How well-structured is your company’s business model? Has it evolved over time? A company’s business model is everything: it defines and controls how the company is able to capture profit. Without the right business model, your company could be expending useless effort, or ignoring potential profit centres. Here’s what you need to know about defining and developing your business model.
There Are Hundreds of Business Models Out There — Each One Different
At its simplest, a business model is this: how a company makes money. What does it produce? Who does it sell it to? What does that production cost — and what are the profit margins? If you don’t have a clear business model, you don’t really know where your money is coming from.
It’s easy to create a business that doesn’t really have a business model. An entrepreneur can come up with a product, but not necessarily know who the primary demographic for that product is, or where to manufacture it. This is why it’s commonly said that a product is not a business.
A small business owner may have a service that they sell, such as wood-working, but may not have developed it into a business model: they may just be taking work as it comes. That means they still have a hobby, but they don’t necessarily have a business yet.
One of the best ways to decide on your business model is to benchmark-take a look at the business models of other successful companies. Creating a business is about locating profit potential and finding the least expensive, most accessible ways to take advantage of that profit potential.
A Business Model Needs to Grow and Adapt over Time
A business model isn’t necessarily static. At times, a company will need to revise its business model. Demographics shift, industries are disrupted, and new products come to light. Companies must possess the ability to be agile and regularly pivot if they are to chase a changing market.
Of course, with a business model being as important as it is, many companies are reluctant to engage in change. Small, iterative change is usually better than large, dramatic change, as it allows the company time to grow into its new model and address any major pain points.
Regularly, a company should investigate whether its business model still works. The most common issue a company will run into isn’t disruption or market shifting, but rather scaling. Business models change, from small businesses to large businesses, and scaling a business often requires a substantial change in model.
The Consequences of Having the Wrong Business Model
Having the right business model means understanding deeply where your company’s profit comes from and how that profit is made. When you have an incorrect business model, what you really have is a fundamental misunderstanding regarding the way that your business creates and captures value.
An incorrect business model indicates that you aren’t aware of the valuable components of your business, or how to make income from these components. It’s something that’s fairly common, and it’s what the old phrase “The Customer Is Always Right” truly means: the strategy that is going to make you the most money is generally the strategy that you should be following.
There are some major consequences related to not having the right business model:
- Your company won’t be agile. If your profit drops off, you may not be able to recognize why profit has dropped off, because you didn’t have a thorough understanding beforehand of why your profit existed.
- You can’t optimize your business. You won’t be able to accurately reduce your expenditures and increase your profits, because you won’t know which metrics or triggers directly correlate to them.
- You aren’t going to be able to scale. Companies with the wrong business model are fairly fragile. They are successful in spite of their operations rather than because of them. Consequently, they often fall apart when scaled.
- All of this means that having an understanding of your business model and the correct business model is one of the most important components to a business.
Developing a Better Understanding of Your Company’s Model
How can you really drill down to your company’s business model? It begins with a description of what your business does. What value does it produce? How does it translate that value into dollars? At its core, every business is a type of factory: translating one thing into another thing, and producing work in exchange for goods.
A company’s business model should be inherently simplistic. It should break down what your company is producing, who it is selling it to, and how it is making its money. It should include the cost of that production, as well as the basic processes of that production.
From there, you can pare down to the most important aspects of your business model. Understanding the skeleton of your business model gives you more manoeuvrability: you understand which parts of your business are critical to the frame of the business, while also developing an understanding of which parts are added on, or potentially even unnecessary.
A business model describes the flow of your business: how your business produces value and how it turns that value into cash. With the right business model, you’ll be able to understand your revenue picture not as a combination of products or services, but as a fully organized company.
As an entrepreneur or small business owner, your company is likely to be modelled after other businesses, unless you’re in a disruptive space. Exploring other businesses and looking at their business models can help you determine your own.