Business Models

The layperson typically thinks a business model is how a business makes money. Revenue generation like subscription or e-commerce models is only partially accurate.

When people decide whether to buy something, they run through a basic cost-benefit. How much does this thing cost? Why do I want this and how much do I want it? The discerning person goes a step further, perhaps doing price comparison or looking at substitutional products. The thorough person will think through:

  • The product’s useful lifespan

  • Does it need maintenance?

  • Accessories

  • What’s the total ownership cost?

  • Can I resell this and what’s it’s terminal value?

Similarly, a business model is much more than simply how a business generates revenue.

A business model is a conceptual structure that supports the viability of a business by outlining how it operates, makes money, and delivers value to its stakeholders. It encompasses the plan or framework a company follows to bring a product or service to the market and attract customers.

The Business Model Canvas is a strategic management template used for developing business models or refining existing ones. It offers a visual diagram with elements describing a firm's or product's value proposition, infrastructure, customers, and finances, assisting businesses in aligning their activities by illustrating potential trade-offs. The canvas is divided into nine key components:

  1. Value Propositions: This section describes the products and services a business offers, highlighting the unique value it brings to its customers.

  2. Customer Segments: Identifies the different groups of people or organisations a business aims to reach and serve.

  3. Channels: Outlines how a business communicates with and reaches its Customer Segments to deliver a Value Proposition.

  4. Customer Relationships: Describes the types of relationships a company establishes with specific Customer Segments.

  5. Revenue Streams: Represents the cash a company generates from each Customer Segment (costs must be subtracted from revenues to create earnings).

  6. Key Resources: Describes the most important assets required to make a business model work.

  7. Key Activities: The most important activities in executing a company's value proposition.

  8. Key Partnerships: The network of suppliers and partners that make the business model work.

  9. Cost Structure: Describes all costs incurred to operate a business model.

This tool is widely used by entrepreneurs and businesses for strategic planning and innovation. It helps in understanding the building blocks of a business, identifying areas of improvement, and testing new business ideas.

While SIPOC is a lean six sigma tool, it’s useful to help conceptualise the business model canvas’ components and how they need to align to deliver outputs to meet business objectives and goals.

Understanding the components of a business model and how they interrelate is square one. Having a clear grasp of the fundamentals and working through a canvas will give you the big picture and potentially save you a lot of unforced errors.