How to Build a Business Model for your Business!

Estimated reading time: 5 minutes, 20 seconds. Contains about 1069 words

One of the most exciting things about starting your own business is how to build and organize your thoughts. Throughout my years of experience, I found that the best approach is to think about structuring your business model. So, what is a business model? A business model is how a company creates value for itself while delivering products or services for its customers. In other words, it refers to a company’s plan for making profits. Now, how does someone piece together the business model? And what are the components of a business model? There are nine critical components that you need to visit while building your business model:

1. Value proposition
2. Customer segment
3. Distribution channel
4. Customer relationship
5. Revenue stream
6. Key partners
7. Key resource
8. Key activities
9. Cost structure

Component number one “Value Proposition” is a simple answer to what are you trying to build, produce, serve and for whom? In other words, how do you want people to think about your brand? The point is not to describe your brand or product; instead, it is to suggest a solution for a problem or a need that your customers will gain value from.

The next component after you have identified your value proposition comes to the “Customer Segments.” This step involves you determining who your customers are and why they would buy or use your brand. For this step, you would need to do a demographic study about the geographical and social characteristics of your targets in groups. This will help by describing their age, gender, level of education, income, ethnicity, language, geographical location, interests, influence, marital status, beliefs to mention some examples.

After you have figured out your customer segments, the next step is to draw your “Distribution Channel.” In this step, you will explain how do your products/services get to your customers. Thirty years ago, distribution channels were mainly physical, where customers need to visit a store, meet with salespeople to conduct a business transaction. However, over the last couple of decades, customers now have virtual channels such as the web and mobile devices to virtual-visit and review products or services. In this step, you will need to see how you are planning to sell your products/services and how do you move these products/services, whether via the web or mobile application and throughout physical or digital channels?

The fourth step is to identify your “Customer Relationships,” which very much interact with all the above three components of the business model. The customer relationships have to answer three critical questions; How do I get clients? How do I retain these clients? And how do I grow the number of my clients? This is entirely a marketing aspect of the business. For instance, in digital marketing planning, we tend to use the term sales funnels. These funnels are designed to build client awareness of any product/service, grab attention based on interests, meet a particular desire, and then lead to action. Using sales funnels will help you in defining your methods of how to get your clients. Moving along, once you have identified your sales tunnels and converted interested individuals/entities into clients, you need to figure out the lifecycle of the client base, plan for client retention rate, create methods to resolve complaints, induce customer loyalties with promotions, and finally, promote advocacy with the help of existing satisfied and genuine customers. The last aspect of the customer relationships component for the business model is to grow clients. Here you need to develop a plan to improve your existing and new client base with up-selling, down-selling and cross-selling.

Next would be visiting the “Revenue Stream” component of your business model. The revenue stream deals with how you actually would make money from your products/services being sold to your customer segments. This deals with defining the value your customers will pay for your products/services and the needed strategy to capture that value, such as in the case of direct sales, free trial periods, periodic subscriptions, free samples, or promotions. Once these strategies are being defined, then pricing strategy needs to be drafted to follow the stream.

The sixth component of your business model is your “Resources.” To make your business model work, you will need resources such as essential assets. Here you have to figure out the required capital, finances, physical and digital means to produce products and/or offer services, equipment to make and carry out your brand, human resource to drive your production engine, intellectual property to protect your technology, database, software, hardware, and finally the how to maintain and protect all of these assets.

Component number seven is defining your “Partners.” Here you will need to identify your key partners and suppliers. What you are acquiring from these partners and what value or critical activities they are bringing to your organization. These partners might sometime refer to venture capitalists, joint ventures, strategic alliances or just a conventional relationship between ordinary vendors and buyers. While all depend on the size and your business lifecycle, these partners certainly change in type or priority from one stage to another during your business life cycle.

The eight component is your “Key Activities.” These activities relate to the most essential actions you need to take to make the business model work; thus, basically any activities that your business is engaging in for the primary purpose of making a profit. Business activities include operations, marketing, production, problem-solving, and administration. At this stage, structuring an ERP system will help in defining these vital activities. The benefits of well structured ERP system is to enhance business reporting structure, lead to better customer service, improve inventory and variable costs, boost cash flow management, and establish a superior supply chain management style.

The last component of a business model is “Cost Structure.” This final step involves defining all the costs and expenses that your company will incur while operating your business model. You will need to clearly decide whether your organization is adopting a value-driven or cost-driven structure. Value-driven structure result is high-end products/services being offered to your clients, while a cost-driven cost structure should be implemented when you tend to offer your clients products/services at a bargain. Then you will need to examine all your standard accounting fixed costs, such as startup and acquisition costs, plus variable costs, such as your monthly operating costs. Of course, in the end, your cost will have to be less than revenue to see some profits. This is when everything starts to add up.

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