How Companies Make Money
- Search Search Please fill out this field.
What Is a Business Model?
Understanding business models, evaluating successful business models, how to create a business model.
- Business Model FAQs
The Bottom Line
Learn to understand a company's profit-making plan
Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.
Investopedia / Laura Porter
The term business model refers to a company's plan for making a profit . It identifies the products or services the business plans to sell, its identified target market , and any anticipated expenses . Business models are important for both new and established businesses. They help new, developing companies attract investment, recruit talent, and motivate management and staff.
Established businesses should regularly update their business model or they'll fail to anticipate trends and challenges ahead. Business models also help investors evaluate companies that interest them and employees understand the future of a company they may aspire to join.
- A business model is a company's core strategy for profitably doing business.
- Models generally include information like products or services the business plans to sell, target markets, and any anticipated expenses.
- There are dozens of types of business models including retailers, manufacturers, fee-for-service, or freemium providers.
- The two levers of a business model are pricing and costs.
- When evaluating a business model as an investor, consider whether the product being offer matches a true need in the market.
A business model is a high-level plan for profitably operating a business in a specific marketplace. A primary component of the business model is the value proposition . This is a description of the goods or services that a company offers and why they are desirable to customers or clients, ideally stated in a way that differentiates the product or service from its competitors.
A new enterprise's business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy , a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company.
Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands .
When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company's business model. Admittedly, the business model may not tell you everything about a company's prospects. But the investor who understands the business model can make better sense of the financial data.
A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable. Counting costs to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses.
One way analysts and investors evaluate the success of a business model is by looking at the company's gross profit . Gross profit is a company's total revenue minus the cost of goods sold (COGS). Comparing a company's gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model. Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income . That is gross profit minus operating expenses and is an indication of just how much real profit the business is generating.
The two primary levers of a company's business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many analysts consider gross profit to be more important in evaluating a business plan. A good gross profit suggests a sound business plan. If expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves.
When evaluating a company as a possible investment, find out exactly how it makes its money (not just what it sells but how it sells it). That's the company's business model.
Types of Business Models
There are as many types of business models as there are types of business. For instance, direct sales, franchising , advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrid models as well, such as businesses that combine internet retail with brick-and-mortar stores or with sporting organizations like the NBA .
Below are some common types of business models; note that the examples given may fall into multiple categories.
One of the more common business models most people interact with regularly is the retailer model. A retailer is the last entity along a supply chain. They often buy finished goods from manufacturers or distributors and interface directly with customers.
Example: Costco Wholesale
A manufacturer is responsible for sourcing raw materials and producing finished products by leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods or highly replicated, mass produced products. A manufacturer can also sell goods to distributors, retailers, or directly to customers.
Example: Ford Motor Company
Instead of selling products, fee-for-service business models are centered around labor and providing services. A fee-for-service business model may charge by an hourly rate or a fixed cost for a specific agreement. Fee-for-service companies are often specialized, offering insight that may not be common knowledge or may require specific training.
Example: DLA Piper LLP
Subscription-based business models strive to attract clients in the hopes of luring them into long-time, loyal patrons. This is done by offering a product that requires ongoing payment, usually in return for a fixed duration of benefit. Though largely offered by digital companies for access to software, subscription business models are also popular for physical goods such as monthly reoccurring agriculture/produce subscription box deliveries.
Freemium business models attract customers by introducing them to basic, limited-scope products. Then, with the client using their service, the company attempts to convert them to a more premium, advance product that requires payment. Although a customer may theoretically stay on freemium forever, a company tries to show the benefit of what becoming an upgraded member can hold.
Example: LinkedIn/LinkedIn Premium
Some companies can reside within multiple business model types at the same time for the same product. For example, Spotify (a subscription-based model) also offers free version and a premium version.
If a company is concerned about the cost of attracting a single customer, it may attempt to bundle products to sell multiple goods to a single client. Bundling capitalizes on existing customers by attempting to sell them different products. This can be incentivized by offering pricing discounts for buying multiple products.
Marketplaces are somewhat straight-forward: in exchange for hosting a platform for business to be conducted, the marketplace receives compensation. Although transactions could occur without a marketplace, this business model attempts to make transacting easier, safer, and faster.
Affiliate business models are based on marketing and the broad reach of a specific entity or person's platform. Companies pay an entity to promote a good, and that entity often receives compensation in exchange for their promotion. That compensation may be a fixed payment, a percentage of sales derived from their promotion, or both.
Example: social media influencers such as Lele Pons, Zach King, or Chiara Ferragni.
Aptly named after the product that invented the model, this business model aims to sell a durable product below cost to then generate high-margin sales of a disposable component of that product. Also referred to as the "razor and blade model", razor blade companies may give away expensive blade handles with the premise that consumers need to continually buy razor blades in the long run.
Example: HP (printers and ink)
"Tying" is an illegal razor blade model strategy that requires the purchase of an unrelated good prior to being able to buy a different (and often required) good. For example, imagine Gillette released a line of lotion and required all customers to buy three bottles before they were allowed to purchase disposable razor blades.
Reverse Razor Blade
Instead of relying on high-margin companion products, a reverse razor blade business model tries to sell a high-margin product upfront. Then, to use the product, low or free companion products are provided. This model aims to promote that upfront sale, as further use of the product is not highly profitable.
Example: Apple (iPhones + applications)
The franchise business model leverages existing business plans to expand and reproduce a company at a different location. Often food, hardware, or fitness companies, franchisers work with incoming franchisees to finance the business, promote the new location, and oversee operations. In return, the franchisor receives a percentage of earnings from the franchisee.
Example: Domino's Pizza
Instead of charging a fixed fee, some companies may implement a pay-as-you-go business model where the amount charged depends on how much of the product or service was used. The company may charge a fixed fee for offering the service in addition to an amount that changes each month based on what was consumed.
Example: Utility companies
A brokerage business model connects buyers and sellers without directly selling a good themselves. Brokerage companies often receive a percentage of the amount paid when a deal is finalized. Most common in real estate, brokers are also prominent in construction/development or freight.
There is no "one size fits all" when making a business model. Different professionals may suggest taking different steps when creating a business and planning your business model. Here are some broad steps one can take to create their plan:
- Identify your audience. Most business model plans will start with either defining the problem or identifying your audience and target market . A strong business model will understand who you are trying to target so you can craft your product, messaging, and approach to connecting with that audience.
- Define the problem. In addition to understanding your audience, you must know what problem you are trying to solve. A hardware company sells products for home repairs. A restaurant feeds the community. Without a problem or a need, your business may struggle to find its footing if there isn't a demand for your services or products.
- Understand your offerings. With your audience and problem in mind, consider what you are able to offer. What products are you interested in selling, and how does your expertise match that product? In this stage of the business model, the product is tweaked to adapt to what the market needs and what you're able to provide.
- Document your needs. With your product selected, consider the hurdles your company will face. This includes product-specific challenges as well as operational difficulties. Make sure to document each of these needs to assess whether you are ready to launch in the future.
- Find key partners. Most businesses will leverage other partners in driving company success. For example, a wedding planner may forge relationships with venues, caterers, florists, and tailors to enhance their offering. For manufacturers, consider who will provide your materials and how critical your relationship with that provider will be.
- Set monetization solutions. Until now, we haven't talked about how your company will make money. A business model isn't complete until it identifies how it will make money. This includes selecting the strategy or strategies above in determining your business model type. This might have been a type you had in mind but after reviewing your clients needs, a different type might now make more sense.
- Test your model. When your full plan is in place, perform test surveys or soft launches. Ask how people would feel paying your prices for your services. Offer discounts to new customers in exchange for reviews and feedback. You can always adjust your business model, but you should always consider leveraging direct feedback from the market when doing so.
Instead of reinventing the wheel, consider what competing companies are doing and how you can position yourself in the market. You may be able to easily spot gaps in the business model of others.
Criticism of Business Models
Joan Magretta, the former editor of the Harvard Business Review, suggests there are two critical factors in sizing up business models. When business models don't work, she states, it's because the story doesn't make sense and/or the numbers just don't add up to profits. The airline industry is a good place to look to find a business model that stopped making sense. It includes companies that have suffered heavy losses and even bankruptcy .
For years, major carriers such as American Airlines, Delta, and Continental built their businesses around a hub-and-spoke structure , in which all flights were routed through a handful of major airports. By ensuring that most seats were filled most of the time, the business model produced big profits.
However, a competing business model arose that made the strength of the major carriers a burden. Carriers like Southwest and JetBlue shuttled planes between smaller airports at a lower cost. They avoided some of the operational inefficiencies of the hub-and-spoke model while forcing labor costs down. That allowed them to cut prices, increasing demand for short flights between cities.
As these newer competitors drew more customers away, the old carriers were left to support their large, extended networks with fewer passengers. The problem became even worse when traffic fell sharply following the September 11 terrorist attacks in 2001 . To fill seats, these airlines had to offer more discounts at even deeper levels. The hub-and-spoke business model no longer made sense.
Example of Business Models
Consider the vast portfolio of Microsoft. Over the past several decades, the company has expanded its product line across digital services, software, gaming, and more. Various business models, all within Microsoft, include but are not limited to:
- Productivity and Business Processes: Microsoft offers subscriptions to Office products and LinkedIn. These subscriptions may be based off product usage (i.e. the amount of data being uploaded to SharePoint).
- Intelligent Cloud: Microsoft offers server products and cloud services for a subscription. This also provide services and consulting.
- More Personal Computing: Microsoft sells physically manufactured products such as Surface, PC components, and Xbox hardware. Residual Xbox sales include content, services, subscriptions, royalties, and advertising revenue.
A business model is a strategic plan of how a company will make money. The model describes the way a business will take its product, offer it to the market, and drive sales. A business model determines what products make sense for a company to sell, how it wants to promote its products, what type of people it should try to cater to, and what revenue streams it may expect.
What Is an Example of a Business Model?
Best Buy, Target, and Walmart are some of the largest examples of retail companies. These companies acquire goods from manufacturers or distributors to sell directly to the public. Retailers interface with their clients and sell goods, though retails may or may not make the actual goods they sell.
What Are the Main Types of Business Models?
Retailers and manufacturers are among the primary types of business models. Manufacturers product their own goods and may or may not sell them directly to the public. Meanwhile, retails buy goods to later resell to the public.
How Do I Build a Business Model?
There are many steps to building a business model, and there is no single consistent process among business experts. In general, a business model should identify your customers, understand the problem you are trying to solve, select a business model type to determine how your clients will buy your product, and determine the ways your company will make money. It is also important to periodically review your business model; once you've launched, feel free to evaluate your plan and adjust your target audience, product line, or pricing as needed.
A company isn't just an entity that sells goods. It's an ecosystem that must have a plan in plan on who to sell to, what to sell, what to charge, and what value it is creating. A business model describes what an organization does to systematically create long-term value for its customers. After building a business model, a company should have stronger direction on how it wants to operate and what its financial future appears to be.
Harvard Business Review. " Why Business Models Matter ."
Bureau of Transportation Statistics. " Airline Travel Since 9/11 ."
Microsoft. " Annual Report 2021 ."
- How Companies Make Money 1 of 23
- How IBM Makes Money 2 of 23
- How Micron Makes Money 3 of 23
- How Snapchat Makes Money 4 of 23
- How Spotify Makes Money 5 of 23
- How X (Formerly Twitter) Makes Money 6 of 23
- How Uber Makes Money 7 of 23
- How Alibaba Makes Money 8 of 23
- How Amazon Makes Money 9 of 23
- How Lockheed Martin Makes Money 10 of 23
- How Nike Makes Money 11 of 23
- How Starbucks Makes Money 12 of 23
- How Bank of America Makes Money: Consumer Banking 13 of 23
- How Berkshire Hathaway Makes Money 14 of 23
- How BlackRock Makes Money 15 of 23
- How JPMorgan Makes Money 16 of 23
- How Square (Block) Makes Money 17 of 23
- How Visa Makes Money 18 of 23
- How Does Robinhood Make Money? 19 of 23
- How Acorns Makes Money 20 of 23
- How Chime Makes Money 21 of 23
- How Credit Karma Makes Money 22 of 23
- How Reddit Makes Money 23 of 23
- Terms of Service
- Editorial Policy
- Your Privacy Choices
- Search Search Please fill out this field.
- Building Your Business
What Is a Business Model?
PeopleImages / Getty Images
A business model is a plan describing how a business will make money. It is an outline that explains the company’s revenue and cost structure, and how it expects to turn a profit—or at least sustain itself as a going concern.
- A business model is an outline of how your business will generate a profit. The plan includes important information like target market, market need, and details on business expenses.
- There are lots of types of business models, and models can be combined as well. You’re probably familiar with some of the more common ones like manufacturer, distributor, retailer, and franchise.
- When creating a business model, you should be clear about who your target customer is and how you’ll reach them. You’ll also want to know specifics about what you’re selling, and what sets you apart from your competition.
Definition and Examples of a Business Model
A business model is an outline that breaks down the ways that a company makes its profit. It identifies the target market, the market’s need, and how the business will serve its customers. The plan also includes the costs incurred from expenses like producing and marketing the product. There are multiple types of business models, each tailored to fit the unique needs of various businesses.
An example of a business model is one in which the concepts are split into two categories—business ideas and business resources. Under the business idea category lies products and services, target audience, competition, differentiation, advertising, and sales. Business resources, meanwhile, are what’s needed to make the idea work and can be divided into ownership, staffing, facilities, financial model, funding, and balance sheet.
A business is unlikely to be successful unless all facets of the business model provided in the example above allow it to be competitive in its marketplace.
Types of Business Models
Here are a few commonly used business models that you’re probably familiar with.
This type of business model is when a company makes a product from raw materials or assembles prefabricated items to create new merchandise. The business can sell the items directly to consumers itself, which is a business-to-consumer (B2C) model, or it can use a business-to-business (B2B) model in which it sells to other businesses.
An example of a B2C manufacturer would be a shoe company that sells its products directly to customers. A B2B manufacturer would be a business that sews dresses and only sells its products wholesale to other businesses, which then sell the dresses to the general public.
The distributor business model is when a company purchases inventory from a manufacturer and sells it to either a retailer or directly to the public. A common challenge that distributors face is picking the right price point that allows them to make a profit on the sale, but still offers competitive pricing. An example of a distributor would be a company that buys soft drinks from a manufacturer and sells those beverages to restaurants at a higher price.
There are many different types of business models and multiple models can be combined to create a new approach.
Retail business models are those used by companies that buy inventory from a manufacturer or distributor and sell those products to the public. Retailers can range from a single mom-and-pop shop to huge chain stores—they often have brick-and-mortar locations, an online store, or both.
An example of a retailer would be a hat store that buys the products from a distributor. A limited selection of the hat store’s products is available at its brick-and-mortar storefront, but its full inventory can be purchased online.
The franchise business model can be applied to other business models, like the ones we just discussed. The franchisee takes on the business model of the franchise and with it, the latter’s pre-established processes and protocols. Examples of popular franchises include McDonald’s, KFC, Burger King, and 7-Eleven.
When developing your business model, identify your target customer and how you’ll reach them. You’ll also want to familiarize yourself with what you’re selling (costs, margins, features, benefits, etc.) and what your competitive advantage is .
SCORE. “ Do you have a Successful Business Model? ”
SCORE. “ Develop Your Business Model by Answering These 4 Questions .”
Le guide de la création d'entreprise
Business model de l’entreprise : de quoi s’agit-il et comment le construire .
Définir le business model de votre entreprise est un prérequis indispensable à son lancement. Vous ne pouvez pas mettre votre projet à flot sans vous être posé au préalable les questions suivantes :
Que vendez-vous et pourquoi ? (votre proposition de valeur)
A qui le vendez-vous ? (vos clients)
Avec quelles ressources le vendez-vous ? (partenaires, ressources-clés)
Comment le vendez-vous ? (canaux, relation-clients)
Combien le vendez-vous ? (flux de revenus, structure de coûts)
Bâtir le business model (ou “modèle d'affaires”) de sa future entreprise permet de répondre à ces questions. Indispensable pour toutes les entreprises puisqu'il s'agit de décrire votre projet ! Pour vous simplifier le travail, un outil existe : le business model canvas (que nous développons dans un autre article de ce site).
- Le business model (modèle d'affaires) en 5 points essentiels
- Comprendre le business model : les explications
- Quelques typologies de business models
- Autres ressources sur les business models
Qu'est-ce que le business model ?
Le business model a pour fonction de décrire la manière dont une entreprise crée de la valeur et assure ainsi sa propre pérennité. C’est la traduction concrète de la “bonne idée” de départ de l’entrepreneur, et de la manière dont il va l’exploiter sur le marché. Très concrètement, cela traduit la manière dont l’entreprise fait des affaires. Le business plan inclut donc par nécessité l’ensemble des questions posées ci-avant.
Le business model de l'entreprise en cinq points
1- le business model est nécessaire pour toutes les entreprises.
Toute entreprise, quelle que soit sa taille ou son activité, met en oeuvre un business model (modèle d'affaires). En effet, c'est la description générale de votre projet qui explique comment l’entreprise va créer de la valeur pour le client (quelle offre et quels avantages pour le client et pour quel client), délivrer cette valeur (distribution, communication, relation-clients...) et capturer de la valeur en retour (quelle rentabilité financière, quelle notoriété...).
Même si vous êtes une "start-up" (entreprise dont le business model n'est pas encore complètement arrêté mais dont l'offre a une forte scalabilité), vous devez poser une hypothèse de business model même si celui-ci va évoluer !
2- Ne pas construire le business model sans une analyse plus large
Le business Model se définit après avoir analysé le contexte de votre future entreprise et après avoir posé la mission, vision et stratégie de la future entreprise. En effet, les tendances sont particulièrement importantes car elles peuvent influer sur votre vision, stratégie et donc sur votre business model.
3- Le business model est différent du business plan !
Le business model ne remplace pas le business plan :
le Business Model décrit les liens logiques entre l'offre (la proposition de valeur), les clients, les revenus…
Le Business Plan explique la mise en œuvre opérationnelle et stratégique de cette logique.
4- Pour construire votre business model, servez-vous du business model canvas
Le business model canvas , outil qui permet de travailler sur le business model, est adapté à tout type d'entreprise (de la plus petite à la plus grande) et à toutes les activités (du commerce ambulant à l'entreprise numérique).
Si vous lancez une innovation de produit, le Lean canvas peut vous sembler plus simple. L'outil vous permet de vérifier la cohérence entre ce que vous vendez et pourquoi, à qui vous le vendez, comment vous le vendez, avec qui vous le vendez et combien vous le vendez. Et, éventuellement, trouver des innovations.
5- Ne travaillez pas seul(e) !
Il est fortement recommandé de ne pas travailler seul(e) sur son business model : participez à des ateliers, travaillez en équipe... Challengez le fruit de vos réflexions avec un tiers qui portera un regard neutre sur votre travail et vous aidera à le regarder sous d'autres angles pour, éventuellement, identifier des innovations qui vous démarqueront plus de vos concurrents.
Comprendre le business model : les explications en vidéo
Comprendre la notion de "création de valeur" : les explications en vidéo, la méthode pour travailler sur le modèle d'affaire de votre future entreprise.
Nous vous proposons de transformer votre idée en un business model cohérent voire innovant. Pour cela, nous vous proposons la démarche itérative suivante :
Si vous avez déjà testé votre offre avec la méthode du Lean Startup , alors vous avez déjà beaucoup d'informations mais étant donné que vous avez pivoté probablement plusieurs fois pendant la phase de test, il est intéressant de tout remettre à plat et repartir sur de bonnes bases.
Ne faites pas ce travail seul, faites-vous aider par des tiers. Les conseillers CCI ont été formés et sont en capacité de vous accompagner.
Typologie de business model : des exemples
Pour travailler sur votre business model, il est utile de connaître les différentes typologies de business models existants
Source : BMI-Lab
D'autres ressources sur le business model
Découvrez les études de dizaines de business models réalisées par le cabinet ONOPIA , spécialisé dans la stratégie de rupture, l’innovation de business models, la création d’expériences clients mémorables, le design thinking et la créativité.
Des exemples de business models sont proposés dans le chapitre Définir votre business model .
Besoin d'aide ?
Mise à jour : 24 juillet 2021 - Nathalie CARRE / CCI Entreprendre en France
Essayez CCI Business Builder
Créez votre compte gratuit dès maintenant et structurez votre projet d'entreprise !
Business model : qu’est-ce que c’est et comment le construire ?
On a souvent tendance à les confondre, mais votre business modèle est bien plus qu’une simple extension de votre business plan. C’est la boussole qui vous permet d ’ identifier comment votre entreprise va créer de la valeu r et atteindre ses objectifs commerciaux.
Mais par où commencer pour construire son business model ? Peut-être en comprenant un peu mieux ce que l’on entend par là et en s’inspirant de ceux qui ont fait leur preuve. C’est le sujet de cet article !
Business model : définition
Un business model, ou modèle économique, est le principe fondateur qui régit le fonctionnement de votre entreprise . Concrètement, il identifie le problème que vous allez résoudre, le marché auquel vous allez vous adresser, les investissements dont vous avez besoin pour vous lancer… Tout cela pour déterminer quelle est la meilleure façon de vendre votre produit ou service et de générer des revenus stables.
Pour résumer, un business model est donc la manière dont votre entreprise va créer, fournir et capter de la valeur. On parle bien sûr de valeur économique, mais votre business model peut aussi prendre en compte la valeur sociale ou culturelle que va créer votre entreprise.
Les différents composants d’un business model
Comme on vient de le voir, votre business model s’articule autour de trois composantes cruciales :
- La proposition de valeur : elle décrit qui sont vos clients et ce que vous allez leur proposer ;
- La livraison de valeur, soit la manière dont vous allez organiser vos processus opérationnel pour offrir cette proposition de valeur ;
- La captation de valeur : c’est l’hypothèse sur la façon dont votre proposition et livraison de valeur vont s’aligner pour permettre à votre entreprise d’être viable voire de grandir.
En théorie, la construction de votre business model est donc un peu plus complexe que la simple définition de votre politique tarifaire. Vous allez devoir documenter de la manière la plus précise possible (pour vos équipes comme vos partenaires) la façon dont votre organisation va mettre en œuvre ces trois leviers de valeur.
Parmi les composants que l’on retrouve dans chaque business model, il y a par exemple :
- Votre mission : que souhaitez-vous accomplir avec votre produit/service ? À quel besoin répondez-vous ?
- Vos persona : quelles sont vos cibles, leurs attentes, leurs habitudes de consommation ?
- Vos objectifs : quel est le niveau de rentabilité que vous souhaitez atteindre et à quel horizon ? Comment prévoyez-vous de mesurer votre succès ?
- Votre tarification : combien coûtera le développement de votre solution ? Et quel est le prix que vos prospects sont prêts à mettre pour l’acheter ? Réfléchissez à la manière dont elle sera vendue (quels canaux, intermédiaires, etc.)
- Votre positionnement : comment comptez-vous communiquer la valeur de votre offre ?
- Votre stratégie go-to-market : soit la manière dont vous allez lancer votre offre, la mettre à jour.
- Vos opportunités de croissances ; pensez-vous élargir votre gamme de produits ? Avez-vous l’intention de vous développer à l’international dans un avenir proche ?
Les différents types de modèles économiques
Maintenant que vous avez les éléments qui vont composer et orienter votre business model, il est intéressant de vous pencher sur les différents types de modèles parmi lesquels vous pouvez piocher.
En pratique, il existe autant de business models que d’entreprises. Mais on peut néanmoins dégager plusieurs archétypes dont vous pourrez vous inspirer pour tracer votre feuille de route. En fonction de votre produit, de votre marché, de votre cible mais aussi de vos objectifs, un modèle commercial sera plus indiqué qu’un autre. Il ne vous restera ensuite plus qu’à l’adapter à votre sauce !
Vous aurez notamment le choix entre :
- Le retail / le fabricant : selon l’implication que vous souhaitez avoir dans votre processus de production, vous pouvez simplement être le dernier maillon de votre chaîne d’approvisionnement. Ou au contraire, maîtriser toute cette dernière, de l’approvisionnement en matière première à la commercialisation. À vous de décider quels sont vos moyens et quelle stratégie est plus adaptée pour votre contexte ;
- L’abonnement. C’est un business model de plus en plus populaire, dans des secteurs aussi variés que la vente de paniers alimentaires au streaming et de VOD. L’intérêt de l’abonnement est de pouvoir sécuriser des revenus réguliers et de fidéliser des utilisateurs sur le long terme ;
- Le modèle freemium. Prenez l’exemple de LinkedIn ou YouTube, qui attirent leurs utilisateurs avec une offre gratuite. Ces plateformes valorisent ensuite leur version payante en offrant des fonctionnalités plus avancées ou une expérience plus qualitative (sans publicité, etc.) ;
- Le bundle / la marketplace. Les plateformes regroupant de nombreux vendeurs sont un bon moyen de limiter ses coûts d’acquisition, tout en regroupant un large choix de produits ;
- L’affiliation. De nombreux blogs et médias fonctionnent sur ce modèle pour toucher des commissions sur les lecteurs qu’ils redirigent vers le site web d’entreprise.
5 étapes pour construire son business model
Vous avez compris quelles options s’offraient à vous et choisi la plus adaptée ? Il ne vous reste désormais plus qu’à passer à la pratique et définir votre business model ! Voici les étapes à suivre pour le structurer et créer une stratégie commerciale qui soit vraiment alignée avec votre offre et votre marché.
1. Identifier votre cible
Vous avez besoin de savoir à qui vous allez commercialiser votre produit ou service. En fonction de vos buying persona, de leurs besoins et attentes, vous pourrez définir une proposition de valeur pertinente et une stratégie de go-to-market efficace. Réfléchissez tout particulièrement au problème que vous comptez résoudre et au prix que votre cible est prête à investir pour se débarrasser de son pain point.
2. Développer une proposition de valeur forte
Comment votre entreprise compte-t-elle se démarquer de la concurrence ? Allez-vous proposer à vos clients un prix plus attractif, une expérience d’achat plus fluide ou un produit premium ? C’est tout l’enjeu de votre proposition de valeur de répondre à ces questions importantes.
3. Créer une stratégie de pricing
À partir des différentes étapes et processus par lesquels vous devez passer pour créer votre proposition de valeur, mais aussi des ressources dont dispose votre entreprise, vous allez pouvoir fixer le prix de votre produit (ou service).
Votre pricing doit être aligné avec vos coûts opérationnels. Mais aussi, tenir compte du positionnement de vos concurrents et des ressources que peuvent allouer vos clients à votre offre.
4. Élaborer une stratégie de génération de la demande
Comment allez-vous attirer l’attention et susciter l’intérêt de vos prospects ? Votre stratégie go-to-market doit établir les canaux sur lesquels vous allez acquérir vos futurs clients.
Il est aussi essentiel de bien comprendre les différents leviers de motivation que vous pouvez leur offrir pour les faire avancer le plus loin possible dans votre parcours de vente. Sans oublier la rétention et la fidélisation de vos clients, particulièrement si vous optez pour un modèle d’abonnement ou freemium !
5. Évaluer et adapter son business model
Votre business model n’est pas figé dans le marbre. Il repose en effet sur un certain nombre d’hypothèses qu’il vous faudra valider par l’expérience. Surtout, il est amené à évoluer avec les fluctuations de votre marché, l’élargissement de votre offre, etc.
Ne vous reposez donc pas trop sur vos lauriers et prévoyez des KPIs à suivre pour mesurer son efficacité. Vous pourrez ainsi ajuster votre pricing, revoir votre proposition de valeur ou même affiner vos buying persona si nécessaire !
Apprenez à repenser les business models pour un marché en constante évolution.
Rejoignez le Master of Science Online International Business Management.
Abonnez vous à la newsletter BOOST, l’email qui fait du bien à votre carrière.
Business Model Canvas: Explained with Examples
Got a new business idea, but don’t know how to put it to work? Want to improve your existing business model? Overwhelmed by writing your business plan? There is a one-page technique that can provide you the solution you are looking for, and that’s the business model canvas.
In this guide, you’ll have the Business Model Canvas explained, along with steps on how to create one. All business model canvas examples in the post can be edited online.
What is a Business Model Canvas
A business model is simply a plan describing how a business intends to make money. It explains who your customer base is and how you deliver value to them and the related details of financing. And the business model canvas lets you define these different components on a single page.
The Business Model Canvas is a strategic management tool that lets you visualize and assess your business idea or concept. It’s a one-page document containing nine boxes that represent different fundamental elements of a business.
The business model canvas beats the traditional business plan that spans across several pages, by offering a much easier way to understand the different core elements of a business.
The right side of the canvas focuses on the customer or the market (external factors that are not under your control) while the left side of the canvas focuses on the business (internal factors that are mostly under your control). In the middle, you get the value propositions that represent the exchange of value between your business and your customers.
The business model canvas was originally developed by Alex Osterwalder and Yves Pigneur and introduced in their book ‘ Business Model Generation ’ as a visual framework for planning, developing and testing the business model(s) of an organization.
What Are the Benefits of Using a Business Model Canvas
Why do you need a business model canvas? The answer is simple. The business model canvas offers several benefits for businesses and entrepreneurs. It is a valuable tool and provides a visual and structured approach to designing, analyzing, optimizing, and communicating your business model.
- The business model canvas provides a comprehensive overview of a business model’s essential aspects. The BMC provides a quick outline of the business model and is devoid of unnecessary details compared to the traditional business plan.
- The comprehensive overview also ensures that the team considers all required components of their business model and can identify gaps or areas for improvement.
- The BMC allows the team to have a holistic and shared understanding of the business model while enabling them to align and collaborate effectively.
- The visual nature of the business model canvas makes it easier to refer to and understand by anyone. The business model canvas combines all vital business model elements in a single, easy-to-understand canvas.
- The BMC can be considered a strategic analysis tool as it enables you to examine a business model’s strengths, weaknesses, opportunities, and challenges.
- It’s easier to edit and can be easily shared with employees and stakeholders.
- The BMC is a flexible and adaptable tool that can be updated and revised as the business evolves. Keep your business agile and responsive to market changes and customer needs.
- The business model canvas can be used by large corporations and startups with just a few employees.
- The business model canvas effectively facilitates discussions among team members, investors, partners, customers, and other stakeholders. It clarifies how different aspects of the business are related and ensures a shared understanding of the business model.
- You can use a BMC template to facilitate discussions and guide brainstorming brainstorming sessions to generate insights and ideas to refine the business model and make strategic decisions.
- The BMC is action-oriented, encouraging businesses to identify activities and initiatives to improve their business model to drive business growth.
- A business model canvas provides a structured approach for businesses to explore possibilities and experiment with new ideas. This encourages creativity and innovation, which in turn encourages team members to think outside the box.
How to Make a Business Model Canvas
Here’s a step-by-step guide on how to create a business canvas model.
Step 1: Gather your team and the required material Bring a team or a group of people from your company together to collaborate. It is better to bring in a diverse group to cover all aspects.
While you can create a business model canvas with whiteboards, sticky notes, and markers, using an online platform like Creately will ensure that your work can be accessed from anywhere, anytime. Create a workspace in Creately and provide editing/reviewing permission to start.
Step 2: Set the context Clearly define the purpose and the scope of what you want to map out and visualize in the business model canvas. Narrow down the business or idea you want to analyze with the team and its context.
Step 3: Draw the canvas Divide the workspace into nine equal sections to represent the nine building blocks of the business model canvas.
Step 4: Identify the key building blocks Label each section as customer segment, value proposition, channels, customer relationships, revenue streams, key resources, key activities, and cost structure.
Step 5: Fill in the canvas Work with your team to fill in each section of the canvas with relevant information. You can use data, keywords, diagrams, and more to represent ideas and concepts.
Step 6: Analyze and iterate Once your team has filled in the business model canvas, analyze the relationships to identify strengths, weaknesses, opportunities, and challenges. Discuss improvements and make adjustments as necessary.
Step 7: Finalize Finalize and use the model as a visual reference to communicate and align your business model with stakeholders. You can also use the model to make informed and strategic decisions and guide your business.
What are the Key Building Blocks of the Business Model Canvas?
There are nine building blocks in the business model canvas and they are:
Customer relationships, revenue streams, key activities, key resources, key partners, cost structure.
- Value Proposition
When filling out a Business Model Canvas, you will brainstorm and conduct research on each of these elements. The data you collect can be placed in each relevant section of the canvas. So have a business model canvas ready when you start the exercise.
Let’s look into what the 9 components of the BMC are in more detail.
These are the groups of people or companies that you are trying to target and sell your product or service to.
Segmenting your customers based on similarities such as geographical area, gender, age, behaviors, interests, etc. gives you the opportunity to better serve their needs, specifically by customizing the solution you are providing them.
After a thorough analysis of your customer segments, you can determine who you should serve and ignore. Then create customer personas for each of the selected customer segments.
There are different customer segments a business model can target and they are;
- Mass market: A business model that focuses on mass markets doesn’t group its customers into segments. Instead, it focuses on the general population or a large group of people with similar needs. For example, a product like a phone.
- Niche market: Here the focus is centered on a specific group of people with unique needs and traits. Here the value propositions, distribution channels, and customer relationships should be customized to meet their specific requirements. An example would be buyers of sports shoes.
- Segmented: Based on slightly different needs, there could be different groups within the main customer segment. Accordingly, you can create different value propositions, distribution channels, etc. to meet the different needs of these segments.
- Diversified: A diversified market segment includes customers with very different needs.
- Multi-sided markets: this includes interdependent customer segments. For example, a credit card company caters to both their credit card holders as well as merchants who accept those cards.
Use STP Model templates for segmenting your market and developing ideal marketing campaigns
Visualize, assess, and update your business model. Collaborate on brainstorming with your team on your next business model innovation.
In this section, you need to establish the type of relationship you will have with each of your customer segments or how you will interact with them throughout their journey with your company.
There are several types of customer relationships
- Personal assistance: you interact with the customer in person or by email, through phone call or other means.
- Dedicated personal assistance: you assign a dedicated customer representative to an individual customer.
- Self-service: here you maintain no relationship with the customer, but provides what the customer needs to help themselves.
- Automated services: this includes automated processes or machinery that helps customers perform services themselves.
- Communities: these include online communities where customers can help each other solve their own problems with regard to the product or service.
- Co-creation: here the company allows the customer to get involved in the designing or development of the product. For example, YouTube has given its users the opportunity to create content for its audience.
You can understand the kind of relationship your customer has with your company through a customer journey map . It will help you identify the different stages your customers go through when interacting with your company. And it will help you make sense of how to acquire, retain and grow your customers.
This block is to describe how your company will communicate with and reach out to your customers. Channels are the touchpoints that let your customers connect with your company.
Channels play a role in raising awareness of your product or service among customers and delivering your value propositions to them. Channels can also be used to allow customers the avenue to buy products or services and offer post-purchase support.
There are two types of channels
- Owned channels: company website, social media sites, in-house sales, etc.
- Partner channels: partner-owned websites, wholesale distribution, retail, etc.
Revenues streams are the sources from which a company generates money by selling their product or service to the customers. And in this block, you should describe how you will earn revenue from your value propositions.
A revenue stream can belong to one of the following revenue models,
- Transaction-based revenue: made from customers who make a one-time payment
- Recurring revenue: made from ongoing payments for continuing services or post-sale services
There are several ways you can generate revenue from
- Asset sales: by selling the rights of ownership for a product to a buyer
- Usage fee: by charging the customer for the use of its product or service
- Subscription fee: by charging the customer for using its product regularly and consistently
- Lending/ leasing/ renting: the customer pays to get exclusive rights to use an asset for a fixed period of time
- Licensing: customer pays to get permission to use the company’s intellectual property
- Brokerage fees: revenue generated by acting as an intermediary between two or more parties
- Advertising: by charging the customer to advertise a product, service or brand using company platforms
What are the activities/ tasks that need to be completed to fulfill your business purpose? In this section, you should list down all the key activities you need to do to make your business model work.
These key activities should focus on fulfilling its value proposition, reaching customer segments and maintaining customer relationships, and generating revenue.
There are 3 categories of key activities;
- Production: designing, manufacturing and delivering a product in significant quantities and/ or of superior quality.
- Problem-solving: finding new solutions to individual problems faced by customers.
- Platform/ network: Creating and maintaining platforms. For example, Microsoft provides a reliable operating system to support third-party software products.
This is where you list down which key resources or the main inputs you need to carry out your key activities in order to create your value proposition.
There are several types of key resources and they are
- Human (employees)
- Financial (cash, lines of credit, etc.)
- Intellectual (brand, patents, IP, copyright)
- Physical (equipment, inventory, buildings)
Key partners are the external companies or suppliers that will help you carry out your key activities. These partnerships are forged in oder to reduce risks and acquire resources.
Types of partnerships are
- Strategic alliance: partnership between non-competitors
- Coopetition: strategic partnership between partners
- Joint ventures: partners developing a new business
- Buyer-supplier relationships: ensure reliable supplies
In this block, you identify all the costs associated with operating your business model.
You’ll need to focus on evaluating the cost of creating and delivering your value propositions, creating revenue streams, and maintaining customer relationships. And this will be easier to do so once you have defined your key resources, activities, and partners.
Businesses can either be cost-driven (focuses on minimizing costs whenever possible) and value-driven (focuses on providing maximum value to the customer).
This is the building block that is at the heart of the business model canvas. And it represents your unique solution (product or service) for a problem faced by a customer segment, or that creates value for the customer segment.
A value proposition should be unique or should be different from that of your competitors. If you are offering a new product, it should be innovative and disruptive. And if you are offering a product that already exists in the market, it should stand out with new features and attributes.
Value propositions can be either quantitative (price and speed of service) or qualitative (customer experience or design).
What to Avoid When Creating a Business Model Canvas
One thing to remember when creating a business model canvas is that it is a concise and focused document. It is designed to capture key elements of a business model and, as such, should not include detailed information. Some of the items to avoid include,
- Detailed financial projections such as revenue forecasts, cost breakdowns, and financial ratios. Revenue streams and cost structure should be represented at a high level, providing an overview rather than detailed projections.
- Detailed operational processes such as standard operating procedures of a business. The BMC focuses on the strategic and conceptual aspects.
- Comprehensive marketing or sales strategies. The business model canvas does not provide space for comprehensive marketing or sales strategies. These should be included in marketing or sales plans, which allow you to expand into more details.
- Legal or regulatory details such as intellectual property, licensing agreements, or compliance requirements. As these require more detailed and specialized attention, they are better suited to be addressed in separate legal or regulatory documents.
- Long-term strategic goals or vision statements. While the canvas helps to align the business model with the overall strategy, it should focus on the immediate and tangible aspects.
- Irrelevant or unnecessary information that does not directly relate to the business model. Including extra or unnecessary information can clutter the BMC and make it less effective in communicating the core elements.
What Are Your Thoughts on the Business Model Canvas?
Once you have completed your business model canvas, you can share it with your organization and stakeholders and get their feedback as well. The business model canvas is a living document, therefore after completing it you need to revisit and ensure that it is relevant, updated and accurate.
What best practices do you follow when creating a business model canvas? Do share your tips with us in the comments section below.
Join over thousands of organizations that use Creately to brainstorm, plan, analyze, and execute their projects successfully.
FAQs About the Business Model Canvas
- Use clear and concise language
- Use visual-aids
- Customize for your audience
- Highlight key insights
- Be open to feedback and discussion
More Related Articles
Amanda Athuraliya is the communication specialist/content writer at Creately, online diagramming and collaboration tool. She is an avid reader, a budding writer and a passionate researcher who loves to write about all kinds of topics.
- SUGGESTED TOPICS
- The Magazine
- Managing Yourself
- Managing Teams
- Work-life Balance
- The Big Idea
- Data & Visuals
- Reading Lists
- Case Selections
- HBR Learning
- Topic Feeds
- Account Settings
- Email Preferences
How to Design a Winning Business Model
- Ramon Casadesus-Masanell
- Joan E. Ricart
Smart companies’ business models generate cycles that, over time, make them operate more effectively.
Most executives believe that competing through business models is critical for success, but few have come to grips with how best to do so. One common mistake, the authors’ studies show, is enterprises’ unwavering focus on creating innovative models and evaluating their efficacy in standalone fashion—just as engineers test new technologies or products. However, the success or failure of a company’s business model depends largely on how it interacts with those of the other players in the industry. (Almost any business model will perform brilliantly if a company is lucky enough to be the only one in a market.) Because companies build them without thinking about the competition, companies routinely deploy doomed business models.
Moreover, many companies ignore the dynamic elements of business models and fail to realize that they can design business models to generate winner-take-all effects similar to the network externalities that high-tech companies such as Microsoft, eBay, and Facebook often create. A good business model creates virtuous cycles that, over time, result in competitive advantage.
Smart companies know how to strengthen their virtuous cycles, undermine those of rivals, and even use them to turn competitors’ strengths into weaknesses.
The Idea in Brief
There has never been as much interest in business models as there is today; seven out of 10 companies are trying to create innovative business models, and 98% are modifying existing ones, according to a recent survey.
However, most companies still create and evaluate business models in isolation, without considering the implications of how they will interact with rivals’ business models. This narrow view dooms many to failure.
Moreover, companies often don’t realize that business models can be designed so that they generate virtuous cycles—similar to the powerful effects high-tech firms such as Facebook, eBay, and Microsoft enjoy. These cycles, when aligned with company goals, reinforce competitive advantage.
By making the right choices, companies can strengthen their business models’ virtuous cycles, weaken those of rivals, and even use the cycles to turn competitors into complementary players.
This is neither strategy nor tactics; it’s using business models to gain competitive advantage. Indeed, companies fare poorly partly because they don’t recognize the differences between strategy, tactics, and business models.
Strategy has been the primary building block of competitiveness over the past three decades, but in the future, the quest for sustainable advantage may well begin with the business model. While the convergence of information and communication technologies in the 1990s resulted in a short-lived fascination with business models, forces such as deregulation, technological change, globalization, and sustainability have rekindled interest in the concept today. Since 2006, the IBM Institute for Business Value’s biannual Global CEO Study has reported that senior executives across industries regard developing innovative business models as a major priority. A 2009 follow-up study reveals that seven out of 10 companies are engaging in business-model innovation, and an incredible 98% are modifying their business models to some extent. Business model innovation is undoubtedly here to stay.
- RC Ramon Casadesus-Masanell is a professor at Harvard Business School and the author, with Joan E. Ricart, of “How to Design a Winning Business Model” (HBR January–February 2011).
- JR Joan E. Ricart ( [email protected] ) is the Carl Schroder Professor of Strategic Management and Economics at IESE Business School in Barcelona.
- Learning Center
Business Model Canvas
What is the business model canvas.
A business model canvas provides a high-level, comprehensive view of the various strategic details required to successfully bring a product to market. The typical use case for this tool is to outline the fundamental building blocks of a business, but it can be used effectively for individual products as well. The exact ingredients may vary, but these are some of the typical components included:
- Customer segments —Who is going to use this product?
- Product value propositions —What is this going to do for the customer to make their life/job better?
- Revenue streams —How will the company make money from this product?
- Channels —How will the product be sold or distributed?
- Customer relationships —What is the success and support strategy for new customers?
- Key partners —What other companies or individuals are part of the development and go-to-market strategy?
- Key activities —What must happen internally to release this product?
- Key resources —What people, materials and budget are required to pull this off?
- Cost structure —How much will it cost to develop, manufacture, distribute, and support the product?
Asking and answering these questions should be de rigueur for any new product, but this particular framework is useful for distilling the supporting business case down into something easily digestible. By forcing everything to be on a single page, each question must be answered succinctly, which often cuts through any grandstanding to illustrate whether each area is truly addressed and viable.
How do product managers use the business model canvas?
The business model canvas serves two primary purposes for product managers : focusing their thinking during its creation along with expediting and framing the conversation when communicating with others.
Because the business model canvas is a comprehensive summary of what the product will do, who will use it, why they’ll use it, how it will happen, and how the money works, it requires a lot of thinking and homework to put it together. This exercise is very helpful for product managers to fully understand the market opportunity and refine their story while uncovering potential problem areas and fully vetting their impact. Plus the process of boiling everything down to a single page ensures that what is included is as truthful and well supported as possible.
The business model canvas can serve as a continually referenceable touchstone for the product development process and beyond, essentially serving as a mission statement for the product. As conditions on the ground change and more is learned about the product’s market reception and usage, the canvas can be updated to accurately reflect the latest information; reviewing the canvas periodically is a worthy activity in and of itself.
As a communication tool, the business model canvas is an ideal document for our short attention span world and is as useful with the executive team as it is with a junior developer. Since it only contains the most salient and relevant information, the audience won’t be drowning in details or distracted by supporting evidence or non-sequiturs. The canvas can also create a universal vocabulary for the product and get everyone using the same language and concepts going forward.
Tips for using the business model canvas
Here is how to make the most of the business model canvas and the process of creating and maintaining it:
- Note assumptions and challenge them —Since a business model canvas is developed while a product is still “theoretical” there is often a lack of actual facts to rely on. Instead, educated guesses, informed opinions and assumptions are utilized to build it out. While there’s often no escaping these, anything in the canvas that is an assumption versus a proven fact should be called out, with every effort made to both challenge the assumption and anticipate the impact if the assumption turns out to be incorrect.
- Bounce it off a virgin audience —Fellow employees and even board members will approach a business model canvas with a trunkload of inherent biases. To truly test the veracity and completeness of a canvas, allow some outside parties to validate it independently. It should be a self-explanatory document, so allowing them to review it and provide feedback without any dialogue or explanations is a great test of its worthiness and thoroughness.
- It’s easy to update, so keep it current —Unlike longer, weightier documents, the single-page nature of the business model canvas means there’s no excuse for it to languish and fall behind the business’s current line of thinking or newly gathered information. Reviewing it on a regular basis and maintaining its accuracy enhances its usefulness and is a helpful process to note when assumptions or plans have changed.
- An ever-present reminder —Thoughts, plans, goals, and assumptions were laid out succinctly in the canvas with great care and deliberation. Going forward the canvas can be continually referred to for guidance, inspiration, and level setting as folks become swept up in the momentum of product development, sales, and marketing.
- Present it in pieces —Sure, the entire business model canvas fits on one piece of paper, but there is a lot of things on that 8 ½ x 11 inch page. When presenting it, discuss each piece individually, gradually revealing the entire contents. This will prevent information overload and allow the team to convey things narratively instead of an information dump.
- Reference all the evidence —Any hard data should be clearly referenced (if not included) in the canvas to give the arguments and statements as much legitimacy as possible. Reviewers will be trying to poke holes (as they should), so firm things up whenever there’s a chance.
- Be specific —No one needs a business model canvas to understand fundamental business case elements; it is intended to tell the story and rationale for this particular product. Cut out anything generic and make it as relevant to this exact opportunity as possible. In particular, link individual customer segments with their respective value propositions, since a product won’t be all things to all people.
- Create multiple canvases —During the early phases, generating more than one business model canvas based on divergent assumptions, target markets, or value propositions can be a useful tool for exploring different directions the product could head. After the plans are firmed up, multiple canvases can still be employed, this time to see how different scenarios pan out when key factors change… it can be used as a wargaming tool to prepare for different potential outcomes.
- Who, what, and why first. How and how much second —Although a business model canvas includes everything from a value proposition and personas to implementation costs and resources, everything should be driven from the market opportunity and rationale for bringing a product to market. If those aren’t solid, spending cycles on technology and costs is a waste of time.
Creating a business model canvas puts new product ideas under the microscope and pulls together disparate sources of intelligence, opinions, hunches and research into a single piece of paper. It forces critical thinking and analysis of assumptions and guesses and provides an excellent reference point for the entire organization.
Once the canvas is approved and productization begins, the canvas can also serve as a straw man for the product roadmap, lining up future features and functionality based on the priorities laid out in the document to achieve market success.
Try ProductPlan free for 14 days
Share on mastodon.
Business models: the toolkit to design a disruptive company
In today's fast-paced business world, having a solid understanding of business models is essential for creating a successful and disruptive company. In this deep dive article, we will explore the toolkit to design a disruptive company through the lens of the Business Model Canvas.
1. What is a business model?
A business model describes the rationale of how an organization creates, delivers and captures value. It can be described through 9 building blocks: Customer Segments, Value Propositions, Channels, Customer Relationships, Revenue Streams, Key Resources, Key Activities, Key Partnerships & Cost Structure.
Business Model History
Where did the term even come from?
The search to define what a business model is goes as far back as 1994, when Peter Drucker introduced the theory of the business was a set of assumptions about what a business will and won’t do in an article for the Harvard Business Review. He speaks about how companies fail to keep up with changing market conditions, as well as their duty to identify customers and competitors, their values and behaviour. Now considering that we've had businesses for over hundreds of years - it's pretty remarkable we only just came up with the term 'business model' a few decades ago!
In the middle of the 2002 dot com crisis, Joan Magretta built on Drucker’s business definition to exclaim that business models are “at heart, stories. Stories that explain how enterprises work. A good business model answers Peter Drucker’s age-old questions: ‘Who is the customer? And what does the customer value?'
The shift from a business plan to business model goes hand-in-hand with the rise of personal computers and the use of spreadsheets. Entrepreneurs used to plan their businesses year by year, quarter by quarter, and write it down in a document almost like a book who’s copy is final. The change occurred hand in hand alongside the introduction of powerful new technology such as Microsoft Excel, enabling people to model them digitally and more accurately. Being able to calculate your entire profit and loss for a business was now available to you on a single Microsoft Excel page. This now meant businesses could be modelled before they were actually launched. Products or services could be done ahead of time in terms of calculating the business' recurring revenue, profit, marketing costs, advertising spend etc. in order to model the framework of the business.
This change in approach prompted the likes of Alexander Osterwalder and Yves Pigneur to invent the Business Model Canvas in 2005, the first ever visual business tool of its kind. Long gone are the days of having to come up with a long & highly unrealistic business plan, trying to predict what product or service you'll be selling at the company five years from now!
What is the Business Model Canvas (BMC) ?
The Business Model Canvas is a strategic management and lean startup template for developing new or documenting existing business models. It is a visual tool with elements describing a company’s value proposition, infrastructure, customers and finances. It provides an organized way to lay out your assumptions about not only the key resources and key activities of your value chain, but also your value proposition, customer relationships, channels, customer segments, cost structures, and revenue streams.
It assists companies in aligning their activities by illustrating potential trade-offs by comparing them to one another and being able to see the bigger picture of their overall business framework. It's essentially taken Peter Drucker's hypothetical concept of a business 'model' and turned it into something much more tangible, that we can now see visually and use as a tool to consider all the different aspects of a single business model.
The Business Model Canvas explained in a short 2-minute video:
Why use the Business Model Canvas?
Create a shared language
This concept can become a shared language that allows you to easily describe and manipulate business models to create new strategic alternatives. Without such a shared language it is difficult to systematically challenge assumptions about one’s business and innovate successfully.
Simple, visual and practical
The canvas is perfect for any good discussion, meeting, or workshop on business model innovation and creates a shared language. We need a concept that everybody understands: one that facilitates description and discussion. We need to start from the same point and talk about the same thing. The challenge is that the concept must be simple, relevant, and intuitively understandable, while not oversimplifying the complexities of how enterprises function.
By going through the process of listing the different parts of your business on the canvas, you begin to visualise and understand the different relationships between the nine building blocks that make up the tool.
Whether you’re using sticky notes on a real life Business Model Canvas or you’re designing your business model on the Strategyzer app , you can iterate on your designs very quickly. The tool enables you to prototype a first version and simply keep iterating until you’ve tested enough ideas to find product-market fit.
Read more: 14 Ways to Apply the Business Model Canvas
2. The 9 building blocks of The Business Model Canvas
We believe a business model can best be described through nine basic building blocks that show the logic of how a company intends to deliver value and make money. The nine blocks cover the three main areas of a business: desirability, viability and feasibility. The business model is like a blueprint for a strategy to be implemented through organizational structures, processes, and systems. Let’s take a look into the three different sections:
The Value Proposition's Building Block describes the bundle of products and services that create value for a specific Customer Segment The Value Proposition is the reason why customers turn to one company over another. It solves a customer problem or satisfies a customer need.
Each Value Proposition consists of a selected bundle of products and/or services that caters to the requirements of a specific Customer Segment. In this sense, the Value Proposition is an aggregation, or bundle, of benefits that a company offers customers. Some Value Propositions may be innovative and represent a new or disruptive offer. Others may be similar to existing market offers, but with added features and attributes
The Customer Segments Building Block defines the different groups of people or organizations an enterprise aims to reach and serve Customers are the heart of any business model. Without (profitable) customers, no company can survive for long. In order to better satisfy customers, a company may group them into distinct segments with common needs, common behaviors, or other attributes. A business model may define one or several large or small Customer Segments. An organization must make a conscious decision about which segments to serve and which segments to ignore. Once this decision is made, a business model can be carefully designed around a strong understanding of specific customer needs.
The Channels Building Block describes how a company communicates with and reaches its Customer Segments.
Channels are customer touch points that play an important role in the customer experience. Channels serve several functions, including:
- Raising awareness among customers about a company’s products and services
- Helping customers evaluate a company’s Value Proposition
- Allowing customers to purchase specific products and services
- Delivering a Value Proposition to customers
- Providing post-purchase customer support
The Customer Relationships Building Block describes the types of relationships a company establishes with specific Customer Segments. A company should clarify the type of relationship it wants to establish with each Customer Segment. Relationships can range from personal to automated. Customer relationships may be driven by the following motivations:
- Customer acquisition
- Customer retention
- Boosting sales (up-selling)
The Revenue Streams Building Block represents the cash a company generates from each Customer Segment (costs must be subtracted from revenues to create earnings).
If customers is the heart of a business model, Revenue Streams are its arteries. A company must ask itself, For what value is each Customer Segment truly willing to pay? Successfully answering that question allows the firm to generate one or more Revenue Streams from each Customer Segment. Each Revenue Stream may have different pricing mechanisms, such as fixed list prices, bargaining, auctioning, market dependent, volume dependent, or yield management.
A business model can involve two different types of Revenue Streams:
- Transaction revenues resulting from one-time customer payments
- Recurring revenues resulting from ongoing payments to either deliver a Value Proposition to customers or provide post-purchase customer support
The Cost Structure describes all costs incurred to operate a business model. This building block describes the most important costs incurred while operating under a particular business model.
Creating and delivering value, maintaining Customer Relationships, and generating revenue all incur costs. Such costs can be calculated relatively easily after defining Key Resources, Key Activities, and Key Partnerships. Some are more cost-driven than others. So-called “no frills” airlines, for instance, have built business models entirely around low cost structures
The Key Resources Building Block describes the most important assets required to make a business model work Every business model requires Key Resources. These resources allow an enterprise to create and offer a Value Proposition, reach markets, maintain relationships with Customer Segments, and earn revenues.
Different Key Resources are needed depending on the type of business you are building. A microchip manufacturer requires capital-intensive production facilities, whereas a microchip designer focuses more on human resources. Key resources can be physical, financial, intellectual, or human. Key resources can be owned or leased by the company or acquired from key partners.
The Key Activities Building Block describes the most important things a company must do to make its business model work. Every model calls for a number of Key Activities. These are the most important actions a company must take to operate successfully. Like Key Resources, they are required to create and offer a Value Proposition, reach markets, maintain Customer Relationships, and earn revenues. And like Key Resources, Key Activities differ depending on business model type. For software maker Microsoft, Key Activities include software development. For PC manufacturer Dell, Key Activities include supply chain management. For consultancy McKinsey, Key Activities include problem solving.
The Key Partnerships Building Block describes the network of suppliers and partners that make the business model work. Companies forge partnerships for many reasons, and partnerships are becoming a cornerstone of many business models. Companies create alliances to optimize, reduce risk, or acquire resources. We can distinguish between four different types of partnerships:
- Strategic alliances between non-competitors
- Coopetition: strategic partnerships between competitors
- Joint ventures to develop new businesses
- Buyer-supplier relationships to assure reliable supplies
3. Types of business models
In 2009, Amazon expands from platform to sales by launching Amazon private labels. It copies third-party sellers who created successful businesses by sourcing products absent from Amazon’s platform. Amazon sees this as an opportunity to create its own line of products.
In 1999 Amazon launched its third-party seller marketplace and established itself as an incredibly successful e-commerce platform for other retailers. In 2007 Amazon began to use its platform to sell its own electronic devices (Kindle e-reader) and expanded to private label products under the AmazonBasics brand. While many companies aim to shift from sales to platform, Amazon executed are verse shift from platform to sales. With its private label business Amazon started to compete with third-party suppliers who are also customers of its e-commerce business. Amazon continuously expanded its private label product catalog with a wide selection (from electronics to clothing and everyday accessories) and lower prices.
The term “freemium” was coined by Jarid Lukin and popularized by venture capitalist Fred Wilson on his blog. It stands for business models, mainly Web-based, that blend free basic services with paid premium services. The freemium model is characterized by a large user base benefiting from a free, no-strings-attached offer. Most of these users never become paying customers; only a small portion, usually less than 10 percent of all users, subscribe to the paid premium services. This small base of paying users subsidizes the free users. This is possible because of the low marginal cost of serving additional free users.
In a freemium model, the key metrics to watch are:
(1) the average cost of serving a free user
(2) the rates at which free users convert to premium (paying) customers
Flickr, the popular photo-sharing Web site acquired by Yahoo! in 2005, provides a good example of a freemium business model. Flickr users can subscribe for free to a basic account that enables them to upload and share images. The free service has certain constraints, such as limited storage space and a maximum number of uploads per month. For a small annual fee users can purchase a “pro” account and enjoy unlimited uploads and storage space, plus additional features.
Multi-sided platforms, known by economists as multi sided markets, are an important business phenomenon. They have existed for a long time, but proliferated with the rise of information technology. The Visa credit card, the Microsoft Windows operating system, the FinancialTimes, Google, the Wii game console, and Facebook are just a few examples of successful multi-sided platforms. We address them here because they represent an increasingly important business model pattern.
What exactly are multi-sided platforms? They are platforms that bring together two or more distinct but interdependent groups of customers. They create value as intermediaries by connecting these groups. Credit cards, for example, link merchants with cardholders; computer operating systems link hardware manufacturers, application developers, and users; newspapers link readers and advertisers; video gaming consoles link game developers with players.
The key is that the platform must attract and serve all groups simultaneously in order to create value. The platform’s value for a particular user group depends substantially on the number of users on the platform’s “other sides.” A video game console will only attract buyers if enough games are available for the platform. On the other hand, game developers will develop games for a new video console only if a substantial number of gamers already use it. Hence multi-sided platforms often face a “chicken and egg” dilemma.
One way multi-sided platforms solve this problem is by subsidizing a Customer Segment. Though a platform operator incurs costs by serving all customer groups, it often decides to lure one segment to the platform with an inexpensive or free Value Proposition in order to subsequently attract users of the platform’s “other side.” One difficulty multi-sided platform operators face is understanding which side to subsidize and how to price correctly to attract customers.
Multi-sided platforms bring together two or more distinct but interdependent groups of customers. Such platforms are of value to one group of customers only if the other groups of customers are also present. The platform creates value by facilitating interactions between the different groups. A multi-sided platform grows in value to the extent that it attracts more users, a phenomenon known as the network effects.
Let’s take a look into Google ’s multi-sided business model.
As a multi-sided platform Google has a very distinct revenue model. It makes money from one Customer Segment, advertisers, while subsidizing free offers to two other segments: Web surfers and content owners. This is logical because the more ads it displays to Web surfers, the more it earns from advertisers. Increased advertising earnings, in turn, motivates even more content owners to become AdSense partners. Advertisers don’t directly buy advertising space from Google. They bid on ad-related keywords associated with either search terms or content on third party Web sites. The bidding occurs through an AdWords auction service: the more popular a keyword, the more an advertiser has to pay for it. The substantial revenue that Google earns from AdWords allows it to continuously improve its free offers to search engine and AdSense users.
Google’s Key Resource is its search platform, which powers three different services: Web search (Google.com), advertising (AdWords), and third-party content monetization (AdSense). These services are based on highly complex proprietary search and match making algorithms supported by an extensive IT infrastructure.
Google’s three Key Activities can be defined as follows:
1. Building and maintaining the search infrastructure.
2. Managing the three main services.
3. Promoting the platform to new users, content owners, and advertisers.
More platform business model examples: Visa, Google, eBay, Microsoft Windows, Financial Times
In 1999 Salesforce.com disrupts the customer relationship management (CRM) arena by offering CRM-as-a service over the Internet. Salesforce unlocks a new market and continuously strengthens its business model with new innovations.
Salesforce.com was founded in 1999 with the goal of “making enterprise software as easy to use as a website like amazon.com.” Salesforce pioneered the software as-a-service (Saas) for customer relationship management tools. The company didn’t stop there and has constantly improved its services and business model. We distinguish between two, non-exhaustive phases: the early business model in 1999 and extensions starting in 2005.
In 2006, Spotify launches a free online music service to compete against freely available, pirated music. Its main revenue source comes from users upgrading to a premium subscription.
Spotify is a music streaming platform that gives users access to a large catalog of music. It uses a freemium revenue model that offers a basic, limited, ad-supported service for free and an unlimited premium service for a subscription fee.
Spotify relies heavily on its music algorithms and its community of users and artists to keep its premium experience delightful. Its premium subscriber base has grown from 10% of total users in 2011 to 46% in 2018.
From the start Spotify saw itself as a legal alternative to pirated music and paid song purchases on iTunes. Spotify pays a significant portion of its revenue in the form of royalties to music labels. It has paid close to $10 billion in royalties since its launch in 2006.
The company accelerated the shift from music downloads to streaming and disrupted Apple iTunes in the process. For the first time in company history, Spotify made a profit in 2019.
4. What is business model innovation?
Business model innovation describes the innovative processes and rationale of how an business creates, delivers and captures value as opposed to how to create a new product or service. It's about fundamentally rethinking your business around a clear, new customer need, and then realigning your key resources, processes and profit formula with this new value proposition.
It’s not easy approach to take when making decisions as it pushes people out of their comfort zones. But the results can be dramatic, providing a real competitive business advantage - and we're seeing this sort of disruption a lot more often. Internet technology giants such as Amazon as world-class at demonstrating this kind of business acumen, where the founder Jeff Bezos even describes his company as 'the best place to fail in the world', referring to his company's approach to coming up with new business ideas.
Take Amazon Web Services for example: A project grew out of the company's need to improve their own tech stack performance. The American company went on to create Amazon Web Services to offers customers reliable, scalable, and inexpensive cloud computing services, paying only for what they used. Within 5-years would go on to totally dominate the cloud computing market and make Amazon over $10bn.
Read the case study we put together for Amazon Marketplace, using the business model portfolio to tell the story of how they validated their business idea: Patience is a Virtue: An Amazon Case Study in Three Parts . Otherwise you can read about the differences between organizations such as Amazon and Nestle .
4. Business Model Patterns
In the following section we outline a pattern library that is split into two categories of patterns: invent patterns to enhance new ventures and shift patterns to substantially improve an established, but deteriorating business model to make it more competitive.
Codify aspects of a superior business model. Each pattern helps you think through how to compete on a superior business model, beyond the traditional means of competition based on technology, product, service, or price. The best business models incorporate several patterns to outcompete others.
Codify the shift from one type of business model to another. Each pattern helps you think through how you could substantially improve your current business model by shifting it from a less competitive one to a more competitive one.
Applying Business Model Patterns
Understand patterns to better perform the following business model activities:
Design and assess
Use patterns to design better business models around market opportunities, technology innovations, or new products and services. Use them to assess the competitiveness of an existing one.
Disrupt and transform
Use patterns as an inspiration to transform your market. In the following section, we provide a library of companies that disrupted entire industries. They were the first to introduce new business model patterns in their arena.
Question and improve
Use patterns to ask better business model questions, beyond the traditional product, service, pricing, and market-related questions. Regardless, whether you are a senior leader, innovation lead, entrepreneur, investor, or faculty, you can help develop superior business models based on better questions.
Market explorers: unlock markets.
Develop innovative value propositions that create, unleash, or unlock completely new, untapped, or underserved markets with large potential.
Be a pioneer and unearth new revenue potential through market exploration.
Channel Kings: Access customers
Radically change how to reach and acquire a large number of customers. Pioneer innovative new channels that haven’t been used in your industry before.
Gravity Creators: Lock in customers
Make it difficult for customers to leave or switch to competitors. Create switching costs where previously there were none and turn transactional industries into ones with long term relationships.
A great product isn’t enough to bring a flock of customers to your door. You must design a superior business model to attract and retain customers into your ecosystem. Switching costs have enabled industry leaders such as Adobe, Salesforce, Microsoft or Rolls Royce to lock customers in and outcompete other players.
Resource castles: build moats.
Build a competitive advantage with key resources that are difficult or impossible for competitors to copy.
Activity Differentiators: Better configure activities
Radically change which activities they perform and how they combine them to create and deliver value to customers.Create innovative value propositions based on activity differentiation.
Scalers: Grow faster
Find radically new ways to scale where others stay stuck in conventional non-scalable business models.
Revenue differentiators: boost revenues.
Find innovative ways to capture value, unlock previously unprofitable markets, and/or substantially increase revenues.
Recurring Revenue – Generate recurring revenues from one-time sales. Advantages include compound revenue growth (new revenues stack up on top of existing revenues), lower cost of sales (sell once and earn recurrently), and predictability.
Bait & Hook – Lock customers in with a base product (the bait) in order to generate recurring revenues from a consumable (the hook) that customers need recurrently to benefit from the base product.
Freemium Providers – Offer basic products and services free of charge and premium services and advanced product features for a fee. The best freemium models acquire a large customer base and excel in converting a substantial percentage to paid users.
Subsidizers – Offer the full value proposition for free or cheaply by subsidizing it through a strong alternative revenue stream. This differs from freemium, which only gives free access to a basic version of products and services.
Cost Differentiators: Kill costs
Build a business model with a game-changing cost structure, not just by streamlining activities and resources, but by doing things in disruptive new ways.
Resource Dodgers – Eliminate the most costly and capital-intensive resources from your business model to create a game-changing cost structure. (Examples: Airbnb, Uber, Bharti Airtel)
Technologists – Use technology in radically new ways to create a game-changing cost structure. (Examples: WhatsApp, Skype)
Low Cost – Combine activities, resources, and partners in radically new ways to create a game-changing cost structure with disruptively low prices. (Examples: EasyJet, Ryanair, Trader Joe’s)
Margin Masters: Boost margins
Achieve significantly higher margins than competitors by focusing on what customers are willing to pay for most, while keeping your cost structure in check. Prioritize profitability over market share.
Contrarians – Significantly reduce costs and increase value at the same time. Eliminate the most costly resources, activities, and partners from your business model, even if that means limiting the value proposition. Compensate by focusing on features in the value proposition that a well-defined customer segment loves and is willing to pay for, but which are relatively cheap to provide. (Examples: CitizenM, Cirque de Soleil, Nintendo Wii)
High Enders – Create products and services at the high end of the market spectrum for a broad range of high-end customers. Use these to maximize margins and avoid the small size and extreme cost structure of a luxury niche. (Example: iPhone )
5. Business model examples
Below are 4 examples of business models. See our searchable business model examples catalog for dozens of business models analyzed using the business model canvas.
Tesla was founded in 2003 with the goal of commercializing electric vehicles, starting with luxury sports cars and then moving onto affordable, mass market vehicles. In 2008, Tesla began selling its Roadster. Its first breakthrough was in 2012 when it launched the Model S.
Tesla’s first “affordable” car, the Model 3, was announced in 2015 and produced in 2017. Prior to Tesla, the market for electric vehicles was relatively insignificant and was served by utilitarian and unremarkable models. Tesla was the first car manufacturer to view the market for electric vehicles differently: Tesla saw a significant opportunity by focusing on performance and the high end of the market.
Learn more about Tesla’s business model by downloading your free copy of the 100-page preview of our bestselling book: The Invincible Company.
IKEA, the popular furniture company, also relies on customers as their free workforce but in a different way. Hundreds of thousands of IKEA customers assemble their bookshelves, tables, and other furniture at home after buying big boxes at big stores.
This was unthinkable before IKEA made it popular, because people used to expect furniture manufacturers to perform the assembly task. There’s a reason why customers are willing to do the work and it's because IKEA’s business model of boxed furniture offers a larger choice, immediate delivery, and all at a lower cost.
Read more about how Facebook, IKEA, WhatsApp, and Uber's business model make billions .
Dollar Shave Club
Dollar Shave Club (“DSC”) disrupted the market for shaving products by selling directly to consumers through its online store. Because they cut out the middleman (retail), they can pass on savings to customers. DSC makes up for the lack of established brand and distribution reach by harnessing the power of viral videos and internet marketing.
Could you access your customers in an unprecedented and scalable way? How could you cut out the middleman and create direct access to your end-customers?
Apple is one of the leading smartphone manufacturers in the world. But their product doesn’t do it all; in fact, you could argue that there are better smartphones out there. But Apple’s business model has moats that make it extremely difficult for others to overthrow them.
For example Apple’s app store connects its millions of iOS users with countless software developers that supply hundreds of thousands of apps searching for an audience. It's this ecosystem that's hard to copy, not the technology. Even with the best technology it is very hard to gain market share. Only Google with its Android operating system has managed to create a competing ecosystem.
Other interesting business models: AirBnb , ARM , citizenM , Dell , Didi , Dyson , Fortnite , M-Pesa , Microsoft Windows , Patagonia , Spotify , Tupperware , Waze , Whatsapp , Zara .
6. Business model tools and resources
- Business Model Canvas template
- The Portfolio Map template
- Business Model Generation masterclass
- Business Model Generation book
- Value Proposition Design book
- Testing Business Ideas book
- The Invincible Company book
- Business Model Generation Masterclass
- Testing Business Ideas by David Bland & Alexander Osterwalder
- The Invincible Company: Manage a portfolio of innovation
About the speakers
Download your free copy of this whitepaper now, explore other examples.
Get Strategyzer updates straight in your inbox
What is Business Model Innovation? Definition, Framework, Examples and Best Practices
By Nick Jain
Published on: July 13, 2023
Table of Contents
What is Business Model Innovation?
Business model innovation framework: key components, 12 key examples of business model innovation, top 10 best practices for business model innovation.
Business model innovation is defined as the process of creating, modifying, or defining the fundamental structure and components of a business model to create new value propositions, capture new market opportunities, and gain a competitive advantage. It involves developing innovative ways to generate revenue, deliver products or services, and create and capture customer value.
Traditional business models typically consist of various elements such as target customer segments, value propositions, distribution channels, revenue streams, key activities, resources, and cost structure. Business model innovation challenges existing assumptions, norms, and industry practices to explore new avenues for growth and profitability.
Business Model Innovation Forms:
Business model innovation is essential in today’s dynamic and rapidly changing business environment. It enables companies to adapt, stay relevant, and seize new opportunities, particularly in the face of digital innovation , disruptive technologies, and evolving customer expectations. Successful business model innovation can lead to improved competitiveness, increased market share, higher profitability, and sustainable growth.
- New Revenue Models: Introducing novel ways of generating revenue, such as subscription-based models, freemium models, licensing, or pay-per-use.
- Value Proposition Innovation: Developing innovative products, services, or features that offer unique benefits to customers and differentiate the business from competitors.
- Cost Structure Innovation: Identifying cost-saving opportunities, optimizing resource allocation, or leveraging technology innovation to reduce costs and improve profitability.
- Distribution Channel Innovation: Finding new channels or leveraging existing ones in innovative ways to reach customers more effectively and efficiently.
- Platform and Ecosystem Innovation: Building platforms or ecosystems that connect different stakeholders and create value through network effects and collaborations.
- Business Model Reinvention: Completely reimagining the business model to adapt to changing market conditions, emerging trends, or disruptive innovation .
Importance of Business Model Innovation
Business model innovation is crucial for companies to remain competitive, respond to market changes, and create sustainable growth. It enables companies to deliver enhanced value to customers, optimize operations, and seize new opportunities, ultimately driving long-term success in a rapidly evolving business landscape. Business model innovation is significantly important for businesses due to the following reasons:
1. Competitive Advantage
Business model innovation allows companies to differentiate themselves from competitors by offering unique value propositions, exploring untapped market segments, or leveraging emerging technology innovation . It enables businesses to gain a competitive edge and stay ahead in the market.
2. Adaptation to Changing Environment
Business environments are subject to constant change, driven by technological advancements, evolving customer preferences, regulatory shifts, and market disruptions. By innovating their business models, companies can adapt to these changes, mitigate risks, and capitalize on emerging opportunities.
3. Revenue Growth
Effective business model innovation can lead to new revenue streams or increased revenue generation. By exploring new business models or modifying existing ones, companies can tap into previously unexplored markets, attract new customers, and capture additional value from their existing customer base.
4. Operational Efficiency
Optimizing and innovating the various components of a business model can lead to increased operational efficiency. By streamlining processes, leveraging technology, digital innovation , and optimizing resource allocation, companies can reduce costs, improve productivity, and enhance overall performance.
5. Improved Customer Value
Through business model innovation, companies can elevate the value they deliver to customers. By understanding customer needs and pain points, businesses can develop innovative value propositions, personalized experiences, and tailored solutions that meet customer expectations and create long-term loyalty.
6. Business Resilience
A well-designed and innovative business model is more likely to withstand market disruptions and economic downturns. By diversifying revenue streams, exploring alternative business models, or building resilient ecosystems, companies can improve their ability to navigate uncertainties and maintain long-term sustainability.
7. Organizational Renewal
Business model innovation promotes a culture of innovation , creativity, adaptability, and continuous improvement within organizations. It encourages employees to think outside the box, challenge conventional wisdom, and contribute to the ongoing evolution of the business. This fosters a dynamic and innovative organizational culture.
8. Attracting Investment and Partnerships
Business model innovation often attracts the attention of investors, partners, and stakeholders who recognize the potential for growth and profitability. Innovative business models demonstrate a forward-thinking approach and can enhance a company’s attractiveness for funding, partnerships, and strategic alliances.
Learn more: What is Continuous Innovation?
When approaching business model innovation, several frameworks and key components can guide the process. Here are some commonly used components in a business model innovation framework:
- Value Proposition: This component defines the unique value that a business offers to its customers. It encompasses the products, services, features, and benefits that address customer needs, solve their problems, or fulfill their desires.
- Customer Segments: Identifying and understanding the target customer segments is crucial for effective business model innovation. It involves analyzing customer feedback , behaviors, preferences, and pain points to tailor the value proposition and business model accordingly.
- Revenue Streams: This component focuses on how the business generates revenue from its value proposition. It includes pricing strategies, revenue models (e.g., one-time sales, subscriptions, licensing), and potential sources of income from customers, partners, or other stakeholders.
- Channels: Channels represent the distribution and communication channels used to reach and engage customers. This component considers both physical and digital channels, such as direct sales, online platforms, retail partnerships, or mobile applications.
- Innovation Mechanisms: This component focuses on fostering a culture of innovation within the organization and implementing mechanisms to encourage and support business model innovation. It can involve innovation processes , idea platforms, cross-functional teams, experimentation, or learning loops.
- Key Activities: Key activities encompass the core processes, operations, and actions required to deliver the value proposition effectively. It includes activities such as research and development, manufacturing, marketing, sales, customer support, and strategic partnerships.
- Key Resources: Key resources refer to the essential assets, capabilities, and infrastructure needed to operate the business model. These resources can include physical assets, intellectual property, technology, human capital, supplier networks, or financial resources.
- Innovation Drivers: The external and internal factors that push a company to reconsider and evolve its business model to remain competitive, relevant, and adaptable in the ever-changing business landscape. Identify the factors driving the need for business model innovation, such as technological innovation , changes in customer behavior, or industry disruptions.
- Partnerships and Ecosystems: This component involves identifying and leveraging strategic partnerships or building ecosystems that complement the business model. Collaborations with suppliers, distributors, technology providers, or complementary businesses can enhance value delivery and create new opportunities.
- Cost Structure: The cost structure defines the expenses associated with operating the business model. It includes costs related to production, marketing, distribution, infrastructure, talent, and any other resources required to deliver the value proposition.
There are numerous examples of business model innovation across various industries. These examples illustrate how business model innovation can lead to industry disruption, improved customer experiences, and increased efficiency. Adapting to changing market dynamics and exploring innovative business models can be key to long-term success.
- Netflix (Transforming Entertainment Distribution): Netflix revolutionized the home entertainment industry by introducing a subscription-based model for streaming movies and TV shows. Instead of traditional DVD rentals, Leveraging technology innovation they shifted to a digital platform that allows users to access content on-demand for a monthly subscription fee.
- Uber (Disrupting Transportation Services): Uber disrupted the transportation industry by introducing a peer-to-peer ride-sharing platform. They created a business model that connects riders and drivers through a mobile app, providing convenient, affordable, and flexible transportation services.
- Airbnb (Redefining Accommodation): Airbnb transformed the hospitality industry by offering a platform that allows individuals to rent out their homes or spare rooms to travelers. They created a marketplace that connects hosts and guests, enabling people to find unique and affordable accommodations worldwide.
- Apple (Integrated Ecosystem): Apple’s business model revolves around an integrated ecosystem of hardware, software, and services. Products like the iPhone, MacBook, and Apple Watch seamlessly work together, creating a cohesive user experience.
- Tesla (Electric Vehicles and Beyond): Tesla disrupted innovation in the automotive industry by introducing electric vehicles (EVs) with a vertically integrated business model. They not only manufacture and sell EVs but also build and operate their own charging infrastructure, providing a comprehensive solution for sustainable transportation.
- Spotify (Transforming the Music Industry with Streaming): Spotify changed the music industry with its streaming service that offers access to a vast library of music. They introduced a freemium model, providing both free and premium subscription options, while compensating artists based on streaming plays.
- Amazon (E-commerce Ecosystem): Amazon transformed e-commerce by creating a comprehensive online marketplace that offers a wide range of products, competitive prices, and fast delivery. They also introduced Prime membership, providing additional benefits like free shipping and access to streaming services.
- Alibaba (E-commerce Ecosystem): Alibaba revolutionized e-commerce in China by creating a business-to-business (B2B) online marketplace that connects manufacturers with buyers. They expanded their business model to include business-to-consumer (B2C), consumer-to-consumer (C2C), and other services like digital innovation such as cloud computing and digital payments.
- Google (Monetizing Search and Advertising): Google’s business model innovation lies in its search engine and advertising platform. They provide free access to their search engine while generating revenue through targeted advertising based on user data and search queries.
- Patreon (Empowering Creators with Fan Support): Patreon introduced a membership platform that allows creators, such as artists, musicians, and podcasters, to receive ongoing financial support from their fans. It enables fans to become patrons and support their favorite creators through this innovation .
- Dollar Shave Club (Subscription-based Razors): Dollar Shave Club disrupted the shaving industry by offering a subscription-based model for razors and grooming products. They eliminated the need for purchasing expensive razors in stores and instead provided affordable, high-quality products delivered directly to customers’ doors.
- IKEA (Flat-Pack Furniture and In-Store Experience): IKEA’s business model innovation includes flat-pack, self-assembled furniture and a unique in-store experience. This approach allows for cost savings and a distinctive shopping environment.
Learn more: What is Discontinuous Innovation?
When engaging in business model innovation, it’s important to follow certain best practices to increase the chances of success. Outlined below are several essential best practices to consider:
1. Customer-Centric Approach
Start by deeply understanding customer needs, pain points, and behaviors. Identify unmet needs and gaps in the market to develop innovative solutions that deliver superior value to customers.
2. Embrace a Growth Mindset
Foster a culture of continuous innovation like learning and experimentation. Encourage employees to challenge assumptions, take calculated risks, and learn from failures. Embrace an entrepreneurial mindset that embraces change and seeks out new opportunities.
3. Collaborative and Cross-Functional Approach
Involve diverse perspectives from different teams and departments within the organization. Collaborate across functions to generate innovative ideas, validate assumptions, and ensure alignment and buy-in throughout the organization.
4. Data-Driven Decision Making
Leverage data and analytics to inform decision-making processes. Gather insights on customer feedback , behavior, market trends, and industry dynamics to support business model innovation efforts. Use data to validate assumptions and iterate on the business model.
5. Iterative and Agile Approach
Adopt an iterative approach to business model innovation. Start with small experiments, test assumptions, gather feedback, and iterate based on the results. Embrace agile methodologies to quickly adapt and respond to changing market dynamics.
6. External Insights and Open Innovation
Look beyond internal resources for inspiration and insights. Engage with external stakeholders, such as customers, partners, industry experts, and academia, to gain diverse perspectives and identify emerging trends and technologies that can drive innovation .
7. Prototyping and Minimum Viable Products (MVPs)
Develop prototypes or MVPs to quickly test and validate different aspects of the business model. Use rapid prototyping techniques to gather feedback from customers and stakeholders and make necessary refinements before scaling.
8. Intellectual Property Protection
Evaluate the intellectual property (IP) aspects of the business model to protect any unique innovations or competitive advantages. Secure patents, trademarks, copyrights, or trade secrets where appropriate to safeguard the business model and prevent imitation.
9. Scalability and Long-Term Viability
Consider scalability and long-term viability when designing the business model. Ensure that the model can be effectively scaled as the business grows and that it aligns with the organization’s strategic goals and capabilities.
10. Continuous Monitoring and Adaptation
Business model innovation is an ongoing process. Continuously monitor market trends, customer feedback , and competitive landscape to identify opportunities for refinement and adaptation. Stay agile and be prepared to adjust the business model as needed to maintain relevance and competitiveness.
Learn more: What is Business Innovation?
Manage Ideas and Ignite Innovation with IdeaScale’s Award Winning Software.
Ignite Innovation With Your IdeaScale Community!
IdeaScale is an innovation management solution that inspires people to take action on their ideas. Your community’s ideas can change lives, your business and the world. Connect to the ideas that matter and start co-creating the future.
Copyright © 2024 IdeaScale