What is a business model?
A business model is a company’s plan for making money – an enterprise’s plan for its successful operations, listing its sources of revenue, intended customer base, products and financing details. It describes how the company tries to capture value from its business while delivering products and services to customers.
A business model will look at several aspects of a company, including how it makes its products, distributes them, as well as pricing and advertising strategies.
The aim of every company is to thrive – to generate greater revenue, make more profits and expand. The business model is a plan on how the company believes it can achieve this. It includes the components and functions of the business.
If you think only a professor would understand your definition of what a business model is, throw it away and start again. If a schoolchild understands you, it is probably right.
According to Cambridge Dictionaries Online, a business model is:
“A description of the different parts of a business or organization showing how they will work together successfully to make money.”
The Model includes a business’ functions
A business model typically contains all the functions of a business, including its revenues, expenses, corporate structure, operating strategies, plus sales and marketing procedures. In fact, anything related to the day-to-day operations of the business are included.
The model has definitions of the responsibilities of the senior executives within the organization.
In some cases it will also define all the departments and divisions within a company, and describe people’s positions and job responsibilities.
Put simply, a business model explains how a company makes money. It may be quite simple and straightforward, or very complex.
Examples of a business model
For example, the business model of a restaurant is an easy one to write – it makes money by preparing meals and selling them to customers who want something to eat.
A website’s business model may not be so straightforward – business might be generated in one of several ways. Some websites offer a free service and make money from the ads other companies place on its pages, while others may have an online shop and sell products directly to the public.
Makers of home and office printers have a business model that consists of selling the printer super cheaply, and following up with expensive ink-toners, which they hope customers will continue buying for years.
Several businesses, such as shaving razors & blades firms and mobile phone companies, sell a product very cheaply and then add-on consumables at high prices. Gillette sells the razor at a low price, and then expensive replacement blades.
Mobile phone companies start off by selling you a cheap handset, and then sign you up to buy calls over a 1-year period.
The dot.com bubble and business model craze
American non-fiction author and financial journalist, Michael Monroe Lewis, said once of the business model that “All it really meant was how you planned to make money.”
The ‘business model’ was one of the great buzzwords during the dot.com boom at the turn of the millennium, which Mr. Lewis said was routinely invoked “to glorify all manner of half-baked plans.”
At the time, a company did not really need a strategy or any special competence – it did not even need customers. All that was required was a web-based model that promised incredible profits at some vague distant future. Millions of people, executives, entrepreneurs and investors alike, fell for the fantasy and got badly burned.
When the dot.com bubble burst, the concept of the ‘business model’ rapidly fell out of fashion.
Video – From business idea to business model