According to a recent study, having no business model for a product resulted in 17% of startup failures. Most founders focused on developing a product but they failed to conceptualize a business model for making the product successful. Ensuring that a product fits the needs of the market is only a part of starting a successful business. The other key ingredient is figuring out how you’re going to make money. This is the function of a business model.
What is a Business Model?
A Business Model is a structure that supports the viability of a product or company. It explains how the company operates, makes money, and how it intends to achieve its goals. It’s an explanation of how you deliver value to your customers at an appropriate cost.
In their simplest forms, business models have three parts:
- What it takes to make something - design, raw materials, manufacturing, labor, etc.
- What it takes to sell that thing - marketing, distribution, delivery, and processing
- How and what the customer pays - pricing strategy, payment methods, payment timing, etc.
A business model is what costs and expenses you have and how much you can charge for your product or service. You need to collect more money from customers than it costs to make, market and sell the product.
Why a Business Model is so Important?
A Business Model is a Blueprint for Small Business Success
Who can imagine a house built without preliminary sketches? Like building a house, creating a business model is putting your plan down on paper. Write the details of your business concepts and make a realistic evaluation of the potential success of your business idea.
Take Your Time Creating a Business Model
You may have a few ideas scribbled down on a sheet of paper – name ideas, product prices, and ideal locations. It might be exciting. But you also need the strongest foundation possible to ensure success. Take time to research. Survey your friends and leverage your business network. Take time in creating your business model. It will ensure you haven’t underestimated – or overestimated – anything.
Consider All Possible Areas of Concern
Developing a business model makes you think about the business plan. An effective business model should address topics including:
- The type of product or service offered
- How to draw revenue from the product or service
- What advantages and disadvantages the company has compared to similar offerings
Understand the Exact Business Model You Need
There are many types of business models and you need to research which one is right for your company, target industry and product. You can blend various business models together in a business plan. Understand the exact types of business model you need that best suit your products. It can turn your idea into a profitable and sustainable business.
Developing an Ideal Business Model
Sourobh Das, in his article at Feedough, suggested the ways to develop an ideal business model:
- Size your product value in the market - You should match your prices with those of the competitor products. If you priced your product too high, the sales will dip. If too low, the margins will not be high enough for long-term sustainability.
- Get high-value customers - High-value customers give the greatest value and keep your costs as low as possible. They help you achieve your business targets. You can reach these customers with minimal marketing expenses.
- Ensure high margins - Keep manufacturing costs low helps in keeping higher margins. Your product can have features that provide enhanced value to the customer which allows you to charge a premium for it. You can even opt for a low-touch model to reduce manpower costs. There are various ways to make sure that the margins are high enough to sustain the business in the long run.
- See if your product is the best solution available - The prototype phase takes care of how most of the stakeholders feel about your product. You have to see that your solution solved the pain point you are trying to address and it's the best at what it does. The best business model does not offer a lackluster product.
- Ensure customer satisfaction - Acquiring a new customer is more expensive than keeping an existing customer satisfied. A satisfied customer is also a promoter of the brand. Quality after-sales customer service is one of the ways to ensure customer satisfaction.
- Decide on the channel and distribution strategy - A great product will not be great if the distribution or marketing is poor. Test all the elements of your channel strategy in detail. An efficient distribution channel keeps margins high.
- Maintain market position - A good business model includes plans to make the business sustainable. It also includes plans to improve its market position. Take into account all the growth opportunities and incorporate a long-term product roadmap. You have to consider all the factors and decide how you plan to maintain and then improve your offering.
- Plan funding strategy - Your long-term sustainability depends on funding your business. We are not referring to funding by investors only. Your company will need a constant flow of funds to sustain itself. Your initial funding rounds should allow you to multiply your sales. Aim for sales manifold so that external funding is no longer required.
- Execute a pilot rollout - A pilot limited rollout tests everything from costs to quality to pricing. It's a low-risk, high-speed way for fine-tuning pricing and channel strategy before the final launch.
Your business model is as important as your product, if not more. While you might think that your product is the best, the reality might be different. Developing your business model lets you compare yourself with the market competition to make sure you're delivering something of value.