What is a Business Model?

Introduction

• A business model describes the rationale for how a business achieves three main objectives:
  1. Creating value
  2. Delivering value
  3. Capturing value
• Simplistically, it's often thought of as how a business makes money (revenue model), but it's more comprehensive.

Key Areas of a Business Model

Creating Value

• Involves solving real problems for consumers.

Delivering Value

• Includes all activities to deliver value to customers, such as marketing, distribution, and infrastructure.

Capturing Value

• Selling a product at a price people will pay and covering costs to achieve profitability.

Four Key Components of Every Business Model

1. The Offer

• Represents what is being sold to customers.
  • Value Proposition: Answers how the product/service is different and why it is worth buying.
  • Ensures offers solve real problems and are market-tested for viability.
  • Focuses on product-market fit.

2. The Customer

• The target consumer for the product.
  • Important to accurately understand the customer through methods like customer discovery interviews.
  • Focus on demographic variables to identify common characteristics of target consumers.
  • Offer and customer development should occur simultaneously.

3. Infrastructure

• Often overlooked, but crucial. Involves resources needed to create and deliver the offer.
  • Includes skilled labor, suppliers, key partners, and essential activities.
  • Infrastructure needs vary based on the type of business model (e.g., subscription-based vs. manufacturing).

4. Financial Viability

• Ensures the business is profitable.
  • Involves understanding revenues and costs to determine profitability.
  • Break Even Analysis: Assesses if and when a business can cover its costs and begin to make a profit.
    • Calculate variable costs (direct materials, labor, etc.) and fixed expenses.
    • Determine price per unit and sales needed to break even.

Recap

• A successful business model needs:
  1. Creation of value through products/services.
  2. Efficient delivery of value via robust infrastructure.
  3. Financial viability to capture value through profitable operations.