A business model is an account of the activities involved in a company towards the generation of revenue and the resources it invests in and the logic that drives its generation of income. It ensures that the business owners are not caught unprepared by issues that arise once the business has been prepared. The business model has 8 major elements which must always be incorporated to ensure business success.
First, there is the value proposition which describes the value of the company to the customer. It explains the specific needs that are to be satisfied by the consumer. It also defines what the customer will pay for the goods or services rendered. In estimating how much will be paid for a product, a percentage of the amount of money spent on production.
Second, there is the market segment. The market segment is the target market that will be served by the product. In most cases, companies do not target the entire market of their services. A clothing business may opt to make clothes for women or children or even both.
Third, the business model should identify its value chain. This refers to the chain of raw material producers, transporters, producers, manufacturers, suppliers and retailers. In determining the value chain, the company also determines what value they can add to others in the network.
Fourth, we have the cost structure of the company. The cost structure determines all the costs expected to be incurred during production and all costs allocated to their respective uses. In that respect, a manufacturing company may have transport, facilities and equipment as the major shares in the cost structure.
Fifth, there is the profit potential. This is described in two ways: the total return on the dollar and the means by which the profit is generated. The company may employ more than one profit generating activities which include: subscription, reselling, product sales and licensing. The total value may be defined in terms of the total sales revenue or in terms of the profit margin per product unit sold.
Sixth is the value network which is the position of the company on the value network. The company at this point identifies collaborations it can make to add value to its products. A transportation company may need to collaborate with a parcel delivery company to deliver parcels to individual users.
Seventh, the company must identify its competitive strategy or competitive advantage. There are three primary strategies that are used. These are the cost, niche, and differentiation. A company that chooses to use the strategy of cost ensures that it can offer the lowest costs in the market. Another company may use differentiation where it commits to serve a particular class of its customers. Target, for example, uses this strategy by attracting to the more fashion-conscious customers. The niche strategy is used by those companies that are willing to pursue a unique method of marketing. Amazon’s decision to sell online predominantly to the extent of becoming the largest online retailer is an illustration of niche strategy.
Finally, the business model must describe the competitive environment. The competitive environment is a review of those already in the market and how they are offering the product. It is influenced by the number of active competitors, the size of their operations, the level of their profitability and how much their products cost.
In conclusion, the business model is a very important aspect of a business at start-up. It should be approached carefully and exhaustively to avoid getting surprised in the middle of the business. It is one factor that determines if the business fails or succeeds.
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