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Startup 101s: The Business Model

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Strategy is Dead! Long live the Business Model. Well, the reality may not be this extreme, but management theory and practice have in the last decade or so (especially in the aftermath of the dot.com bubble), paid more attention to the models designed to deliver the objectives of a strategy.

The need to exploit the opportunities in developing countries, the increasing proliferation of technology and changing tastes and needs of customers is forcing organizations to create new business models and continually modify existing ones. Well-thought out business models set the pace for organizational growth and above average returns. Developing the right product is hard, but even harder is building a good business model. Management writer, Joan Magretta defines a business model as “the story that explains how an enterprise works”. A business model shows how your business is going to generate revenues and profits. It details your long term strategy and day-to-day operations.

Here are six components to take into consideration when developing a business model:

  1. Reaching Customers: It is not enough to develop a world-class product or service, you also have to sell them to real people, who can back their demand with cash or some kind of mutually agreed value. You are going to have to develop a strategy to find your customers, figure out how to reach them and convince them to buy your product.
  2. Product/Service Differentiation: Differentiation is a key concept to take into consideration when developing your model. How does your value proposition (product or service) stand out as being innovative and why should your customers buy from you instead of the competition? You need to thoroughly understand the competition and effectively communicate the unique advantages of your product.
  3. Costs: Your business model must take into consideration your fixed and variable costs. Not all businesses start raking in revenue from the onset, so your business should indicate the upfront costs you expect to incur, the funds you intend to use to cover those costs and when you expect revenues to start pouring into the business. You may also need to also understand your breakeven periods.
  4. Pricing: The price of your product must be greater than its overall costs (fixed and direct), or your business would not survive. In developing your business model, you’ll have to develop a pricing system that’s not only profitable but one that customers are willingly to pay. This is usually difficult, especially in a saturated market with a lot of suppliers.
  5. Delivery/Distribution: You will also have to consider the delivery/distribution system that will suit your value proposition and customers. Some products become exposed to spoilage in certain conditions and that is a critical factor to consider.
  6. Customer Support & Satisfaction: It is not enough to have customers, you customers have to be happy and satisfied with your sales and after-sales service or they become vulnerable to your competitors. In developing a business model you need to map out the modalities for delivering this customer support and ensuring customer satisfaction.

In developing your business model, be sure to take into account the business models of the other players in the industry. The real test of a good model is not in how it performs in isolation but how it performs when it is put up in the context of competing models in the industry.

 

Photo credit: grasshopperherds.com

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