A business model explains how a company generates value, or in other words, how it earns money. In the book Business Model Generation (2010), authors Osterwalder & Pigneur describe a business model as a strategy a business will execute through its organizational structures, processes and systems.
According to them, business models are composed of nine building blocks, which cover four focus areas -customers, infrastructure, offer and financial viability of a business.
The building blocks of a business model are mentioned below.
Customer segments
Customers are vital to the success of any business. For a business to succeed, it needs to satisfy its customers. So, business models are designed considering the needs and wants of customers.
Customers of a business are grouped together based on their similarities in terms of needs, behaviors and other traits. Each group of customers is different from other groups. Each group is called a separate customer segment.
In order to satisfy customers, businesses may offer different products/services to different segments. For example, Toyota’s target market includes drivers of all ages, but demand for specific models vary with age of customers. Toyota Camry is popular among families, whereas Yaris is more popular among younger customers.
Businesses may also identify their most profitable segments and serve those only. Once a business decides which segment(s) to serve, it designs a business model based on the needs of those segments.
Value Propositions
Value Proposition refers to the benefits a company offers to its customers. A company’s product/service may solve a problem faced by customers, which could be the reason why customers purchase from said company over other companies.
Some businesses have unique and new value propositions which disrupt their market. For example, Uber disrupted the traditional taxi service industry by providing on-demand, automatically dispatched ride-sharing service to its customers.
On the other hand, some businesses offer value propositions which are similar to those offered by other market players, but have additional features. For example, when Pathao started offering ride-sharing services like Uber, it was already providing courier and food delivery services. Using Pathao, customers could access ride-sharing, courier and food delivery services from one single app.
Channels
A company delivers value proposition to its customers through three channels-communication, distribution and sales. Using these channels, a company informs customers about its product/service, delivers its product/service and provides after-sales services. A company’s channels may be direct or indirect. For example, if we consider sales, a direct channel will include sales from websites and the company’s physical stores. An indirect channel will include sales to wholesalers and retailers, who in turn will sell to final consumers.
Customer Relationships
This refers to the relationships a company forms with each of its customer segments, to acquire and retain customers as well as to boost sales. This may include personal assistance, self-service, automated service, etc.
For example, Link3 (an Internet service provider in Bangladesh) offers personal assistance by receiving bill payments in-person in their offices. It also offers a self-care option, where customers can log into their Link3 accounts and pay online.
Revenue Streams
Revenue streams refer to the revenues generated from customer segments. A company may have one or more revenue streams from each customer segment, and the pricing mechanism for each stream may be different. For example, prices may be fixed for one stream, and negotiable for another. Generally, revenue streams can be one-time payments (like the fare paid for an Uber ride) or ongoing revenues (like monthly subscription fees for Netflix).
Key Resources
These are the main resources a business needs to create and deliver its value proposition. These resources can be financial, physical, human or intellectual. For example, hospitals need human resources and nurses- to offer their value proposition (healthcare services). A pharmaceutical company needs money to fund its research efforts. A food-processing company needs machinery to prepare its final product. Without these resources, a business is not able to function.
Key Activities
Like key resources, key activities are the main activities a business needs to create and deliver its value proposition. Key activities of businesses vary according to their business models. For example, for a business consultancy firm like Kore Facilitation, problem-solving is a key business activity. For an electronics company like Walton, production is a key business activity.
Key Partnerships
Key partnerships refer to the relationships a business forms with its suppliers and partners (competitors and non-competitors of a business) for risk mitigation and resource acquisition. For example, the merger between Bangladesh’s mobile operators Robi and Airtel was done with the aim of reducing operational and distributional costs as well as capturing a greater share of the market than they could individually.
Cost Structure
This refers to all the costs a business incurs to implement its business model. It can be calculated on the basis of key resources, activities, and partnerships a business needs to operate successfully. Some business models are more dependent on their costs than others. For example, Toyota may be more sensitive to its costs than Rolls Royce, as demand for Toyota cars will vary with their prices, but Rolls Royce is for the ultra-rich who may remain unaffected by changes in prices.
Designing a winning business model is key to the success of any business. It is common practice for businesses to modify or innovate their business model over time to survive or outpace competitors.
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