Optimised Your Business Model

A business model is a description of how your business intends to operate and make money. At the most basic level, it involves a producer making something and selling it directly to customers at a profit (but this simple model has propagated into numerous diverse models in recent years).

The development of a business model is essentially a strategic perspective rather than an operational assessment, and focuses on how you capture value i.e. it includes a description of the value proposition. Deciding upon a business model becomes particularly important as a concept when it is not a simple ‘make and sell direct‘ model and you are looking to create value through a non linear route.

The Business Model – An Introduction

In days of old, business was arguably a lot simpler; you produced something and sold it for a profit, building up a good reputation over time so as to ensure ongoing patronage. Before the industrial revolution most sales were essentially local, and you had a much greater steer on competition, demand levels and pricing. You probably sold your products directly to consumers as the butcher, baker or candlestick maker.

Fast forward 200 years and business has changed considerably. A lot more creativity is needed to get noticed in a time-pressed world (not to mention in making a sale). You are probably facing global competitors, and in many instances a widely dispersed audience who are increasingly difficult to reach in a cost effective manner. As a result, numerous alternative strategies have emerged to get your product to market, safely into the hands of the consumer and business model innovation has become increasingly popular.

In many respects the emergence of business model innovation started with Gillette and razor blades. They worked out that if they sold the razor at low cost, consumers would happily pay for the blades. Given the resultant switching costs and customer inertia, the result was often a lifetime of patronage (despite the fact the initial transaction was a loss-making one for the producer). In essence, by providing something at below the market price (the razor); you can create a market for a secondary product (the blade) upon which you make ongoing profits. A second characteristic of the model was that the mark-up on the secondary products were often disproportionate relative to their cost so were highly profitable for the manufacturer. Anyone who has had to buy replacement ink cartridges will bear witness to this!