Starting and running a successful business is no easy feat. According to the UK Office for National Statistics, only around half of new businesses survive past their fifth year.
So before diving into entrepreneurship, it’s important to carefully think through your business model. But what exactly is a business model? What business model type is the best? Let’s break it down.
What is the business model?
At its core, a business model is a framework for how a company will generate revenue and make a profit.
It’s essentially the business plan for sustainability and growth. A solid business model identifies the company’s target customers, the value proposition offered to those customers, the expenses required to deliver that value, and the ways the company will capture revenue from the value it provides.
When starting a business in the UK or anywhere else, the business model is one of the first things entrepreneurs need to develop. It’s a key component of the business plan and investor pitch materials. According to Gallup research, having a clearly defined business model is one of the most important factors in a start-up’s success.
So where should you begin when developing your new business model? Here are some key questions to consider:
Who are your target customers?
Get very specific here. Really dig into the demographics, behaviours, needs and pain points of your ideal customers. The more specifically you can define your target audience, the better you’ll be able to cater your offering and messaging directly to them.
What value will you provide?
Figure out exactly what core value proposition or problem/need you will address for those target customers. What will you provide them that they can’t easily get elsewhere? How will you make their lives easier?
How will you deliver that value?
Determine the core products, services or experiences you will create to deliver the value to your customers. Also, consider how you will distribute or deliver those offerings. Will it be in person? Online? Through an app? In people’s homes? B2B or B2C?
What ongoing relationship will you have?
Consider how customers will engage with your business beyond initial transactions. Will you establish ongoing subscriptions, service contracts, loyalty programs or other continuing relationships? These long-term engagements are extremely valuable.
What are the primary costs inherent in your model? From production to labour to marketing and distribution, what are the main recurring costs involved in efficiently delivering your value proposition to customers? Map out what expense areas will be necessary to operate your model.
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What is the revenue model?
Finally, determine exactly how you will turn your core value into turnover or revenue. What will customers pay for? How much? How frequently? Mapping out clear revenue streams is obviously essential for achieving your profit goals.
While a simple concept in theory, designing a strong, sustainable business model is complex in practice. It requires thoroughly analyzing and testing assumptions around target customers, their needs, operational costs and revenue strategies. That’s why creating a business plan to document your business model is so important.
A well-researched business plan helps prove and validate your business model assumptions. It also shows investors that you have done in-depth planning and analysis to develop a model primed for success. According to a study from HBS professors, new businesses that create business plans are 30% more likely to stay in business over 5 years.
Business model
So in summary, a business model is the core logic and strategic blueprint for how a business will create sustainable value for customers and capture revenues. It’s the foundation of any successful start-up or enterprise. While the business model canvas provides a simple framework, designing and proving a smart, efficient model takes significant research, planning, iteration and insight. But investing the time upfront to validate and optimize your model will set your new business up for the long-term growth and prosperity that entrepreneurs dream of.
