

Your business idea might be ready for presenting to investors or funders, but it is worth nothing without a viable business model in place. The purpose of a Business Model is to explain what your product does/intends to do and how it is going to add/create value for customers and the company.

It is a term people frequently use but most don’t truly understand what it means. They know it when they see it but cannot accurately describe it.

We will explain what a business model is, in this article and give you a framework so as to help you understand it better. How you decide to sum up the parts of that framework and look at the bigger picture rests with you.

What is a Business Model?

A business model is a description of the rationale how a company creates, delivers and captures value for itself as well as the customer. It is a conceptual structure that supports the viability of a product or company and explains how the company operates, makes money, and how it intends to achieve its goals. The business processesand policies that a company adopts and follows are part of the business model.

Management guru Peter Drucker said:

“a business model is supposed to answer who your customer is, what value you can create/add for the customer and how you can do that at reasonable costs.”

Business models came into existence with the advent of the personal computer which let people test and model the different components of a business. Successful business models before that were mostly created by accident and not by design. It’s different for business plans and business strategies though.

Every business model intrinsically has three parts –

  • everything related to designing and manufacturing the product
  • everything related to selling the product, from finding the right customers to distributing the product
  • everything related to how the customer will pay and how the company will make money

Different Types of Business Models

There are many different types of business models meant for different businesses. We will explore a few basic types of business models:

Manufacturer

A manufacturer makes finished products from raw materials. It may sell directly to the customers or sell it to a middleman i.e. another business that sells it finally to the customer. Examples – Motor car manufacturers

Retailer

A retailer sells directly to the public after purchasing the products from a distributor or wholesaler. Examples – Checkers, Pick n Pay, Game
 

Franchise

A franchisecan be a manufacturer, distributor or retailer. Instead of creating a new product, the franchisee uses the parent business’s model and brand while paying royalties to it. Examples – McDonald’s, KFC.
 

eCommerce

E-Commerce business model is an upgradation of the traditional brick-and-mortar business model. It focuses on selling products by creating a webstore on the internet.

Nickel-and-dime

In this model, the basic product provided to the customers is very cost-sensitive and hence priced as low as possible. For every other service that comes with it, a certain amount is charged. Examples – All low-cost air carriers.

Subscription

If customer acquisition costs are high, this business model might be the most suitable option. The subscription business model lets you keep customers over a long-term contract and get recurring revenues from them through repeat purchases. Examples Netflix, DSTV

Aggregator

Aggregator business model has developed model where the company offers various service providers of a niche products and services under its own brand. The money is earned as commissions. Examples – Uber, Airbnb.
 

Online Marketplace

Online marketplaces aggregate different sellers into one platform who then compete to provide the same product/service at competitive prices. The marketplace builds its brand over different factors like trust, free and/or on-time home delivery, quality sellers, etc. and earns commission on every sale carried on its platform. Examples – Take A lot, Amazon

Advertisement

Advertisement business models are evolving even more with the rise of the demand for free products and services on the internet. Just like the earlier times, these business models are popular with media publishers like YouTube, Forbes, etc. where the information is provided for free but are accompanied with advertisements which are paid for by identified sponsors.


There are many more models not mentioned in this article, but most companies do not operate on any one of these business models but rather on a combination of some. What business model you choose depends on your business needs and what value you want to create for your stakeholders. Our aim is to help you develop the perfect business model for your start-up or existing business. We know how important your business is to you and by helping you create a great Business Model will enhance and amplify the chances of your success.
 

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