UNIT 3

What is Business Model?

• A business model is the conceptual structure supporting the viability of a
business, including its purpose, its goals and its ongoing plans for
achieving them. At its simplest, a business model is a specification
describing how an organization fulfills its purpose.
• A business model is an outline for how your company plans to make
money. In general, a business model explains four things:
• What product or service a company will sell.
• How it intends to market that product or service.
• What kind of expenses the company will face.
• How the company expects to turn a profit.
 What is Business Model
• A business model is a conceptual tool that contains a set of elements and
their relationships and allows expressing the business logic of a specific firm.
It is a description of the value a company offers to one or several segments
of customers and of the architecture of the firm and its network of partners
for creating, marketing, and delivering this value and relationship capital, to
generate profitable and sustainable revenue streams (Osterwalder, Pigneur
& Tucci, 2005).
• Epia Consulting defines a business model as “a model, which helps
organisations to realise the economic value of their product, services,
business, and /or technology.”
• A business model can be analysed with the use of different
methodologies and tools. As an example, visualisation methods are
usually used to have tangible elements to reflect on. This approach
provides ways of examining and improving managerial judgement by
transforming raw data into accessible forms of knowledge
representation (Yee, Walker & Menzfield, 2012).
Types of Business Model
1. Retailer model
A retailer is the last link in the supply chain. These businesses purchase
goods from manufacturers or distributors and then sell them to
customers for a price that will both cover expenses and turn a profit.
Retailers may specialize in a particular niche or carry a range of
products.
Examples: Many of the businesses you patronize day to day are
probably retailers, from grocery stores to pharmacies to florists.
2. Manufacturer model
A manufacturer converts raw materials into products. Then, they sell
those products to distributors, retailers or directly to consumers.
Example: Manufacturing businesses build everything from furniture to
pharmaceuticals. They can be companies of any size and in almost any
industry.
3. Fee-for-service model
A fee-for-service is just what it sounds like: A business charges a set fee for
a specific service. A business set up on this model can increase its earnings
by doing work for additional clients or by raising its rates.
Depending on what type of work the business does, it might charge an
hourly rate, monthly retainer or commission. It may also create a fee
schedule with a set rate for different types of services.
Example: Hairstylists, accountants and real estate agents all charge fees for
their specialized services. They may work independently or be affiliated
with a salon, office or brokerage that provides resources in exchange for a
percentage of their earning
4. Subscription model
A subscription business model can be applied to both traditional brick-
and-mortar stores and e-commerce businesses alike. Essentially, the
customer makes a recurring payment for ongoing access to a service or
product. A company may directly ship its product in the mail, or you
may pay a fee to use its services.
Example: Many local farms offer farm shares or community-supported
agriculture subscriptions, where clients get access to fresh produce on
an ongoing basis while crops are in season.
5. Bundling model
The bundling business model involves companies selling two or more products
together as a single unit, often for a lower price than they would charge selling
the products separately.
This type of business model allows companies to generate a greater volume of
sales and perhaps market products or services that are more difficult to sell.
However, profit margins often shrink since businesses sell the products for less.
Example: Many class-based fitness centers and gyms use a type of bundling
model, where clients pay fees for a certain number of classes per month. The
more classes a client buys, the cheaper each individual class becomes, even
though their total spend increases.
6. Product-as-a-service model
Product-as-a-service businesses charge customers to use physical
products. They may charge a subscription fee, a per-use or per-mile fee,
or a combination of both.
Example: Bike rental companies offer products as a service. Customers
might pay an annual membership fee plus a per-mile fee each time they
ride, or they might have the option to rent a bike for the day.
7. Leasing model
Under a leasing business model, a company buys a product from a seller.
That company then allows another company to use the product they
purchased for a recurring fee. Leasing agreements are usually most
efficient with big-ticket items like manufacturing and medical equipment,
but some companies lease smaller items too.
Leasing is similar to the product-as-a-service business model, but leases
usually have longer terms — days or weeks compared to minutes or
hours. Leasing companies are unlikely to charge a subscription or
membership fee for access to their products.
Example: A business that rents machinery like backhoes, augers and
dozers to individuals for their home construction projects is using a
leasing business model.
8. Franchise model
A franchise is an established business blueprint that a franchisee
purchases and reproduces. The franchiser, or original owner, works
with the franchisee to help them with financing, marketing and other
business operations to ensure the business functions as it should. In
return, the franchisee pays the franchiser a percentage of the profits.
Example: Domino’s, Anytime Fitness and Ace Hardware are all examples
of the franchise model.
9. Distribution model
A company operating as a distributor is responsible for taking
manufactured goods to the market. To make a profit, distributors buy
the product in bulk and sell it to retailers at a higher price.
Example: A chain of beauty salons that buys supplies in bulk and sells
some of them to other salons is using a distribution business model,
though they may have other revenue streams too.
10. Freemium model
In a freemium model, customers can use parts of a product or service
for free but must pay for access to more advanced features. This model
is common in the software-as-a-service space — Spotify, for instance,
has a free ad-supported tier, but subscribers get to listen ad-free.
Example: Some news and internet publishing companies use a
freemium model, where some or all content is free but premium
content or special features are paywalled.
11. Advertising or affiliate marketing model
The advertising and affiliate marketing business models leverage a business’s
audience as an asset.
With advertising, a business sell its audience’s attention. Advertisers pay for
space — whether it’s in the pages of a magazine or on the side of a vehicle
— with rates usually determined by the size of the business's audience.
With affiliate marketing, a business earns a commission when a member of
its audience buys a product or service it recommends. If you’ve ever heard a
podcaster encourage you to use a specific offer code when you buy a
product they’re promoting, affiliate marketing is probably part of the
podcaster's business model.
Example: A fashion blogger who sells ads on their podcast or website is
using an advertising model. If they post outfit-of-the-day photos with links
that viewers can click to “get the look,” they might also earn an affiliate
marketing commission on those purchases.
12. Razor blades model
To understand the razor blades model, you can simply look to your local drugstore.
You’ll notice that replacement razor blades may cost more than razors themselves.
Companies offer a cheaper razor with the understanding that you’ll continue to
purchase more expensive accessories — in this case, razor blades — in the future.
In addition to the traditional razor blades model, you'll also see companies use the
reverse razor blades model, in which they offer customers a high-margin product
and then promote the sales of lower-margin products that accompany that initial
product.
Examples: This business model is most common among companies that sell
physical products. Printers that require a specific type of ink or water pitchers that
require a specific type of filter are examples of the razor blades model.
 How to design a business model
There is no one-size-fits-all business model. Many businesses include elements of several models —
the yoga studio that bundles classes may also sell retail products in its lobby, for instance.
To design your own business model, start by answering the following questions:
How will you make money? Outline one or several revenue streams, which are the different ways
your company plans to generate earnings.
What are your key metrics? Having a profitable business is great, but it usually doesn’t happen right
away. You’ll want to identify other ways your company will measure its success, like how much it
costs to acquire a customer or how many repeat customers you'll have.
Who’s your target customer? Your product or service should solve a specific problem for a specific
group of consumers. Your business model should consider how big your potential customer base is.
How will your product or service benefit those customers? Your business model should have a clear
value proposition, which is what makes it uniquely attractive to customers. Ideally, your value
proposition should be specialized enough that competitors can’t easily copy it.
What expenses will you have? Make a list of the fixed and variable expenses your business requires
to function, and then figure out what prices you need to charge so your revenue will exceed those
costs. Keep in mind the costs associated with the physical, financial, and intellectual assets of your
company.
Reasons, why a business model is
important
• define where the business is in the value chain;
• ̶ determine what the consumer gets out of it;
• ̶ determine the future of a business – whether it succeeds or fails;
• ̶ achieve success of any business;
• ̶ create a foundation for optimising innovative technology;
• ̶ test out a new idea to see if it holds real promise of success;
• ̶ create a clear statement of the business mission and vision;
• ̶ create a set of values that can help to steer business;
• ̶ create a clear-eyed analysis of the industry, including opportunities and threats;
• ̶ create a portrait of potential customers;
• create a roadmap and timetable for achieving goals and objectives;
• ̶ form a description of the products and services that are offered;
• ̶ form an explanation of marketing strategies;
• ̶ create a handbook for new employees describing the company and its
activities; and,
• ̶ create a résumé that can be used to introduce the business to
suppliers, vendors, or lenders
 Business Plan vs. Business Model
• At its simplest, a business plan is a written description of the future of a
business. It's a document that not only gets a business concept on paper
but also outlines the people and steps that will be involved to lead the
business to success. The business plan is where you discuss the industry and
the need for a particular product or service, the business structure and how
you will achieve success.

• The business plan also talks about the market in which the business will
operate, lays out the competition and what the plans are to position the
business as a leader. Lastly, the business plan lays out the ever-important
financial plan, discussing things such as income and cash flow, loans and
obligations and when and how investors can expect to see a return.
• A business model, on the other hand, is a business's rationale and plan
for making a profit. If the business plan is a road map that describes
how much profit the business intends to make in a given period of time,
the business model is the skeleton that explains how that money will be
made. A model covers everything from how a company is valued within
an industry to how it will interact with suppliers, clients and partners to
generate profits.

• There are several different kinds of business models. A software

company, for instance, might be based on a subscription model, which
generates revenue from customers that renew subscriptions annually
for a license to use the software. An example of an accessories model
would be a razor company or computer printer company that
guarantees future income through the sale of razor blades and printer
cartridges.
 Focus
• Business models are descriptions of how a business plans to deliver
products and services to customers. They focus on specific sales funnels,
marketing strategies and similar areas. In contrast, business plans are
more comprehensive explanations of every facet of a business. While
they include sales and marketing information, they also include financial
information, revenue predictions and mission statements.
Audience
• Business leaders often create business plans for an audience of
potential investors and other stakeholders. For example, they may
present a business plan to raise funds, apply for grants or update
investors on business progress. In contrast, business models are
primarily for executives and internal members within a company.
These schemes help team members coordinate activities.
Relation to products and services
• Both plans and models relate to products and services. Plans convey
the products and services a company seeks to develop and provide.
Models discuss how businesses want to produce and deliver or sell
those products and services to customers.

• https://www.youtube.com/watch?v=zibpovqIx2g