A business model is what a company has in order to make money from what they do. It outlines what the company is going to sell or what kind of services it will provide, where and to whom it is going to sell them and now how much that is going to cost.
Whenever you start a new business you need to have a good business model in order to succeed, to get investors to your company, to get good employees and give the already employed a good enough reason to work hard and better the company. As far as companies or businesses that are not new, they have to go back to their business model and keep updating it constantly or they won’t be able to tell what kind of trends are going to happen. Investors need to be very familiar with what a good business model is like in order to identify where they can invest.
How does it work?
A business model is a complicated plan that works for the company in order to make a profit in a particular market. The base of a business model is the value proposition. This is what tells investors what kind of goods or services the company offers and why someone should buy or pay them.
As far as new companies go, a business model should entail what they think it is going to cost to make the business grow and get going, the target demographic for the business, advertising strategy, who they are going up against in that specific market and how much money they expect to spend and make.
A mistake that people often make when making a business model is not understanding how much money they will need to fund the business until it becomes profitable. A company needs to be run until profit outweighs the expenses.
Kinds of Business Models
There are too many types of business models to mention since it probably matches the number of types of businesses that exist in the world. For instance, direct sales, advertising, franchising, brick and mortar shops, these are just examples of common business models. There business models that combine 2 or more common business models, like ones that mix internet retail with brick and mortar shops, or sporting organizations like the NFL.
With these vague categories, every business plan is very specific. Let’s look at the shaving industry, Gillette sells their Mach3 razor handle at a low price in order to get a good customer base that is going to buy their much more profitable razor blades. It basically means you give away a part of the product in order to get people to buy the other more expensive part. This business model’s name is actually the razor-razorblade model but you can use it in any industry or business really.
All successful businesses have a good business model that enables them to meet the clients’ expectations at a good price and consistent cost. But as time passes businesses have to get back to their original business models and redesign them if need be.
A good way to know if a business model is good is by looking at the company’s gross profit. Gross profit is how much money a company has made when you take away the cost of the goods that were sold. When you compare it to the competition it lets you know if a business model has been successful or not.
But that alone can sometimes not tell the whole story, you also need to look at cash flow or net income, which also incorporates the cost of operations and that shows you the real profit a company has.