Business model: definition, relevance and types
The business model of a company describes the way in which the company generates sales or profits. Especially in today’s world, which is increasingly characterised by globalisation and digitalisation, this topic is becoming more and more important in the SME sector. After all, the right business model allows you to ensure the company’s success in the long term as well.
In this article, you will learn everything about the definition, relevance and different types of business models. This will give you a good overview to make the right decisions.
What is a business model?
Although there is no uniform definition of the term business model, basically all explanations of it end up being very similar. The focus is on how the company ultimately earns its money. Business models answer important questions, for example, how it creates value and brings it to its customers in order to profit from it.
There can be considerable differences in the business model, for example between manufacturing companies or service companies. Therefore, there are no universal truths that apply to all companies in all situations. Because every company has its very own production steps, processes and customers that are responsible for creating value.
What are the central elements of a business model?
There are usually three important core aspects at the centre of a business model that needs to be considered. These include the value proposition, the value creation architecture and the revenue model. All three then contribute to defining the respective business models of different companies.
Value proposition
This describes the benefit for the customer or other companies acting as partners and makes clear what advantage they derive from this relationship. This is why the value proposition is also called the value proposition. Ultimately, it should answer the question of what benefits the company can offer its customers or partners.
The architecture of value creation
The second aspect is not so much about the benefits or the target group, but about how the value is created. This also includes a so-called architecture, which describes which stages and steps are to be taken in this process. Everything here is aimed at defining the type of service provision as well as the markets that are to be served.
Revenue model
Finally, the revenue model represents the monetary success of the business model. The revenues and profits essentially determine how much the business model is worth in the first place. So now that you have answered the questions of what and how the company generates its revenues, the focus is now on the what.
Why are business models important?
The right model manages to identify customer problems, solve them and make a profit from them. That is why business models are often the focus of any consideration in order to be able to build a profitable company.
This results in many important advantages:
- It helps you to align factors for success as well as risks with the business idea.
- This makes it easier to assess the overall profitability and unnecessary cost factors can be made transparent.
- Business models are often the basis for long-term competitiveness in highly competitive markets.
- They also help you to optimise and further develop processes because an analysis of the model can reveal inefficiencies.
- Due to increasing globalisation, the business model is sometimes the most important unique selling point for SMEs.
For these reasons, business models are so important in the modern world, which is why the topic around business model innovation is being pushed ever further. After all, if you have an innovative idea, you can exploit it to the fullest with the help of the right model.
What are the different business models?
There are countless different business models that cover all economic sectors and can therefore be incredibly versatile. Among the most popular and well-known are the following.
Manufacturing
The manufacturing business model is very simple when you break it down into its essential components. It is simply about providing a product or service that meets customer demand. If you sell the product above cost, you have a profitable business model. Of course, this is a very simplistic view.
E-commerce
With rapid digitisation, e-commerce business models are becoming increasingly popular and continue to gain market share. One of the pioneers and dominant companies is certainly Amazon, which is the world’s largest online shop. In the meantime, however, SMEs can also profit considerably from their own Internet presence and thus expand their own business model.
Advertising
The internet age has also brought business models with advertising to the fore, for example Google and Facebook. The use of these services is actually completely free of charge for customers, as the providers are largely financed by advertising. Classic media such as free TV also fall into this category, but they are playing an ever smaller role in today’s world.
Subscription
Another popular business model is the subscription model, in which the provider offers its services for a (often monthly) fee. Netflix or Premiere are among them, but more and more software providers are also switching to this model. With Software-as-a-Service (SaaS), users no longer pay a one-off purchase price but use the software for a subscription fee. More and more SMEs are turning to this model to avoid the high acquisition costs of expensive ERP systems.
Franchise
The franchise business model is mainly popular with fast-food chains, which have experienced rapid growth as a result. Here, interested franchisees buy the concept and supply chains behind the brand that the franchise company provides. In addition, the franchisees make a further contribution, measured in terms of sales or profits, to the company.
Freemium
Another concept that is becoming increasingly popular thanks to the internet is the freemium model. This is a mix of the words “free” and “premium”. In this business model, a company initially provides services free of charge in order to attract as many customers as possible, but then hides practical additional services behind packages that have to be paid for.
Conclusion
If a company can develop a new idea and the right business model, it sets the best conditions for long-term success. This is because rapid globalisation and digitalisation are presenting SMEs in particular with ever greater challenges. The principle applies that one must never rest on one’s laurels, but must always adapt to the changing environment.
This is exactly where the right business model and powerful software like Zoho One (get free trial) can be the decisive unique selling point today. As a business, you not only benefit from clear processes and goals, but you also cover the entire value chain with ease. In this way, you make yourself fit for the future at an early stage thanks to digitalisation. Get in touch now and get advice from the experts at KMU Digitalisierung who will help you map your business model in Zoho One.
This article originally appeared on the KMU Digitalisation blog at: https://kmu-digitalisierung.agency/geschaeftsmodell/