The business model is the company’s value-creating mechanism, your very special way of producing performance. The construction of the business model is therefore quite fundamental, and I have already talked a bit about it in a previous article, which detailed my method of finding the key information to build an effective strategic analysis.
The first step in building a successful business model is the analytical phase. You start by diagnosing what you are already doing, and you must definitely keep in mind that you have to keep it simple.
Here are the 7 keys to a successful business model!
# 1 Create value for consumers
What is the perceived value of your product or service to consumers?
Always remember that the market is always right and that consumers are the justice of the peace. Therefore, what matters most is the perceived value of your good (or service) to consumers. To do this we use 3 dimensions:
- Price : Is the price acceptable to consumers?
- Features : Are the characteristics of this product (or service) valued by consumers compared to competing products (and services)?
- Quantity : Is it easy to get this product (or service) compared to competing products (and services)?
# 2 Encourage consumers to pay to access this value
How do you convince consumers to pay for this product or service?
You have designed a product or service; you have a population of consumers for whom your offer represents value: they like what you do. What methods do you use to get these consumers to buy your product?
Do you open stores everywhere?
Are you creating a particularly attractive website?
Do you advertise on all digital media?
Do you get help from a movie star, a famous sportsman or a singer?
Do you have humorous videos made using your products by a collective of comedians and you post massively on YouTube?
What is the range of actions you implement to get the consumers you are targeting to say to themselves, “I need this thing!”
# 3 Convert these payments to profits
How do you make these payments profitable?
And yes, if generating these payments induces too high fixed and variable costs, you are ruining your profits. You must therefore be able to control your cost structure. To do this, I recommend using the ABC method.
# 4 Define your own way of combining # 1, # 2 and # 3
How would you combine # 1 value creation, # 2 revenue generation and # 3 profit generation?
This is where strategy comes into the picture. Strategy is the way you want to combine the 3 key elements of the business model. The variations are endless, but let’s take two very classic illustrations.
- Cost management strategy : you market a product (or service) extremely close to your competitors, but your costs are lower. You can therefore either sell it for the same price with a higher margin; or sell it cheaper and increase competition. In this strategy you are looking for volume: low margin but high volume.
- Differentiation strategy : you decide to market a product (or service) that is completely different from your competitors. This means that your offer is differentiated on the three variables: price, quantity and / or properties (generally we combine the 3). This differentiation and the specific characteristics of your offer justify a higher price, but you know that you will not sell very large quantities of products. In this strategy you are looking for value: high margin but low quantity.
Be careful, these two examples are a bit caricatured, it’s not that simple, and there are many other strategies, some even allow combining Volume and Margin. However, the illustration makes it easy to understand the articulation of points # 1, # 2 and # 3.
# 5 Create a different business model per. activity
In general, the advice is to keep in mind the following: one activity, one business model.
If your company sells 3 very different product families, implement 3 different business models. If we go back to points # 1, # 2 and # 3, it is clear that the value that consumers perceive will change depending on the type of products being marketed because consumers are different, like technologies, communication channels, distribution methods, etc. Note: some companies are based on a business model that already works before choosing new products or services to launch, within the framework of this business model. In this case, it is the business model that drives the growth, and it is gathered across all activities, but it is rarer.
# 6 Keep it simple!
How do you express your business model?
If you can not explain your business model in one sentence, it is not clear. Remember Elevator Pitch. Imagine: you’re in a hotel, you walk into the elevator, the doors open, and you meet the person you admire the most in the world: Bill Gates, Mark Zuckerberg, or Nana Mouscouri. She goes down a few floors with you. You have about thirty seconds to convince her that you are interesting and that it will not be a waste of time to drink coffee with you. 30 seconds means 6 to 7 sentences. It’s hard to be technical while being understood in so few words. So all you have to do for your business model is formulate it in a short sentence, write it down, and get someone who knows nothing about it to read it, then ask them to read it for you. If what she’s telling you fits what you’re doing: Bingo!
# 7 A business model is not a business plan (the determined BM, the work begins)
No, a business model is not a business plan. No, those two words are not synonymous. No, the confusion is not “not serious”.
The business model is your value-creating mechanism. Your business plan is the document you want to design, detailing all the springs in your business model, but not only, and which you will use to convince. Convince bankers or investors. To convince ! In short, you keep the intimate details of the business model to yourself, and you communicate with your potential partners armed with your business plan.
The first step is therefore to screen your business model for the 7 keys. And as you have seen, to make this diagnosis you need skills in strategy, marketing, accounting, finance … The business model is fundamental, it affects all the fibers of the company. So take your time. With a solid business model, everything follows logically. After this step, you are able to assess the coherence of your reasoning, but also the possibilities for improvement. In this case, there are 4 actions to take to make your business model innovative.
Jean-Philippe Timsit is Professor of Competitive & Digital Strategy at the ESC Rennes School of Business.
He specializes in competitive advantages and value creation, primarily in connection with digital strategies, as well as in the areas of entrepreneurship and leadership. He regularly intervenes on these themes with companies through seminars, training and consulting missions or with entrepreneurs in the creation phase.