Business model is the conceptualization of how different, independent business activities work together as a whole. It is the way to create, deliver and capture value from your customers. Many companies face problems defining their business models. And this is where tools like business model canvas can help. We’ll explain it in details, later.
How you innovate through your business model innovation is much more important than how innovative your product is. When you innovate a product, you risk the fact that competition will easily replicate it and beat you on the market. But, innovating a business model goes much deeper than that.
The need for business model innovation
Globalization of market has increased competition and having much more alternatives, customers constantly raise their expectations from the products they’re getting. Moreover, customers do not want just physical performance, but also delivered value and value can be delivered in many ways: through performance, design, brand, operational efficiency etc. Therefore, in order to survive on the today’s market, a company has to keep up the pace and innovate continuously.
Product and business model innovation:
In order to innovate your business model, you do not have to innovate everything from scratch. Innovation also means, recombining existing practices in novel ways. Innovation, isn’t just an entirely new product. Companies can innovate using the following ways:
- Novelty: adding novel activities to the business, or product;
- Activity linkage; linking activities that create products, in a novel way;
- Lock-in: increase customer cost for changing the provider;
- Efficiency: achieve operational excellence, by making processes more cost-efficient.
Also, in order to innovate, a company has to have the company culture for it. That means, employees motivated to think critically, use their creativity and all their know-how and skills to develop a product the market hasn’t seen before. They also have to possess the right leadership to lead employees through the process of change.
How to create a winning business model:
Customer profile: Segment your market and get to know your customers. What are their characteristics? What makes the purchase?
Products/services: Get high understanding of your products and services. How are you creating them? Which customer problem are they solving? Which customer need are they satisfying.
Processes: How do you deliver the products and services to your customers? Which channels are you using?
Value: How do you create a unique value for your customers? Why should they purchase from you and not your customers?
Different types of business models:
There are many types of business models. We can make endless distinctions between how they generate revenues, how they innovate, how they serve their customers etc. we’ll make a general distinction between 4 business models:
Product Innovation: by product innovation, we’ll also refer to service innovation and innovation in infrastructure. The main goal of product innovation is to create unique value for the customer by ensuring operational excellence, product leadership, or customer intimacy.
Niche innovation: this stands for companies offering a large number of niche products, or a small number of trendy products in large volumes.
Multi–platform: Companies like Google, integrate their models using different kinds of mediums (AdSense, AdWords). That way, they exchange value through one another, the more users the platform has, the more valuable it is to other platforms. This network effect Is mostly used by advertisers, who target large network databases to generate their ads to.
Free: These business models are freebies, or they offer products and service for free to all the customers, but charge prices for premium version of the product, or service. The logic behind it is that, the price charged to those customers, will be enough to cover the costs for all the ones, that use both, the premium and the basic version.
Business model canvas
The business model canvas is a pattern for businesses who want to create a successful and revenue generating business model. The concept consists of 9 parameters. We’ll explain them further in the text.
A lot of successful companies use the business model canvas to explain their business model too operational and technical people. It shows the overall picture of how value is generated and captured to and from customers.
Customer segments: Divide your market in different customer segments. Those are people with similar characteristics organized into groups, so that value is customized to their specific needs.
Value propositions: This is the reason why customers should buy from you and not your competitors. It is a statement, for each of your customer segments, describing the unique value your product provides to them.
Channels: Channels are the media you will use to deliver value propositions to your customers. they can be direct, or indirect channels, or the combination of both.
Customer relationships: This quadrant represents how you maintain your customer loyalty throughout the process. A successful business model doesn’t make one-time, but recurring transactions. This is how you will make your customers come back.
Key partners: These are the partners you couldn’t deliver value without. They represent expertise from outside, or from inside the company, an affiliate business, or your employees, themselves.
Key activities: These activities enable you to create value, in terms of marketing, logistics, screening etc.
Key resources: These resources enable you to build value for your customers. whether it is infrastructure, know-how, people, or the combination of all of them.
Cost structure: What will it cost to generate value for your customers? where will you make the greatest cost, buying supplies, giving wages to your personnel, or..?
Revenue model: The most favorite part of them all. How will you capture value? Will it be through one-time payment, subscription, licenses, premium versions..?