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How To Create A Business Model In Seven Steps
Define the problem you’re going to solve, then define the customers for which the problem will be solved. Next, identify the customer and the problem. After that, define a set of possible solutions. After, define a set of possible monetization strategies for that solution, test, and choose your business model .
A business model design in seven steps
Time needed: 1 day.
How to create a business model in one day and seven simple steps
The most valuable asset any organization has is its business model .
Indeed, that is the way all the moving parts of the organization fit together to create a value chain.
The aim of the value chain is value creation for several players in that industry, market, and so on.
The business model is not static, it changes and evolves along with the scale of the organization.
The type of business model you designed for your company will not work if your company scales. You’ll need to rethink and redefine it.
This is even more evident in companies that are trying to innovate.
When those organizations create a new technology or an innovative approach to existing industries, it is critical to understand who are the players involved in that industry and how you’re creating value for them.
In this blog, we covered the business models of many organizations.
For instance, Google’s massive success is strictly connected to its business model .
The company managed to create a balance between several players in the publishing and information industry where each of those players gets back some value (economic and not) from having a relationship with Google .
Where do you start when it comes to creating a business model ?
Related : Successful Types of Business Models You Need to Know
It’s all about business model design
The primary aim of a business model is to create a sustainable chain, able to unlock value for several players in a market, industry, or niche .
Therefore, this value chain will start from a value proposition , a promise you make to the key players and partners in that market, industry, or niche depending on where you start.
For instance, when PayPal started out it didn’t look to dominate the whole market. It started from a niche .
As Pether Thiel put it in his book, Zero to One:
The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.
Indeed, PayPal began by identifying its most valuable partner, what at the time they called “power user.”
That was a choice driven by its business model design .
Therefore, instead of focusing on generically offering a service for everyone, PayPal focused on acquiring and attracting as many power users as possible.
Those power users were mostly on another platform that had already scaled up: eBay.
Thus, PayPal focused all its effort on acquiring those power users from eBay , fast!
Only after PayPal had drafted, tested, and validated a clear value proposition for a small , yet critical group of power users, it could move on to take larger and larger segments of that market.
What is a value proposition?
At its most basic level, a value proposition is a promise you make as an organization to deliver something (either monetary or advantage) to a critical player you have in our industry.
For instance, when Google started it showed right away it was capable of offering 10x of search results, at a faster speed and more relevant to users.
However, had Google kept its search engine primarily focused on providing paid results, it would not have taken off.
Instead, Google focused on offering relevant paid results but also a bunch of organic results.
In short, Google managed to index and rank the web pages from blogs, journals, news sites and any other website that made those pages available to Google for its index.
In exchange for that content, Google offered back visibility as qualified traffic toward those sites.
Indeed, search engines back then (at the end of the 1990s) were not focused on offering quality traffic.
Thus, most of the audience you got back to your site might have been quite relevant to your business.
Google instead, with its dominant search engine allowed publishers, and businesses (small and large) to gain customers.
That sealed an implicit deal “Me (Google) will send you qualified traffic that helps you grow your business if you (publisher, business, or whoever publishes on the web) offer me your content to be indexed.”
We might call that an implicit contract, which is the beginning of a value chain.
In fact, from this sort of contract part of the Google business model has been built. Imagine the scenario where Google was not attractive enough to provide qualified traffic to content producers.
They would have stopped offering their content for free by blocking access to the search engine.
Instead, they allowed Google to index their pages because the visibility they got was too attractive.
A business model is also about how you make money but how you make money isn’t your business model
One of the biggest misconceptions of the business model is to confuse it with the monetization strategy or the revenue model of the company.
While this is an essential piece of the puzzle, it is just one of the components of a successful business model .
In this blog, we’ve discussed at great length how companies make money as a way to start the discussion of a business model .
However, a business model implies the understanding of
operations, customer acquisition and retention, supply chain management, and the cost above and revenue aspects
According to the business model you designed over the years for your organization there will be a piece that plays a more critical role compared to others.
For instance, a vital component of the Coca-Cola business model is its distribution strategy .
For other companies like McDonald’s, the key to its business model success is the heavily franchised restaurants that helped the company scale up all over the world.
Each company will develop a unique model among the many types of business models which is what makes it thick in the long run!
What principles should I follow to create and design a business model?
Developing a deep understanding of your business model implies asking a few critical questions. For instance, some of those questions might be:
- What value do I offer my potential customers? Or what problem do I solve with my product/service?
- How do I charge my customers?
- What does my acquisition cost look like?
- What channels can I tap into to find my ideal customer?
- Did I create a predictable revenue stream ? If not what can I do to generate that?
Your business model will be based on a few critical assumptions about who your customers are, how your product or service should look like, what are the favorite channels to reach them, and a few others.
Those assumptions will be tested as soon as you start kicking off your operations.
Your main concern should be just that. You need to check those assumptions as quickly as possible.
Steve Blank has identified 17 principles in his Customer Development Manifesto :
- There Are No Facts Inside Your Building, So Get Outside
- Pair Customer Development with Agile Development
- Failure is an Integral Part of the Search for the Business Model
- If You’re Afraid to Fail You’re Destined to Do So
- Iterations and Pivots are Driven by Insight
- Validate Your Hypotheses with Experiments
- Success Begins with Buy-In from Investors and Co-Founders
- No Business Plan Survives First Contact with Customers
- Not All Startups Are Alike
- Startup Metrics are Different from Existing Companies
- Agree on Market Type – It Changes Everything
- Fast, Fearless Decision-Making, Cycle Time, Speed and Tempo
- If it’s not About Passion, You’re Dead the Day You Opened your Doors
- Startup Titles and Functions Are Very Different from a Company’s
- Preserve Cash While Searching. After It’s Found, Spend
- Communicate and Share Learning
- Startups Demand Comfort with Chaos and Uncertainty
I suggest you read this manifesto over and over again. This should be the first step!
What tools can you use to design and create your business model?
One of the most used tools to design and create a business model has revolved around the customer development manifesto above.
However, it is essential to keep in mind that this manifesto was the fruit of an era where venture capital had become scarce compared to the dot-com bubble at the end of the 1990s.
Those tools for business modeling have been developed in that context. Thus, those are not a one-size-fits-all toolbox but rather work better in a context where capital is scarce, and you need to test your business model assumptions as quickly as possible. In that context three primary tools are:
- Business model canvas.
- Lean startup canvas.
- Customer development canvas.
Those tools can be used by entrepreneurs in the phases of the business model generation:
- Map the business model hypotheses.
- Test these hypotheses with customer feedback.
- Iterative this process.
The result will be an incremental development of a product that will reach a minimally viable version .
The better the product, based on customer feedback, the larger the audience it will reach.
Lean makes sense when capital is scarce and when you need to keep burn rates low.
Lean was designed to inform the founders’ vision while they operated frugally at speed. It was not built as a focus group for consensus for those without deep convictions .
Is the lean startup still a valuable model?
As Steve Blank has pointed out in an HBR article entitled “ Is the Lean Startup Dead? “
I realized it was time for a new startup heuristic: the amount of customer discovery and product-market fit you need to find is inversely proportional to the amount and availability of risk capital.
In other words, the more risk capital that is available on the market the least the lean startup model might work.
The reason is, that if you have massive risk capital, you won’t need to test all your assumptions.
Quite the opposite, you’ll need to execute them fast.
Also, one of the primary logic of the lean startup is to burn cash at the slowest rate possible, while evolving (so-called pivoting) your business model .
If money is not an issue, then why go for the lean startup?
Steve Blank went further:
Rather than the “first mover advantage” of the last bubble , today’s theory is that “massive capital infusion owns the entire market.”
Therefore, if you secured a massive injection of money, then your aim might be primarily toward growth , rather than profits.
In that context, the lean startup might not work!
Are capital moats sustainable?
When a company or startup has a substantial capital allocate for growth , that is when this injection can become a short-term competitive advantage.
However, as companies finance growth through artificial injection of capital, those also become extremely risky, because many of the assumptions underlying the business model can’t be tested organically, thus leaving the company’s foundations weak.
An example of this excess of use of capital as a competitive moat has been WeWork , which has proved one of the most disastrous business endeavors of the last decade.
Thus, capital moats and technological moats need to be balanced with careful business model testing and organic validation in the marketplace!
Create Your Business Model Idea In Less Than A Minute!
With our Business Model Idea generator, you can craft the perfect business model idea, in less than a minute, by leveraging AI, to help you find the first version of the building blocks needed to build a successful business model !
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Asymmetric Business Models
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Minimum Viable Audience
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Market Expansion Theory
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Other business resources:
- What Is Business Model Innovation And Why It Matters
- Successful Types of Business Models You Need to Know
- What Is A Heuristic And Why Heuristics Matter In Business
- What Is Bounded Rationality And Why It Matters
- The Complete Guide To Business Development
- Business Strategy: Definition, Examples, And Case Studies
- Blitzscaling Business Model Innovation Canvas In A Nutshell
- What Is a Value Proposition?
- What Is a Lean Startup Canvas?
- What Is Market Segmentation?
- Marketing Strategy: Definition, Types, And Examples
- Marketing vs. Sales
- What is Growth Hacking?
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10 key steps to developing a business model.
Understanding your business model is crucial for evaluating the ability of the company to support a new product idea. Too often we see companies taking on a new product development project, only to discover late in the process that the company is missing key infrastructure, such as the appropriate distribution channels, expertise in key technologies or the ability to finance large product purchases for customers. This post will help you decipher your business model in 10 key steps.
Definition of a Business Model
Before we get started on those 10 steps, a brief definition of a business model: It describes how a company creates and distributes a compelling value proposition that customers are willing to pay for at a price that yields an acceptable profit for the company.
10 Steps to Developing a Business Model
Now for the 10 steps to developing a business model. Throughout the process, stay at a fairly high level and focus on the most important attributes. It’s easy to get lost if you get into every little detail.
- Choose a particular target segment and describe it. A segment is a group of customers with similar needs, behaviors or other attributes that the company chooses to serve.
- Next, what channels are used to market to, sell to, distribute to and support this segment? Are there any partners we need to establish or maintain relationships with?
- What products and/or services are offered to this segment, and are there any differences by channel? If so, make that clear.
- What are the revenue streams? How are prices set? How are customers charged for products and services? How is revenue collected?
- Now, what is the value proposition delivered by each product. Think not only of value propositions for the customer (including the end-customer and any intermediaries), but also partners. Remember that the value proposition is from the perspective of the customer and can vary by customer segment; that is why we focus on one segment at a time.
- What are the key activities the company must perform to ensure the value proposition is delivered? This can include activities supporting partners and channels that are key to the value proposition. This may also involve outsourcing.
- What are key inputs and resources that must be acquired and maintained? This can include human, physical, financial and intellectual assets, as well as suppliers and vendors.
- Next, what implications do the elements defined so far have for the infrastructure of the business? They may not have been captured already. Is there significant investment required in maintaining certain technologies, skills or branding, for example?
- The cost structure includes the fixed costs of maintaining the value chain, as well as variable costs. Where are the biggest or most volatile costs?
- Finally, have you adequately identified what the company does differently to deliver on the competitive strategy (how the company differentiates itself from the competition)? If it’s not evident in the activities or resources identified you’ll need to take another pass at it. It may take several iterations to get something you are comfortable with.
Arranging your Findings for Easy Reference
Repeat for each customer segment, noting similarities and differences with the previous segment(s). You may find it helpful to arrange your findings for easy reference in a diagram like the one below.
The business model is one of the most powerful, and most overlooked, tools of the product developer. New products must fit the existing business model, unless the company is expressly willing to adapt its model to support the new product. Evaluating fit with the business model early and often throughout the development process helps prevent costly mistakes and improve new product success.
Learn more about how the Product Risk Framework® (BFF) integrates important business model components. The BFF is a business intelligence SW tool for product developers.
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Commercialization Process: Business Model Development
Description.
A Business Model describes the rationale of how an organization creates and delivers value in economic, social, or cultural contexts. Business Model Development is the design for the successful operation of a business that includes idenfying revenue sources, customer base, products, and details of financing. The Business Model is heavily influenced from the Customer Discovery, market research, and Market Requirements. A viable business model aggregates these concepts into actionable information to set achievable financial forecasts and goals.
At this point an entrepreneur should have collected enough knowledge about the market to create a go-to-market strategy. Now is the time to assess the team and determine their strengths and weaknesses. Create a plan to fill any voids.
How this Milestone Reduces Project Risk
The business needs a viable and profitable Business Model with enough customers to buy the finished product to be successful or to license the technology to another party. A business needs the correct team and resources in order to thrive, for which the Business Model helps identify and plan. The creation of a go-to-market strategy ensures that there will be concrete steps to take toward success.
What to consider at this time
Are the Business Model’s goals attainable? Is there a return on investment that makes this project worthwhile to the entrepreneur and investors? Does the team possess adequate skills to drive growth? Is there quantifiable intellectual property to drive business growth?
READY TO START?
There are two modules in the Business Model Development Process: Business Model Development (BMD) and Fundraising Materials.
The first one to explore is the BMD where you will learn:
- Cover and expand on key aspects of the Business Model Canvas and Market Requirements Document
- Consistent documentation
- Direct and focus the team’s energy toward successful commercialization
Creating a business model is a complicated process. This is the first step to help you understand the scope of the project.
Before you fire off your BMD questions take a second to explore the supplemental reading.
This worksheet provides a path to follow that ensures that greatest level of success along the BMD runway.
Marketing is a huge subject. This supplemental reading document will help you prepare for the next step.
The next module concerns pitching your idea to investors and customers. Here is a general overview of the material covered here:
- Outline a concise introduction to the company and technology
- Convey the most relevant facts while capturing audience’s attention, leaving room for questions
- Organize goals of technology launch and an overview of financials into a concise and convincing pitch deck
- Develop a realistic Ask and Call-to-Action to motivate and capture investor’s attention
Money doesn’t buy happiness, but it will help bring your product to market. Open this module to learn fundraising mechanisms and what to expect from investors.
A great example of what a strong pitch deck would look like. Use it and share it with us!
Is an SBIR or STTR right for you? Dive deeper into these funding opportunities with this guide.
Crafting your pitch is a bit like refining your resume. It needs to be perfect and focused to derive your desired outcome. Start here to measure how far along the process you are.
When you are ready to build your own pitch deck open this worksheet and use the outline to help craft the perfect pitch.
How to Develop a Business Model
A business model is the blueprint on which your business plans are built. It is not something that exists in the real world, but is rather a description of how you intend to operate your business. As such it is a very important document for any business planning to be successful. But what if you don’t know how to create such a plan?
Don’t worry, as with all areas of life there are good and bad ways to approach the question of how to develop a business model . To help you think through your options, I’ve broken down the different stages of business models into categories. Within these categories, there are sub-categories, and within each sub-category, there are more detailed plans of how to approach each individual stage. Once you have a clear understanding of each stage, you can start developing your business strategies.
Understanding The Existing Market
You may be very excited about starting a new company…and so you would want to know how to create a business model, right? Unfortunately, creating a business model for a new company can be much more difficult than creating one for an existing company. Even though you are starting a completely new company, you still need to understand how existing companies work…so that you can adapt your own company plans to fit. As a simple example, if you are beginning your journey as a YouTuber, you would find out that many use YouTubeStorm to boost their metrics and get ahead of the competition. The same strategy is used by businesses to market their products (as part of their content marketing strategy) .
Business Purpose
How to develop a business model begins with having a clearly defined business purpose. The reason why you are starting your business in the first place should be obvious to you. It should be a company that can profit from a particular market or niche. By identifying your business purposes, you’ll be better able to determine how to develop a business model that will meet your needs. However, even though you already have a clearly defined company purpose, this doesn’t mean that your business model needs to be laid out in stone…or concrete.
Most business plans are not “stone” by any means…they are just plans. As long as they are well-written and carefully structured, business plans can serve as guides for every step of the business development process…even when that step is not entirely clear in your head. When I say “step,” I don’t mean “step forward.” I mean that every step along the way, from “thinking up the idea” to “figuring out how to get it into the real world” needs to be carefully planned out, monitored, and adjusted.
Developing a business model takes effort…and, at the same time, it does not need to be done alone. In fact, you probably don’t need a business plan at all if your company has no customers! A business without customers does not have a business model! Customers are what keep a business going. So, if you have no customers…what’s stopping your company from succeeding?
Every good business plan should provide a baseline “what” you are trying to accomplish, as well as an understanding of what “we” expect to see as a result of the “how.” There are no perfect businesses, but there are business models. The purpose of a business plan is to provide direction so that all the steps that lead up to the final result can be accurately monitored and calculated. As an entrepreneur, you already understand the importance of this…you’ve probably heard the old saying, “If you fail to plan, you are planning to fail.” Without proper planning, no business will thrive.
But you probably also know that business models need to change over time. As your business model changes, you will need to re-plan your business in order to remain competitive in today’s market. What will you do with your business model once it no longer fits your needs? Do you continue to use the same business model? There are no perfect business plans, but if you take the time to craft one that answers to those three questions, you are likely on your way to creating the structure and framework you need to succeed.
Written by Abhishek
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Developing a Business Model
Developing a business model is one of the most important steps in starting a business. A business model is a plan for how a company will generate revenue and make a profit. It outlines the products or services offered, target market, and revenue streams.
Identify Your Target Market
The first step in developing a business model is to identify your target market. This includes understanding who your customers are, what their needs and pain points are, and how your products or services will solve their problems. Knowing your target market will help you define the products or services you will offer and how you will monetize your business.
Conduct Market Research
Once you have identified your target market, conduct market research to understand the competition and identify opportunities for differentiation. This includes researching the size of the market, the potential for growth, and the current competition. Use this information to understand how you can position your business to stand out in the market.
Determine Your Pricing Strategy
Another important aspect of developing a business model is determining your pricing strategy. Consider the cost of goods sold, overhead expenses and profit margin when setting prices. Also, consider the perceived value of your product or service and the pricing of competitors.
Create a Business Plan
Once you have a clear understanding of your target market, competition, and pricing strategy, it’s time to create a business plan. A business plan should include your business model, financial projections, and growth strategy. It should also include details about your products or services, target market, and marketing strategy. A well-written business plan will help you secure funding and attract investors.
Continuously Re-evaluate and Iterate
Keep in mind that your business model is not set in stone, and it’s essential to continually re-evaluate and iterate as needed. Be open to feedback, data and market changes. Always be ready to pivot and adapt your strategy to stay competitive in the market.
In summary, developing a business model is a crucial step in starting a business. It’s essential to identify your target market, conduct market research, determine your pricing strategy, create a business plan, and re-evaluate and iterate as needed. With a solid business model in place, you’ll be well on your way to creating a successful and sustainable business.
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The term business model refers to a company's plan for making a profit . It identifies the products or services the business plans to sell, its identified target market , and any anticipated expenses . Business models are important for both new and established businesses. They help new, developing companies attract investment, recruit talent, and motivate management and staff.
Established businesses should regularly update their business model or they'll fail to anticipate trends and challenges ahead. Business models also help investors evaluate companies that interest them and employees understand the future of a company they may aspire to join.
Key Takeaways
- A business model is a company's core strategy for profitably doing business.
- Models generally include information like products or services the business plans to sell, target markets, and any anticipated expenses.
- There are dozens of types of business models including retailers, manufacturers, fee-for-service, or freemium providers.
- The two levers of a business model are pricing and costs.
- When evaluating a business model as an investor, consider whether the product being offer matches a true need in the market.
Business Model
A business model is a high-level plan for profitably operating a business in a specific marketplace. A primary component of the business model is the value proposition . This is a description of the goods or services that a company offers and why they are desirable to customers or clients, ideally stated in a way that differentiates the product or service from its competitors.
A new enterprise's business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy , a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company.
Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands .
When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company's business model. Admittedly, the business model may not tell you everything about a company's prospects. But the investor who understands the business model can make better sense of the financial data.
A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable. Counting costs to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses.
One way analysts and investors evaluate the success of a business model is by looking at the company's gross profit . Gross profit is a company's total revenue minus the cost of goods sold (COGS). Comparing a company's gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model. Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income . That is gross profit minus operating expenses and is an indication of just how much real profit the business is generating.
The two primary levers of a company's business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many analysts consider gross profit to be more important in evaluating a business plan. A good gross profit suggests a sound business plan. If expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves.
When evaluating a company as a possible investment, find out exactly how it makes its money (not just what it sells but how it sells it). That's the company's business model.
Types of Business Models
There are as many types of business models as there are types of business. For instance, direct sales, franchising , advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrid models as well, such as businesses that combine internet retail with brick-and-mortar stores or with sporting organizations like the NBA .
Below are some common types of business models; note that the examples given may fall into multiple categories.
One of the more common business models most people interact with regularly is the retailer model. A retailer is the last entity along a supply chain. They often buy finished goods from manufacturers or distributors and interface directly with customers.
Example: Costco Wholesale
Manufacturer
A manufacturer is responsible for sourcing raw materials and producing finished products by leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods or highly replicated, mass produced products. A manufacturer can also sell goods to distributors, retailers, or directly to customers.
Example: Ford Motor Company
Fee-for-Service
Instead of selling products, fee-for-service business models are centered around labor and providing services. A fee-for-service business model may charge by an hourly rate or a fixed cost for a specific agreement. Fee-for-service companies are often specialized, offering insight that may not be common knowledge or may require specific training.
Example: DLA Piper LLP
Subscription
Subscription-based business models strive to attract clients in the hopes of luring them into long-time, loyal patrons. This is done by offering a product that requires ongoing payment, usually in return for a fixed duration of benefit. Though largely offered by digital companies for access to software, subscription business models are also popular for physical goods such as monthly reoccurring agriculture/produce subscription box deliveries.
Example: Spotify
Freemium business models attract customers by introducing them to basic, limited-scope products. Then, with the client using their service, the company attempts to convert them to a more premium, advance product that requires payment. Although a customer may theoretically stay on freemium forever, a company tries to show the benefit of what becoming an upgraded member can hold.
Example: LinkedIn/LinkedIn Premium
Some companies can reside within multiple business model types at the same time for the same product. For example, Spotify (a subscription-based model) also offers free version and a premium version.
If a company is concerned about the cost of attracting a single customer, it may attempt to bundle products to sell multiple goods to a single client. Bundling capitalizes on existing customers by attempting to sell them different products. This can be incentivized by offering pricing discounts for buying multiple products.
Example: AT&T
Marketplace
Marketplaces are somewhat straight-forward: in exchange for hosting a platform for business to be conducted, the marketplace receives compensation. Although transactions could occur without a marketplace, this business models attempts to make transacting easier, safer, and faster.
Example: eBay
Affiliate business models are based on marketing and the broad reach of a specific entity or person's platform. Companies pay an entity to promote a good, and that entity often receives compensation in exchange for their promotion. That compensation may be a fixed payment, a percentage of sales derived from their promotion, or both.
Example: social media influencers such as Lele Pons, Zach King, or Chiara Ferragni.
Razor Blade
Aptly named after the product that invented the model, this business model aims to sell a durable product below cost to then generate high-margin sales of a disposable component of that product. Also referred to as the "razor and blade model", razor blade companies may give away expensive blade handles with the premise that consumers need to continually buy razor blades in the long run.
Example: HP (printers and ink)
"Tying" is an illegal razor blade model strategy that requires the purchase of an unrelated good prior to being able to buy a different (and often required) good. For example, imagine Gillette released a line of lotion and required all customers to buy three bottles before they were allowed to purchase disposable razor blades.
Reverse Razor Blade
Instead of relying on high-margin companion products, a reverse razor blade business model tries to sell a high-margin product upfront. Then, to use the product, low or free companion products are provided. This model aims to promote that upfront sale, as further use of the product is not highly profitable.
Example: Apple (iPhones + applications)
The franchise business model leverages existing business plans to expand and reproduce a company at a different location. Often food, hardware, or fitness companies, franchisers work with incoming franchisees to finance the business, promote the new location, and oversee operations. In return, the franchisor receives a percentage of earnings from the franchisee.
Example: Domino's Pizza
Pay-As-You-Go
Instead of charging a fixed fee, some companies may implement a pay-as-you-go business model where the amount charged depends on how much of the product or service was used. The company may charge a fixed fee for offering the service in addition to an amount that changes each month based on what was consumed.
Example: Utility companies
A brokerage business model connects buyers and sellers without directly selling a good themselves. Brokerage companies often receive a percentage of the amount paid when a deal is finalized. Most common in real estate, brokers are also prominent in construction/development or freight.
Example: ReMax
There is no "one size fits all" when making a business model. Different professionals may suggest taking different steps when creating a business and planning your business model. Here are some broad steps one can take to create their plan:
- Identify your audience. Most business model plans will start with either defining the problem or identifying your audience and target market . A strong business model will understand who you are trying to target so you can craft your product, messaging, and approach to connecting with that audience.
- Define the problem. In addition to understanding your audience, you must know what problem you are trying to solve. A hardware company sells products for home repairs. A restaurant feeds the community. Without a problem or a need, your business may struggle to find its footing if there isn't a demand for your services or products.
- Understand your offerings. With your audience and problem in mind, consider what you are able to offer. What products are you interested in selling, and how does your expertise match that product? In this stage of the business model, the product is tweaked to adapt to what the market needs and what you're able to provide.
- Document your needs. With your product selected, consider the hurdles your company will face. This includes product-specific challenges as well as operational difficulties. Make sure to document each of these needs to assess whether you are ready to launch in the future.
- Find key partners. Most businesses will leverage other partners in driving company success. For example, a wedding planner may forge relationships with venues, caterers, florists, and tailors to enhance their offering. For manufacturers, consider who will provide your materials and how critical your relationship with that provider will be.
- Set monetization solutions. Until now, we haven't talked about how your company will make money. A business model isn't complete until it identifies how it will make money. This includes selecting the strategy or strategies above in determining your business model type. This might have been a type you had in mind but after reviewing your clients needs, a different type might now make more sense.
- Test your model. When your full plan is in place, perform test surveys or soft launches. Ask how people would feel paying your prices for your services. Offer discounts to new customers in exchange for reviews and feedback. You can always adjust your business model, but you should always consider leveraging direct feedback from the market when doing so.
Instead of reinventing the wheel, consider what competing companies are doing and how you can position yourself in the market. You may be able to easily spot gaps in the business model of others.
Criticism of Business Models
Joan Magretta, the former editor of the Harvard Business Review, suggests there are two critical factors in sizing up business models. When business models don't work, she states, it's because the story doesn't make sense and/or the numbers just don't add up to profits. The airline industry is a good place to look to find a business model that stopped making sense. It includes companies that have suffered heavy losses and even bankruptcy .
For years, major carriers such as American Airlines, Delta, and Continental built their businesses around a hub-and-spoke structure , in which all flights were routed through a handful of major airports. By ensuring that most seats were filled most of the time, the business model produced big profits.
However, a competing business model arose that made the strength of the major carriers a burden. Carriers like Southwest and JetBlue shuttled planes between smaller airports at a lower cost. They avoided some of the operational inefficiencies of the hub-and-spoke model while forcing labor costs down. That allowed them to cut prices, increasing demand for short flights between cities.
As these newer competitors drew more customers away, the old carriers were left to support their large, extended networks with fewer passengers. The problem became even worse when traffic fell sharply following the September 11 terrorist attacks in 2001 . To fill seats, these airlines had to offer more discounts at even deeper levels. The hub-and-spoke business model no longer made sense.
Example of Business Models
Consider the vast portfolio of Microsoft. Over the past several decades, the company has expanded its product line across digital services, software, gaming, and more. Various business models, all within Microsoft, include but are not limited to:
- Productivity and Business Processes: Microsoft offers subscriptions to Office products and LinkedIn. These subscriptions may be based off product usage (i.e. the amount of data being uploaded to SharePoint).
- Intelligent Cloud: Microsoft offers server products and cloud services for a subscription. This also provide services and consulting.
- More Personal Computing: Microsoft sells physically manufactured products such as Surface, PC components, and Xbox hardware. Residual Xbox sales include content, services, subscriptions, royalties, and advertising revenue.
A business model is a strategic plan of how a company will make money. The model describes the way a business will take its product, offer it to the market, and drive sales. A business model determines what products make sense for a company to sell, how it wants to promote its products, what type of people it should try to cater to, and what revenue streams it may expect.
What Is an Example of a Business Model?
Best Buy, Target, and Walmart are some of the largest examples of retail companies. These companies acquire goods from manufacturers or distributors to sell directly to the public. Retailers interface with their clients and sell goods, though retails may or may not make the actual goods they sell.
What Are the Main Types of Business Models?
Retailers and manufacturers are among the primary types of business models. Manufacturers product their own goods and may or may not sell them directly to the public. Meanwhile, retails buy goods to later resell to the public.
How Do I Build a Business Model?
There are many steps to building a business model, and there is no single consistent process among business experts. In general, a business model should identify your customers, understand the problem you are trying to solve, select a business model type to determine how your clients will buy your product, and determine the ways your company will make money. It is also important to periodically review your business model; once you've launched, feel free to evaluate your plan and adjust your target audience, product line, or pricing as needed.
A company isn't just an entity that sells goods. It's an ecosystem that must have a plan in plan on who to sell to, what to sell, what to charge, and what value it is creating. A business model describes what an organization does to systematically create long-term value for its customers. After building a business model, a company should have stronger direction on how it wants to operate and what its financial future appears to be.
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How to Design a Winning Business Model
- Ramon Casadesus-Masanell
- Joan E. Ricart
Smart companies’ business models generate cycles that, over time, make them operate more effectively.
Reprint: R1101G
Most executives believe that competing through business models is critical for success, but few have come to grips with how best to do so. One common mistake, the authors’ studies show, is enterprises’ unwavering focus on creating innovative models and evaluating their efficacy in standalone fashion—just as engineers test new technologies or products. However, the success or failure of a company’s business model depends largely on how it interacts with those of the other players in the industry. (Almost any business model will perform brilliantly if a company is lucky enough to be the only one in a market.) Because companies build them without thinking about the competition, companies routinely deploy doomed business models.
Moreover, many companies ignore the dynamic elements of business models and fail to realize that they can design business models to generate winner-take-all effects similar to the network externalities that high-tech companies such as Microsoft, eBay, and Facebook often create. A good business model creates virtuous cycles that, over time, result in competitive advantage.
Smart companies know how to strengthen their virtuous cycles, undermine those of rivals, and even use them to turn competitors’ strengths into weaknesses.
The Idea in Brief
There has never been as much interest in business models as there is today; seven out of 10 companies are trying to create innovative business models, and 98% are modifying existing ones, according to a recent survey.
However, most companies still create and evaluate business models in isolation, without considering the implications of how they will interact with rivals’ business models. This narrow view dooms many to failure.
Moreover, companies often don’t realize that business models can be designed so that they generate virtuous cycles—similar to the powerful effects high-tech firms such as Facebook, eBay, and Microsoft enjoy. These cycles, when aligned with company goals, reinforce competitive advantage.
By making the right choices, companies can strengthen their business models’ virtuous cycles, weaken those of rivals, and even use the cycles to turn competitors into complementary players.
This is neither strategy nor tactics; it’s using business models to gain competitive advantage. Indeed, companies fare poorly partly because they don’t recognize the differences between strategy, tactics, and business models.
Strategy has been the primary building block of competitiveness over the past three decades, but in the future, the quest for sustainable advantage may well begin with the business model. While the convergence of information and communication technologies in the 1990s resulted in a short-lived fascination with business models, forces such as deregulation, technological change, globalization, and sustainability have rekindled interest in the concept today. Since 2006, the IBM Institute for Business Value’s biannual Global CEO Study has reported that senior executives across industries regard developing innovative business models as a major priority. A 2009 follow-up study reveals that seven out of 10 companies are engaging in business-model innovation, and an incredible 98% are modifying their business models to some extent. Business model innovation is undoubtedly here to stay.
That isn’t surprising. The pressure to crack open markets in developing countries, particularly those at the middle and bottom of the pyramid, is driving a surge in business-model innovation. The economic slowdown in the developed world is forcing companies to modify their business models or create new ones. In addition, the rise of new technology-based and low-cost rivals is threatening incumbents, reshaping industries, and redistributing profits. Indeed, the ways by which companies create and capture value through their business models is undergoing a radical transformation worldwide.
Yet most enterprises haven’t fully come to grips with how to compete through business models. Our studies over the past seven years show that much of the problem lies in companies’ unwavering focus on creating innovative models and evaluating their efficacy in isolation—just as engineers test new technologies or products. However, the success or failure of a company’s business model depends largely on how it interacts with models of other players in the industry. (Almost any business model will perform brilliantly if a company is lucky enough to be the only one in a market.) Because companies build them without thinking about the competition, they routinely deploy doomed business models.
Business Model
A business model comprises choices and consequences.
Our research also shows that when enterprises compete using business models that differ from one another, the outcomes are difficult to predict. One business model may appear superior to others when analyzed in isolation but create less value than the others when interactions are considered. Or rivals may end up becoming partners in value creation. Appraising models in a stand-alone fashion leads to faulty assessments of their strengths and weaknesses and bad decision making. This is a big reason why so many new business models fail.
Moreover, the propensity to ignore the dynamic elements of business models results in many companies failing to use them to their full potential. Few executives realize that they can design business models to generate winner-take-all effects that resemble the network externalities that high-tech companies such as Microsoft, eBay, and Facebook have created. Whereas network effects are an exogenous feature of technologies, winner-take-all effects can be triggered by companies if they make the right choices in developing their business models. Good business models create virtuous cycles that, over time, result in competitive advantage. Smart companies know how to strengthen their virtuous cycles, weaken those of rivals, and even use their virtuous cycles to turn competitors’ strengths into weaknesses.
“Isn’t that strategy?” we’re often asked. It isn’t—and unless managers learn to understand the distinct realms of business models, strategy, and tactics, while taking into account how they interact, they will never find the most effective ways to compete.
What Is a Business Model, Really?
Everyone agrees that executives must know how business models work if their organizations are to thrive, yet there continues to be little agreement on an operating definition. Management writer Joan Magretta defined a business model as “the story that explains how an enterprise works,” harking back to Peter Drucker, who described it as the answer to the questions: Who is your customer, what does the customer value, and how do you deliver value at an appropriate cost?
Other experts define a business model by specifying the main characteristics of a good one. For example, Harvard Business School’s Clay Christensen suggests that a business model should consist of four elements: a customer value proposition, a profit formula, key resources, and key processes. Such descriptions undoubtedly help executives evaluate business models, but they impose preconceptions about what they should look like and may constrain the development of radically different ones.
Our studies suggest that one component of a business model must be the choices that executives make about how the organization should operate—choices such as compensation practices, procurement contracts, location of facilities, extent of vertical integration, sales and marketing initiatives, and so on. Managerial choices, of course, have consequences. For instance, pricing (a choice) affects sales volume, which, in turn, shapes the company’s scale economies and bargaining power (both consequences). These consequences influence the company’s logic of value creation and value capture, so they too must have a place in the definition. In its simplest conceptualization, therefore, a business model consists of a set of managerial choices and the consequences of those choices.
Companies make three types of choices when creating business models. Policy choices determine the actions an organization takes across all its operations (such as using nonunion workers, locating plants in rural areas, or encouraging employees to fly coach class). Asset choices pertain to the tangible resources a company deploys (manufacturing facilities or satellite communication systems, for instance). And governance choices refer to how a company arranges decision-making rights over the other two (should we own or lease machinery?). Seemingly innocuous differences in the governance of policies and assets influence their effectiveness a great deal.
Consequences can be either flexible or rigid. A flexible consequence is one that responds quickly when the underlying choice changes. For example, choosing to increase prices will immediately result in lower volumes. By contrast, a company’s culture of frugality—built over time through policies that oblige employees to fly economy class, share hotel rooms, and work out of Spartan offices—is unlikely to disappear immediately even when those choices change, making it a rigid consequence. These distinctions are important because they affect competitiveness. Unlike flexible consequences, rigid ones are difficult to imitate because companies need time to build them.
Take, for instance, Ryanair, which switched in the early 1990s from a traditional business model to a low-cost one. The Irish airline eliminated all frills, cut costs, and slashed prices to unheard-of levels. The choices the company made included offering low fares, flying out of only secondary airports, catering to only one class of passenger, charging for all additional services, serving no meals, making only short-haul flights, and utilizing a standardized fleet of Boeing 737s. It also chose to use a nonunionized workforce, offer high-powered incentives to employees, operate out of a lean headquarters, and so on. The consequences of those choices were high volumes, low variable and fixed costs, a reputation for reasonable fares, and an aggressive management team, to name a few. (See “Ryanair’s Business Model Then and Now.”) The result is a business model that enables Ryanair to offer a decent level of service at a low cost without radically lowering customers’ willingness to pay for its tickets.
Ryanair’s Business Model Then and Now
This depiction of Ryanair’s business model in the 1980s highlights the airline’s major choices at the time: offering excellent service and operating with a standardized fleet. The airline was forced to redesign its business model in the face of stiff competition.
Ryanair’s current business model rests on the key choices of offering customers low fares and providing nothing free. The rigid consequences include a reputation for fair fares and low fixed costs. Ryanair’s choices are aligned with its goals, generate cycles that reinforce the business model, and are robust given that it has been operating as a low-cost airline for 20 years.
Click here for a larger image of the graphic.
How Business Models Generate Virtuous Cycles
Not all business models work equally well, of course. Good ones share certain characteristics: They align with the company’s goals, are self-reinforcing, and are robust. (See the sidebar “Three Characteristics of a Good Business Model.”) Above all, successful business models generate virtuous cycles, or feedback loops, that are self-reinforcing. This is the most powerful and neglected aspect of business models.
Three Characteristics of a Good Business Model
How can you tell if a business model will be effective? A good one will meet three criteria.
1. Is it aligned with company goals?
The choices made while designing a business model should deliver consequences that enable an organization to achieve its goals. This may seem obvious until you consider a counterexample. In the 1970s, Xerox set up Xerox PARC, which spawned technological innovations such as laser printing, Ethernet, the graphical user interface, and very large scale integration for semiconductors. However, Xerox PARC was notoriously unable to spawn new businesses or capture value from its innovations for the parent due to a distressing lack of alignment with Xerox’s goals.
2. Is it self-reinforcing?
The choices that executives make while creating a business model should complement one another; there must be internal consistency. If, ceteris paribus, a low-cost airline were to decide to provide a level of comfort comparable to that offered by a full-fare carrier such as British Airways, the change would require reducing the number of seats on each plane and offering food and coffee. These choices would undermine the airline’s low-cost structure and wreck its profits. When there’s a lack of reinforcement, it’s possible to refine the business model by abandoning some choices and making new ones.
3. Is it robust?
A good business model should be able to sustain its effectiveness over time by fending off four threats, identified by Pankaj Ghemawat. They are imitation (can competitors replicate your business model?); holdup (can customers, suppliers, or other players capture the value you create by flexing their bargaining power?); slack (organizational complacency); and substitution (can new products decrease the value customers perceive in your products or services?). Although the period of effectiveness may be shorter nowadays than it once was, robustness is still a critical parameter.
Our studies show that the competitive advantage of high-tech companies such as Apple, Microsoft, and Intel stems largely from their accumulated assets—an installed base of iPods, Xboxes, or PCs, for instance. The leaders gathered those assets not by buying them but by making smart choices about pricing, royalties, product range, and so on. In other words, they’re consequences of business model choices. Any enterprise can make choices that allow it to build assets or resources—be they project management skills, production experience, reputation, asset utilization, trust, or bargaining power—that make a difference in its sector.
The consequences enable further choices, and so on. This process generates virtuous cycles that continuously strengthen the business model, creating a dynamic that’s similar to that of network effects. As the cycles spin, stocks of the company’s key assets (or resources) grow, enhancing the enterprise’s competitive advantage. Smart companies design business models to trigger virtuous cycles that, over time, expand both value creation and capture.
For example, Ryanair’s business model creates several virtuous cycles that maximize its profits through increasingly low costs and prices. (See the exhibit “Ryanair’s Key Virtuous Cycles.”) All of the cycles result in reduced costs, which allow for lower prices that grow sales and ultimately lead to increased profits. Its competitive advantage keeps growing as long as the virtuous cycles generated by its business model spin. Just as a fast-moving body is hard to stop because of kinetic energy, it’s tough to halt well-functioning virtuous cycles.
Ryanair’s Key Virtuous Cycles
Cycle 1: Low fares >> High volumes >> Greater bargaining power with suppliers >> Lower fixed costs >> Even lower fares
Cycle 2: Low fares >> High volumes >> High aircraft utilization >> Low fixed cost per passenger >> Even lower fares
Cycle 3: Low fares >> Expectations of low-quality service >> No meals offered >> Low variable costs >> Even lower fares
However, they don’t go on forever. They usually reach a limit and trigger counterbalancing cycles, or they slow down because of their interactions with other business models. In fact, when interrupted, the synergies work in the opposite direction and erode competitive advantage. For example, one of Ryanair’s cycles could become vicious if its employees unionized and demanded higher wages, and the airline could no longer offer the lowest fares. It would then lose volume, and aircraft utilization would fall. Since Ryanair’s investment in its fleet assumes a very high rate of utilization, this change would have a magnified effect on profitability.
It’s easy to see that virtuous cycles can be created by a low-cost, no-frills player, but a differentiator may also create virtuous cycles. Take the case of Irizar, a Spanish manufacturer of bodies for luxury motor coaches, which posted large losses after a series of ill-conceived moves in the 1980s. Irizar’s leadership changed twice in 1990 and morale hit an all-time low, prompting the new head of the company’s steering team, Koldo Saratxaga, to make major changes. He transformed the organization’s business model by making choices that yielded three rigid consequences: employees’ tremendous sense of ownership, feelings of accomplishment, and trust. The choices included eliminating hierarchy, decentralizing decision making, focusing on teams to get work done, and having workers own the assets. (See the exhibit “Irizar’s Novel Business Model.”)
Irizar’s Novel Business Model
When Irizar—a Spanish cooperative that manufactures luxury motor coach bodies—created a radically different business model, it made several innovative choices.
Shared Ownership
- Workers own assets and contribute financially to join Irizar
- Teams set their own goals and choose leaders
- No bosses, only coordinators
- Flat hierarchy, with only three levels
- No overtime pay
- Decentralized decision making
- Shared information and transparency about performance
- No walls inside plants or offices; no assigned parking spaces
- Tenure after three years of probation; no evaluation or firings thereafter
- No clocking in and out
- Only one product for all markets
- Most repetitive tasks outsourced
Accomplishment
- Relatively high product prices
- Pay scale ratio of just 3:1
- Some profit (or loss) sharing every year
These choices have led to innovation, high quality, and excellent service, generating high sales volume as well as customer loyalty.
Irizar’s main objective, as a cooperative, is to increase the number of well-paying jobs in the Basque Country, so the company developed a business model that generates a great deal of customer value. Its key virtuous cycle connects customers’ willingness to pay with relatively low cost, generating high profits that feed innovation, service, and high quality. In fact, quality is the cornerstone of Irizar’s culture. Focusing on customer loyalty and an empowered workforce, the company enjoyed a 23.9% compound annual growth rate over the 14 years that Saratxaga was CEO. Producing 4,000 coaches in 2010 and generating revenues of about €400 million, Irizar is an example of a radically different business model that generates virtuous cycles.
Competing with Business Models
It’s easy to infuse virtuousness in cycles when there are no competitors, but few business models operate in vacuums—at least, not for long. To compete with rivals that have similar business models, companies must quickly build rigid consequences so that they can create and capture more value than rivals do. It’s a different story when enterprises compete against dissimilar business models; the results are often unpredictable, and it’s tough to know which business model will perform well.
Take, for instance, the battle between two of Finland’s dominant retailers: S Group, a consumers’ cooperative, and Kesko, which uses entrepreneur-retailers to own and operate its stores. We’ve tracked the firms for over a decade, and Kesko’s business model appears to be superior: The incentives it offers franchisees should result in rapid growth and high profits. However, it turns out that the S Group’s business model hurts Kesko more than Kesko’s affects the S Group. Since customers own the S Group, the retailer often reduces prices and increases customer bonuses, which allows it to gain market share from Kesko. That forces Kesko to lower its prices and its profits fall, demotivating its entrepreneur-retailers. As a result, Kesko underperforms the S Group. Over time, the S Group’s opaque corporate governance system allows slack to creep into the system, and it is forced to hike prices. This allows Kesko to also increase prices and improve profitability, drive its entrepreneur-retailers, and win back more customers through its superior shopping experience. That sparks another cycle of rivalry.
Companies can compete through business models in three ways: They can strengthen their own virtuous cycles, block or destroy the cycles of rivals, or build complementarities with rivals’ cycles, which results in substitutes mutating into complements.
Strengthen your virtuous cycle.
Companies can modify their business models to generate new virtuous cycles that enable them to compete more effectively with rivals. These cycles often have consequences that strengthen cycles elsewhere in the business model. Until recently, Boeing and Airbus competed using essentially the same virtuous cycles. Airbus matched Boeing’s offerings in every segment, the exception being the very large commercial transport segment where Boeing had launched the 747 in 1969. Given the lumpiness of demand for aircraft, their big-ticket nature, and cyclicality, price competition has been intense.
How Airbus Bolstered Its Business Model
Companies can often strengthen their business models to take on competitors more effectively. Airbus’s business model initially fell short because Boeing could reinvest profits from its 747, which enjoyed a monopoly in the very large commercial transport segment. In 2007, Airbus launched the 380 to compete in that segment—strengthening its virtuous cycle relative to Boeing’s.
Historically, Boeing held the upper hand because its 747 enjoyed a monopoly, and it could reinvest those profits to strengthen its position in other segments. Analysts estimate that the 747 contributed 70 cents to every dollar of Boeing’s profits by the early 1990s. Since R&D investment is the most important driver of customers’ willingness to pay, Airbus was at a disadvantage. It stayed afloat by obtaining low-interest loans from European governments. Without the subsidies, Airbus’s cycle would have become vicious.
With the subsidies likely to dry up, Airbus modified its business model by developing a very large commercial transport, the 380. To dissuade Airbus, Boeing announced a stretch version of the 747. However, that aircraft would cut into the 747’s profits, so it seems unlikely that Boeing will ever launch it. Not only does the 380 help maintain the virtuousness of Airbus’s cycle in small and midsize planes, but also it helps decelerate the virtuousness of Boeing’s cycle. The increase in rivalry suggests that the 747 will become less of a money-spinner for Boeing. That’s why it is trying to strengthen its position in midsize aircraft, where competition is likely to become even tougher when sales of the 380 take off, by developing the 787.
Weaken competitors’ cycles.
Some companies get ahead by using the rigid consequences of their choices to weaken new entrants’ virtuous cycles. Whether a new technology disrupts an industry or not depends not only on the intrinsic benefits of that technology but also on interactions with other players. Consider, for instance, the battle between Microsoft and Linux, which feeds its virtuous cycle by being free of charge and allowing users to contribute code improvements. Unlike Airbus, Microsoft has focused on weakening its competitor’s virtuous cycle. It uses its relationship with OEMs to have Windows preinstalled on PCs and laptops so that it can prevent Linux from growing its customer base. It discourages people from taking advantage of Linux’s free operating system and applications by spreading fear, uncertainty, and doubt about the products.
In the future, Microsoft could raise Windows’ value by learning more from users and offering special prices to increase sales in the education sector, or decrease Linux’s value by undercutting purchases by strategic buyers and preventing Windows applications from running on Linux. Linux’s value creation potential may theoretically be greater than that of Windows, but its installed base will never eclipse that of Microsoft as long as the software giant succeeds in disrupting its key virtuous cycles.
Turn competitors into complements.
Rivals with different business models can also become partners in value creation. In 1999, Betfair, an online betting exchange, took on British bookmakers such as Ladbrokes and William Hill by enabling people to anonymously place bets against one another. Unlike traditional bookmakers who only offer odds, Betfair is a two-sided internet-based platform that allows customers to both place bets and offer odds to others. One-sided and two-sided businesses have different virtuous cycles: While bookmakers create value by managing risk and capture it through the odds they offer, betting exchanges themselves bear no risk. They create value by matching the two sides of the market and capture it by taking a cut of the net winnings.
Over the past decade, Ladbrokes’ and William Hill’s gross winnings have declined, so Betfair has hurt them, but not as much as expected. Because Betfair has improved odds in general, gamblers lose less money. They then place more wagers, and when bookies pay out, bettors gamble again, feeding a virtuous cycle. This has expanded the British gambling market by a larger proportion than just the improvement of odds might suggest. The better odds Betfair offers also help traditional bookmakers gauge market sentiment more accurately and hedge their exposures at a lower cost. When a new business model creates complementarities between competitors, it is less likely that incumbents will respond aggressively. The initial reaction from bookmakers to Betfair was hostile, but they have become more accommodating of its presence ever since.
Business Models vs. Strategy vs. Tactics
No three concepts are of as much use to managers or as misunderstood as strategy, business models, and tactics. Many use the terms synonymously, which can lead to poor decision making.
To be sure, the three are interrelated. Whereas business models refer to the logic of the company—how it operates and creates and captures value for stakeholders in a competitive marketplace—strategy is the plan to create a unique and valuable position involving a distinctive set of activities. That definition implies that the enterprise has made a choice about how it wishes to compete in the marketplace. The system of choices and consequences is a reflection of the strategy, but it isn’t the strategy; it’s the business model. Strategy refers to the contingent plan about which business model to use. The key word is contingent; strategies contain provisions against a range of contingencies (such as competitors’ moves or environmental shocks), whether or not they take place. While every organization has a business model, not every organization has a strategy—a plan of action for contingencies that may arise.
Consider Ryanair. The airline was on the brink of bankruptcy in the 1990s, and the strategy it chose to reinvent itself was to become the Southwest Airlines of Europe. The new logic of the organization—its way of creating and capturing value for stakeholders—was Ryanair’s new business model.
Changing strategic choices can be expensive, but enterprises still have a range of options to compete that are comparatively easy and inexpensive to deploy. These are tactics—the residual choices open to a company by virtue of the business model that it employs. Business models determine the tactics available to compete in the marketplace. For instance, Metro, the world’s largest newspaper, has created an ad-sponsored business model that dictates that the product must be free. That precludes Metro from using price as a tactic.
Think of a business model as if it were an automobile. Different car designs function differently—conventional engines operate quite differently from hybrids, and standard transmissions from automatics—and create different value for drivers. The way the automobile is built places constraints on what the driver can do; it determines which tactics the driver can use. A low-powered compact would create more value for the driver who wants to maneuver through the narrow streets of Barcelona’s Gothic Quarter than would a large SUV, in which the task would be impossible. Imagine that the driver could modify the features of the car: shape, power, fuel consumption, seats. Such modifications would not be tactical; they would constitute strategies because they would entail changing the machine (the “business model”) itself. In sum, strategy is designing and building the car, the business model is the car, and tactics are how you drive the car.
Strategy focuses on building competitive advantage by defending a unique position or exploiting a valuable and idiosyncratic set of resources. Those positions and resources are created by virtuous cycles, so executives should develop business models that activate those cycles. That’s tough, especially because of their interactions with those of other players such as competitors, complementors, customers, and suppliers that are all fighting to create and capture value too. That’s the essence of competitiveness—and developing strategy, tactics, or innovative business models has never been easy.
- RC Ramon Casadesus-Masanell is a professor at Harvard Business School and the author, with Joan E. Ricart, of “How to Design a Winning Business Model” (HBR January–February 2011).
- JR Joan E. Ricart ( [email protected] ) is the Carl Schroder Professor of Strategic Management and Economics at IESE Business School in Barcelona.
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The 7 Elements of a Strong Business Model
Envisioning the many moving parts of a functioning business is the first step to success.
By Larry Alton • Apr 22, 2015
Opinions expressed by Entrepreneur contributors are their own.
Creating a business model isn't simply about completing your business plan or determining which products to pursue. It's about mapping out how you will create ongoing value for your customers.
Where will your business idea start, how should it progress, and when will you know you've been successful? How will you create value for customers? Follow these simple steps to securing a strong business model .
1. Identify your specific audience.
Targeting a wide audience won't allow your business to hone in on customers who truly need and want your product or service. Instead, when creating your business model, narrow your audience down to two or three detailed buyer personas. Outline each persona's demographics, common challenges and the solutions your company will offer. As an example, Home Depot might appeal to everyone or carry a product the average person needs, but the company's primary target market is homeowners and builders.
Related: The Science of Building Buyer Personas (Infographic)
2. Establish business processes.
Before your business can go live, you need to have an understanding of the activities required to make your business model work. Determine key business activities by first identifying the core aspect of your business's offering. Are you responsible for providing a service, shipping a product or offering consulting? In the case of Ticketbis , an online ticket exchange marketplace, key business processes include marketing and product delivery management.
3. Record key business resources.
What does your company need to carry out daily processes, find new customers and reach business goals? Document essential business resources to ensure your business model is adequately prepared to sustain the needs of your business. Common resource examples may include a website, capital, warehouses, intellectual property and customer lists.
4. Develop a strong value proposition.
How will your company stand out among the competition? Do you provide an innovative service, revolutionary product or a new twist on an old favorite? Establishing exactly what your business offers and why it's better than competitors is the beginning of a strong value proposition. Once you've got a few value propositions defined, link each one to a service or product delivery system to determine how you will remain valuable to customers over time.
Related: How to Develop and Evaluate Your Startup's Value Proposition
5. Determine key business partners.
No business can function properly (let alone reach established goals) without key partners that contribute to the business's ability to serve customers. When creating a business model, select key partners, like suppliers, strategic alliances or advertising partners. Using the previous example of Home Depot, key business partners may be lumber suppliers, parts wholesalers and logistics companies.
6. Create a demand generation strategy.
Unless you're taking a radical approach to launching your company, you'll need a strategy that builds interest in your business, generates leads and is designed to close sales. How will customers find you? More importantly, what should they do once they become aware of your brand? Developing a demand generation strategy creates a blueprint of the customer's journey while documenting the key motivators for taking action.
7. Leave room for innovation.
When launching a company and developing a business model, your business plan is based on many assumptions. After all, until you begin to welcome paying customers, you don't truly know if your business model will meet their ongoing needs. For this reason, it's important to leave room for future innovations. Don't make a critical mistake by thinking your initial plan is a static document. Instead, review it often and implement changes as needed.
Keeping these seven tips in mind will lead to the creation of a solid business plan capable of fueling your startup's success.
Related: 5 Strategies for Generating Consumer Demand
Freelance Writer & Former Entrepreneur
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Back Office
Developing a Business Model That Scales As You Grow
By Thryv Contributor | 08.03.22 | 4 min read
Home » Blog Home » Developing a Business Model That Scales As You Grow
A business model is a blueprint that defines your company’s mission, goals, operations and structure. It’s essential as the foundation for a prosperous business, particularly if you intend to develop it into a franchise.
Business models are concise explanations of how you plan to deliver goods or services, and attract and retain customers. Use these tips to develop a business model for success.
Keep It Simple
Believe it or not, the best business models are concise, easy to follow and only have one page. Business models aren’t the same as business plans , which contain more extensive data and project finances in detail. Business plans might get revised every couple of years, and can reach 100 pages.
A business model is more evergreen, and your emerging franchise’s reason for being. Think of it as the basis for your “elevator pitch.” It might lend itself well to an illustration or diagram that others can reference and understand.
Think of the business model as a single concept, then let that guide you through the development phase.
A business model is a company’s core strategy for profitably doing business. — Investopedia
Operational Flow
How will your company operate? What departments are involved in delivering your services? How will you manage various departments and divisions? How and why will it be successful as a franchise?
Your business model should outline your company’s operational flow, from manufacturing to marketing. It should name each department and define the positions and job responsibilities within them. And it should outline your responsibilities as a franchisor, in addition to your franchisees.
Lay out the type of franchise arrangement you intend to use. According to Tulane University School of Professional Advancement, there are three main types .
- Business format franchise. The most common franchise arrangement. The franchisor allows someone to do business using their trademarks and business model in exchange for royalty fees and a recurring percentage of sales revenue. Franchisees under this model are run according to the parent company’s guidelines.
- Product franchise. The oldest form of a franchise arrangement. Under this model, franchisees exclusively distribute or sell the franchisor’s products.
- Manufacturing franchise. Within this model, third-party manufacturers obtain exclusive rights to produce and distribute products using the franchisor’s trade name and trademark.
Use your model to help determine costs, operational efficiencies and ways to achieve higher margins. Then, your business model could identify efficient distribution channels or other revenue opportunities that don’t increase costs.
Operations, sales, marketing, organizational structure, startup and labor costs are essential components of a successful business model. Over time, you’ll want to revisit your company’s organizational and logistical structure to keep your business practices current and efficient.
Customer Profile
To rise above your competitors, you have to identify the best ways to meet your customers’ wants and needs. Include a customer profile (also known as a persona ) in your business model to help you develop products and services specifically with them in mind.
Answer the following questions to develop a customer profile (whether a consumer or another business):
- What are your customers’ needs?
- What motivates your customers to purchase?
- What are your customers’ common characteristics?
- How can you provide value to your customers?
- How can you improve to attract and retain a larger customer base?
No matter who your customer is, you need to identify their needs and document them in your business model.
Mission Statement
Include the reason your company exists in your business model. Why did you create the company in the first place? Whose unmet need did you decide you could address?
A mission statement helps everyone clearly see your customers’ needs and how the company intends on serving them. A clear statement will guide future decision-making, set the tone for your company’s culture and lay the foundation for day-to-day operations.
To help you write your company’s mission statement, ask yourself:
- What is my business?
- What do I want to accomplish for my customers?
- Why should we exist?
Profit Design
Probably of most interest to lenders, investors or franchisees is how you expect your business to make a profit. In addition to spelling out startup costs, you’ll want to identify how the company will be financed at the outset, and then over time. Let your annual business plans explain revenues and expenses in granular detail.
Don’t dismiss profit, even at the beginning. According to entrepreneur and author Michael Michalowicz , carving out profit from your income isn’t optional. He advises that at the outset, you should set up an account at a bank separate from your daily financial operations. Then, transfer a percentage of every deposit into that account.
The point is, if you can’t afford to take a profit, then your plan to make money isn’t sustainable. This means, there’s a flaw in your business model.
Be Flexible
Probably the single most important feature of your business model is its elasticity. In other words, your model should — and will need to — change several times throughout the years to accommodate changes in the marketplace, technological advances, etc.
As the world changes, so too should your business model. It shouldn’t be strongest at the moment of its inception; build in flexibility to adjust your model as needed to keep it relevant. Over time, you’ll hone and revise to give it more staying power.
Think of your business model as your roadmap to success. Have a clear set of directions on hand, but know that you may need to detour for better routes.
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This a presentation delivered by Angela Ihunweze on how organisations especially SMEs can develop their business model and strategy. Anywhere in the world ,Angela Ihunweze can be invited to deliver this topic practically
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- 1. Prepared by Angela Ihunweze CEO ANGELA ITAMBO COMPANY www.angelaitambo.com.ng 08033280453 Developing a business model; and strategy
- 2. Contents What is a business model What is a strategy The importance strategic planning Difference between a strategic plan and a business plan? Different business models that exist How to evaluate strategies and business models How we can craft business strategies Challenges of implementing business strategy and business model Tools for implementing strategies
- 3. What is a business model? According to investopedia a business model is The plan implemented by a company to generate revenue and make a profit from operations. The model includes the components and functions of the business, as well as the revenues it generates and the expenses it incurs. Activity: What is your current business model or do you have any? ------------------------------------------------------------------ ------------------------------------------------------------------ ------------------------------------------------------------------ -------------
- 4. What is a strategy? A plan of action or policy designed to achieve a major or overall aim. The art of planning and directing overall military operations and movements in a war or battle Important lesson: you must have it at the back of your mind that business is warfare Activity: In what ways can you agree that business is warfare ----------------------------------------------------------------- ------------------------------------------------------------------ ------------------------------------------------------------------ ------------
- 5. The importance strategic planning Helps build your competitive advantage Communicates your strategy to staff Prioritizes your financial needs Provides focus and direction to move from plan to action Activity: Does your business have a strategic plan ----------------------------------------------------------------- ------------------------------------------------------------------ ------------------------------------------------------------------ -------------
- 6. Difference between Strategic planning and a business plan According to strategic plan for dummies: A business plan is a planning tool for new businesses, projects, or entrepreneurs who are serious about starting a business. A business plan Helps define the purpose of your business Helps plan human resources and operational needs Is critical if you’re seeking funding Assesses business opportunities Provides structure to ideas While a strategic plan is a management tool that C-level managers need to master and is for established businesses and business owners who are serious about growth.
- 7. Different business models that exist According to a 2004 Massachusetts Institute of Technology Sloan School of Management study of the largest 1000 U.S. firms, four basic business model archetypes exist. The four archetypes are creator, distributor, landlord and broker. Within these four archetypes exist 16 detailed business models. The four archetypes each control one or more assets that include financial, physical, intangible and human assets. Creator Creators purchase component parts and raw materials and transform these parts and materials into a saleable finished product. Manufacturing companies typically fall under the creator business model. Another attribute of the creator model comes in the form of design. Companies using the creator business model design the products they sell.
- 8. Business model continues Distributor Distributors buy products and resell them to others. Companies that fall under this business model archetype often provide value-added services before reselling the product. Wholesalers and retailers such as Shoprite,distributors at Okearin market are examples Landlord Under this business model archetype, a landlord represents any company that sells the temporary use of its assets. Typically, landlords refer to physical property assets such as houses and apartments, but under this business model it also includes lenders, contractors and consultants. The landlord business model makes use of and controls financial assets (bankers and lenders), physical assets (houses and hotels), intangible assets (intellectual property) and human assets (contractors and temporary agencies).
- 9. Business models continues Broker Brokers perform a service by matching buyers with sellers of goods and services. Where distributors buy the products and resell to others, brokers do not take ownership of the assets they control. Brokers, such as stockbrokers, business brokers and real estate brokers typically get paid a commission when they connect two parties and a transaction occurs. Brokers control financial assets without taking ownership of the asset. Activity: Which group do you belong to?----------- ------------------------------------------------------------------ ---------------------------------------------------------
- 10. How to evaluate strategies and business models Internal Consistency If a strategy is to be effective, it cannot be internally inconsistent or have policies or targets that conflict with overall company structures or goals. The evaluation verifies whether its approach to the internal organization of the company and operations reinforces the valuable aspects of existing structures. The targets specified by the strategy have to match overall company goals. The internal elements of the strategy have to all further the same objectives and avoid conflicting measures. External Environment In addition to being consistent with the internal company structures, a strategy has to match its external environment. Companies exist in a marketplace that includes customers, competitors and regulatory bodies. Businesses create value and deliver benefits. They incur costs and make profits within an existing pricing structure. The evaluation analyzes to what extent the strategy addresses these factors in a consistent manner — for example, verifying that the value creation specified by the strategy matches target market needs.
- 11. Strategic Advantages A strategy has to create advantages to make its implementation worthwhile. The benefits of the strategy have to be substantially greater than the costs of carrying it out, and the strategy has to create competitive advantages in the marketplace. It could, for example, change a product to increase its value for a specific market segment that needs the change. The evaluation compares the costs related to strategy activities, the benefits to the company and what strategic advantages the strategy predicts. Feasibility An evaluation of strategy feasibility asks whether the company has the ability to implement the strategy. It checks that company resources, personnel available for carrying out the work and the expertise of the available staff are adequate. It compares what is available with what the strategy needs for its implementation. It analyzes the consequences of doing the work and identifies any new issues that may surface as a result. A test of its effectiveness is whether it has reached its targets.
- 12. How we can craft business strategies Analyze external and internal factors:- Perform SWOT analyses Draft priority issues Develop high-level action plans Finalise the strategy
- 13. Challenges of implementing business strategy and business model Insufficient partner buy-in:in conducting strategic planning, firm leaders and partners involved in the process develop a strong understanding of the business imperative behind the chosen strategy and the need for change in order to achieve partner goals. Ineffective leadership: Leading strategy implementation requires a balancing act - the ability to work closely with partners in order to build cohesion and support for the firm's strategy, while maintaining the objectivity required in order to make difficult decisions.
- 14. Challenges of implementing business strategy and business model part 2 Weak or inappropriate strategy: During the course of strategic planning, the lack of a realistic and honest assessment of the firm will lead to the development of a weak, inappropriate or potentially unachievable strategy. Resistance to change: Executing a strategy requires adopting a change in approach and new ways of doing things Activity: What has been your challenge in implementing your business strategy? --------------------------------------------------------------------- ------------------------------------------------------------------ -------
- 15. Tools for Success in Strategy Implementation 1. A first step in ensuring the successful implementation of the firm's strategy, firm leaders must take early and aggressive action to institutionalize the strategy within the firm. 2. Implementation Support Structure: To support effective implementation, firm leaders should ask the question: does the firm have the right leadership, governance and operational structure required to support effective implementation? 3. Implementation Planning: A fundamental and critical step in moving forward with strategy execution involves planning. Implementation planning entails developing a detailed outline of the specific actions and sub-actions, responsibilities, deadlines, measurement tools, and follow-up required to achieve each of the firm's identified
- 16. Tools for Success in Strategy Implementation PART 2 Alignment of Management Processes: Successful implementation of a law firm's strategy also requires alignment of the firm's partner compensation system, performance management approach, and other related practice group and client team management structures and processes with the firm's chosen strategy. Measurement, Follow up and Accountability: A key component of success in implementation involves holding firm leaders and partners accountable for actively driving and supporting execution.
- 17. Introducing Angela Ihunweze(Mrs) A business plan writer and entrepreneurial consultant CEO of Angela Itambo Company We are dedicated towards assisting Micro, Small, Medium businesses develop their business concepts as well as plan the business to make it grow How we do so: 1. We help entrepreneurs write business plan themselves. Every Monday for a month we hold business plan writing classes to take an in-depth look at each section of the business plan content. You can send your business development officers or you can attend it yourself. Each new class holds every new month the fee is N30,000
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How to Develop an Ideal Business Model?
Your strategy for making your startup work for you will decide its competitiveness in the market. You would want to gain a sustainable advantage over your competitors and that starts with the right business model.
Now that you know what a business model is and the various types of business models, it’s time to learn what key elements constitute a business model and how to develop a perfectly sustainable business model for your company.
A great business model focuses on creating and delivering great value to the customers while simultaneously delivering great margins. A great business model should also look to avoid customer dissatisfaction or dissonance and funding problems. It should also incorporate plans and methods to achieve and maintain market leadership.
Developing the right business model requires similar efforts as developing the right product. Here’s how you can have an ideal business model:
Size your product’s value in the market
You should match your prices with those of the competitor products. If your product is priced too high, the sales will dip and if too low, the margins will not be high enough for long-term sustainability.
Acquire high-value customers
High-value customers are those customers from whom you gain maximum value while keeping your costs as low as possible. They help you achieve your business targets. You can reach these customers with minimal marketing expenses.
Ensure sufficiently high margins
Keeping manufacturing costs low by either outsourcing the manufacturing or having an improved process helps in keeping higher margins. Your product can have features that provide enhanced value to the customer and thus allow you to charge a premium for it. You can even opt for a low-touch model to reduce manpower costs. There are various ways to make sure that the margins are high enough to sustain the business in the long run .
See if your product is the best solution available
The prototype phase already takes care of how most of the stakeholders feel about your product. You have to see that the pain point you are trying to address is solved by your solution and it is the best at what it does. A lacklustre product cannot be saved even by the best business model.
Ensure customer satisfaction
Acquiring a new customer is far more expensive than keeping an existing customer satisfied. A satisfied customer is also a promoter of the brand. Quality after-sales customer service is one of the ways to ensure customer satisfaction but the associated costs are high and do not bring in any revenue for the company. These costs cannot be avoided but should ideally be either restricted or transferred to a third party.
Decide on the channel and distribution strategy
A great product will not be great if the distribution or marketing is poor. Test all the elements of your channel strategy in detail. An efficient distribution channel keeps margins high.
Maintain market position
A good business model will include plans to make the business sustainable and improve its market position. So it will have to take into account all the growth opportunities and external threats, and incorporate a long-term product roadmap. You do not want to rely on just a few customers for most of your product. You also would not want almost the entire distribution to be controlled by your competition or your competitors to be better funded than you. Technology is rapidly evolving making new product development risky but you would not want to be left behind too. You have to consider all such factors and decide how you plan to maintain and then continuously improve your
Formulate funding strategy
Your long-term sustainability depends on funding your business . By funding, we are not referring to only funding by investors. Your company can be bootstrapped yet it will require a constant flow of funds to sustain itself. Personnel costs, operating capital and various other overheads are required to be borne by any business, not just a start-up. Start-ups require even more funding as most of them have to spend significantly more on customer acquisition and retention than established businesses. You would want your revenues to take care of all of these. Ideally, your initial funding rounds should allow you to multiply your sales manifold so that external funding is no longer required.
Execute a pilot rollout
A pilot limited rollout is a great opportunity for you to test everything associated with your product, from costs to quality to pricing. It is a low-risk, high-speed way for fine-tuning pricing and channel strategy before the final launch.
Alexander Osterwalder , the founder of Strategyzer, has developed perhaps the most comprehensive template for business models, called the Business Model Canvas . After you are done with the above steps, you would be in a position to fill the Business Model Canvas and decide on the entry or growth strategy. Let us dive into its details.
Business Model Canvas
Giants like P&G, GE, Nestlé etc. use the Business Model Canvas to discuss their existing and new businesses in a structured and tangible manner. While new companies use it to search for the right business model, established businesses use it to manage their strategy and create new growth avenues.
The Business Model Canvas has 9 elements:
Customer Segments
For whom are you creating value? What products and services are you offering to each customer segment?
Value Propositions
What value are you going to deliver to the customer? Which customer pain-points are you addressing?
Which channels are to be focused on to reach the desired customer segments? How are those channels integrated? Which ones are the most cost-effective?
Customer Relationships
What type of relationship do you maintain with each customer segment? What are the expectations of your customers? How to establish them? What would be the associated costs?
Revenue Streams
What are the customers willing to pay and for what value? How would they prefer to pay? How are they currently paying? How does each stream add up to the total revenue?
Key Resources
What key resources do your value propositions require? Your distribution channels? Customer relationships? Revenue streams?
Key Activities
What key activities do your value propositions require? Your distribution channels? Customer relationships? Revenue streams?
Key Partners
Who are your key partners? Your key suppliers? Which key resources are you acquiring from them? Which key activities do your partners perform?
Cost Structure
What are the most important cost drivers in your business model? Which key resources and activities are most expensive?
This is how the Business Model Canvas looks. It is your entire business model on a single sheet of paper.
Now, you have all the tools necessary for developing a winning business model. Your business model is as important as your product, if not more. While you might think that your product is the best there is and is sure to be a grand success, the ground reality might be different. Developing and visually mapping your business model lets you compare yourself with the market competition and identify underlying trends. A business model is an encapsulation of everything your business stands for and hence it needs utmost care and attention from your side to devise one.
The Startup Process
We know how important your dream business is to you. Therefore, we’ve come up with an all in one guide: The Startup Process to help you turn your vision into reality.
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How to Make a Business Process Model
Last Updated: October 17, 2022
This article was co-authored by Chris McTigrit, MBA . Chris McTigrit is an Accounting Professional. Chris has over 20 years of accounting experience including working for the Arkansas Department of Finance and Administration. He received his MBA from the University of Arkansas at Little Rock in 2007. This article has been viewed 73,802 times.
Business process modeling, also called simply process modeling, is a method of illustrating a business's processes so that they can be easily understood and improved upon. Process modeling is a key part of business process management (BPM) and often uses a specific type of organization known as business process modeling notation (BPMN), which resembles a flow chart. Business managers often use process modeling to make improvements to a business process, starting with an "as-is" model, which shows the current process, and working towards a "to-be" model, which represent a more efficient version of the original process. [1] X Research source While this process may sound complicated, building out your own business process model is simple if you follow the right steps.
Preparing to Make the Model
- Make sure you choose a process in your business operation that has a clear starting point and output.
- For example, you might model the process of receiving an online order and checking whether or not the customer has the money to pay for it and if the item is in stock.
- External events. These include the initiation of a transaction or a transmitted alert from another business system. For example, a problem in automated system that requires human attention is an external event.
- Content arrival. For content management systems, the starting point might be the arrival of a new document or other form of content.
- Human intervention. This includes customer complaints and other human intervention within or outside of the business.
- For the previous example, the starting point is the receipt of a customer order.
- In traditional business process modeling notation (BPMN), the steps are represented by different shapes depending on their function. Events are circles, activities are rectangles, and decision gateways are diamonds. [3] X Research source
- Connectors can either be solid arrows (activity flow), or dashed (message/information flow).
- For the previous example, we would use steps such as "customer order" (an event), "process order" (an activity), "Check credit" (an action), "Credit?" (a decision gateway that leads to one of two other actions, depending on a "yes" or "no" determination), and so on.
- Pools may be further divided into "lanes," which give more specific information about who's responsible for that step.
- For the step "Check credit" in the previous example, you might write that the action is performed by the business's online retail platform, for instance.
- These models usually work best with group input, so you may be better off using the type of modeling that can be worked on most easily by the group.
Creating an As-Is Model
- Customer order (event) to process order (an activity) to check credit (an activity) to credit? (a decision gateway).
- If the customer's credit doesn't check out, you would move to the step contact the customer (activity), labeling the arrow between the steps with a "no" label. Then, you would move to cancel the order (activity).
- If the customer's credit checks out (a "yes" response), you would move on to check stock (activity) and connect the steps with an arrow labeled "yes." Then, you would check the stock in the decision gateway labeled as "stock?".
- If the item is in stock, label the arrow "yes" as before and send the order to shipping (an activity).
- If the item is not in stock, you would move to contact the customer and cancel the order (both activities).
- For the previous example, you may realize that the process fails to let customers know that the item may be back in stock soon. This cancels the order that could otherwise be fulfilled within a number of days.
Designing the To-Be Model
- Informational: measuring more data regarding the process to find issues.
- Sequential: rearranging steps.
- Tracking: helps you monitor process progress.
- Analytical: improves decision-making at decision gateways.
- For the previous example, you could think about implementing a system for checking when an out-of-stock item will be back in stock and alerting the customer to an estimated delivery time.
Expert Q&A
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- ↑ http://whatis.techtarget.com/definition/business-process-modeling
- ↑ http://www.businessballs.com/business-process-modelling.htm#sequence-in-BPM
- ↑ http://creately.com/blog/diagrams/business-process-modeling-techniques/
- ↑ http://www.sparxsystems.com/business_process_model.html
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In this handbook, you will use your market assessment , established strategic direction , and engagement with current and potential partners to develop a business model for your organization. Your business model will document your understanding of critical market players and your organization’s role in facilitating and growing the market for residential energy efficiency. This planning will help you demonstrate your organization’s self-sufficiency while strategically securing partners for long-term market development and growth. The business model should be reviewed regularly to reflect changing market conditions, changes in funding sources and program costs, and the evolving role of the program relative to other market actors.
Aspects of a business model for you to consider are:
- How energy efficiency services are being provided by other organizations.
- Your organization’s strengths, capabilities, and regulatory requirements.
There may be several organizations offering energy efficiency services in your market, and they may collaborate or compete with your organization.
- Service offering . Determine the types of residential energy efficiency services (e.g., energy advising, energy assessments, contractor training and pre-screening, incentives, financing, energy efficiency certificates) your organization will offer the market either directly or through partnerships with public or private sector organizations. Specific services will be refined in subsequent planning steps as you make decisions about program design .
- For example, nonprofit organizations can help create demand among target customers by focusing on education, outreach, promoting incentives, and implementing grassroots or neighborhood campaigns.
- Utilities may decide to focus on customers by segmenting customer data which will enable them to more effectively target their services.
- Third party administrators (e.g., PACE programs) can develop networks of private contractors that act as a sales force for the program, while offering centralized application processing, financing and project management.
- Assets and infrastructure . Determine what investments in internal or external assets and infrastructure (e.g., program management software systems, program brand, call centers) you will need in order to play your desired role in the market and span the time period you plan to provide energy efficiency services.
- In general, your sources of funding—whether through investors, utility rate-payer funds, government funds, contractor or customer fees, other revenue sources, or a combination of several different sources—may determine, at least initially, what services your organization can offer and how it will operate.
- There are limitations to all funding sources. For example, government funds and grant funds might be used to support all aspects of an efficiency program but are generally available only on a short-term basis. Ratepayer funding can change over time because budgets and allowable uses are set by state and local regulators and driven by factors such as political changes, economic factors, and policy changes.
- For example, if you organize as a nonprofit, how will you set up your board of directors?
- If you operate as a for-profit entity, how will ownership be established and who will make decisions?
- Whom will your organization be accountable to, under your chosen governance structure?
How Does a Business Model Relate to a Business Plan? A business model, as covered in this handbook, describes the value your organization provides to the market, how services are delivered to customers, and how your organization is funded. It includes information on the following: The services you provide The customers you will serve The assets and infrastructure you will need Your financial model, including revenue streams and operating costs Strategic partners and industry allies, such as contractors and financial institutions Your governance structure and external regulatory environment. A business plan, covered in the Market Position Create a Business Plan handbook, explains how you implement your business model in order to achieve your mission, vision, and goals . It details the organizational and financial structures and processes that you need in place to be able to operate in the capacity you choose.
In this handbook, you will be introduced to each of these components of your organization’s business model, including:
- Determining what services to provide and how you will provide them
- Identifying the customers to whom you will provide services
- Determining the assets and infrastructure you will need to implement your program
- Identifying sources of funding and operation costs to develop your financial model
- Determining your governance structure
- Developing and fine-tuning your business model
- Deciding whether to offer energy efficiency services in your market based on the viability of the business model.
Your organization’s unique mix of business model elements will determine how any given actor will be affected by various financial incentives, regulations, and fluctuations in the market, and will ultimately help you determine how to effectively move forward with a residential energy efficiency program.
These handbooks provide more detail on designing and implementing a cohesive and balanced residential energy efficiency program.
Marketing & Outreach – Make Design Decisions
Financing – make design decisions, contractor engagement & workforce development – make design decisions.
As you proceed through these steps, information from the Better Buildings Neighborhood Program Business Models Guide about utility program business models and non-utility program business models provide useful models and lessons. The Guide's "business model 101" presentation describes key terms and concepts for developing a business model.
Establish governance and decision processes; develop value proposition and business model for energy efficiency services
Your program’s range of service offerings should be designed to fill a need in the marketplace, while enabling the growth of a robust market for energy efficiency services, which in many markets are delivered by private sector contractors.
As you consider the different suites of services you might provide and those of your partners, ask the following questions:
- What services are needed in the market?
- What are your organization’s key strengths in providing services? What are your partners’ key strengths?
- Can strategic partnerships help your organization expand its service offerings or control its service-related costs?
The answers will help you assess your organization’s flexibility in certain areas of business, and resulting ability to fill marketplace gaps.
In general, there are five primary suites of services that organizations can provide in the residential energy efficiency market:
- Contractor screening, training, certification and engagement (e.g, mentoring opportunities, public recognition, building science training, lead generation)
- Marketing and engagement of customers (e.g, customer education and outreach)
- Customer experience and management of the upgrade process (e.g., home energy assessments, technical assistance, program administration, certification and labeling of homes)
- Financing and administration (e.g., incentives, access to affordable financing options)
- Data collection and evaluation (e.g, program management, assessment of program impacts)
Each of these service areas are described in greater detail in the corresponding five program components of this Solution Center.
In light of partnership opportunities, your organization may have several options for structuring your program to provide energy efficiency services, including:
- A self-administered program, in which you provide services and financial incentives directly to the customer and administer and implement the program in its entirety.
- A partnership program, in which you work with a partner organization that has existing relationships (e.g., with customers, contractors, financial institutions) that can be leveraged to deliver services to the customer.
- A third-party implementer program , in which you contract with a third-party implementer to deliver services to the customer (i.e., marketing, financial services, incentives). Here, your role is to provide oversight and management to the efficiency program.
In each of these approaches, programs should consider how they partner with and engage contractors that perform energy efficiency services; see the Program Design: Make Design Decisions handbook for more information on models for working with contractors.
As shown in the table below, each of these approaches has its own risks, advantages and disadvantages.
Program Administrator Service Delivery Source: Better Buildings Neighborhood Program Business Models Guide , U.S. Department of Energy, 2012
Self-administer
When program administrators self-administer and provide some or all program services directly to customers, they have the opportunity to develop a deep understanding of customers’ needs. This understanding can facilitate quality control and flexibility to respond to market conditions; however, it can also limit the program administrator’s relationship with key market participants—such as contractors conducting assessments and upgrades or financial institutions providing loans. These organizations may see your organization as a competitor. Additionally, with the self-administrator model, your organization will likely need to hire experts directly, which can result in higher operational costs, compared to partnering with organizations with in-house expertise.
Third-party Implementers
At the other end of the spectrum, a program administrator can leverage third-party implementers to deliver the program. With this approach, the program administrator can tap into these organizations’ subject matter experts and transfer some costs to the third-party organizations that are delivering services. Additionally, establishing financing mechanisms such as consumer loans and partnering with financial institutions will increase private-sector financial contributions to the market. Your organization may be removed from day-to-day program operations, which could limit your organization’s ability to make effective and timely decisions affecting your interactions with customers and contractors. One example of a program using a third-party program implementer to execute program initiatives, including handling incentive payments and designing and conducting marketing campaigns, is New Jersey’s Clean Energy Program .
Partnership
The partnership model is a hybrid of self-administering and using a third-party implementer. In a partnership, a program administrator works with an organization that has existing market relationships to run the program and delegates some aspects of program implementation to a third-party implementer, if desired. The program administrator has no direct relationship with the customer (the partner organization delivers services to the customer), but benefits from leveraging the partner’s existing relationships and cost-sharing of program marketing and operations. An example of the partnership model is Michigan Saves , which partners with regional organizations, utilities, and local community action agencies to deliver the program throughout the state.
In Their Own Words: Partnerships Can Benefit Energy Efficiency Programs and Utilities Source: U.S. Department of Energy, 2012.
Engaging Home Performance Contractors and Home Improvement Trades No matter which approach or hybrid of approaches you choose, you will need strategies for effectively working with home performance contractors and home improvement trades. Home performance contractors generally treat a home as an interconnected system and provide a comprehensive suite of upgrades to be made all at the same time. For example, upgrading a heating and cooling system could be coupled with air and duct sealing and adding attic insulation. The benefits of this approach include maximizing immediate energy savings, saving on the overall cost of the upgrades by bundling them together, and ensuring all parts of the system are working in concert with each other. Examples of programs implementing a whole house approach include Energy Upgrade California , Illinois Home Performance and other Home Performance with ENERGY STAR program sponsors. Programs can also work with individual home improvement trades (e.g., HVAC contractors; window, siding and remodeling firms; insulation contractors) to engage consumers and complete efficiency improvements through individual repair and improvement transactions over the life of home ownership. This approach can accelerate the realization of energy savings from one or more measures that can be deployed and scaled to a high volume of transactions. Single upgrades are often provided as a complementary measure to improvements the homeowner is already planning (e.g., equipment maintenance or repair, roof replacement, single room renovations), laying the groundwork for implementing future measures and creating a long-term relationship with the homeowner. Examples of programs implementing a staged upgrade or single measure approach include Energize Connecticut , Tennessee Valley Authority , and EnergySmart in Boulder, Colorado. For additional information about working with home performance contractors and individual trades, see the Workforce handbooks and the Department of Energy’s Home Improvement Catalyst , respectively.
Use the information collected in your market assessment to answer the following questions, which in turn will help you decide which customers to focus on:
- What target markets will help your organization meet its vision, mission, and goals related to energy efficiency?
- What is the estimated overall demand for each service being provided in each of your potential target markets?
Your selected customer base will influence design decisions in your business model. For example, if you are focused on higher-income customers who can pay out-of-pocket, you might devote fewer resources to financing but more to branding, marketing, and outreach tailored to these customers. If you are focused on moderate-income customers, you might need more resources for incentives and financing ; however, you might be able to adequately access your target market by partnering with existing institutions (e.g., housing organizations; community or economic development groups) rather than by investing significant resources in marketing.
For more detail on how to refine your target market for your specific residential energy efficiency program(s), see the Program Design & Customer Experience handbook on making design decisions .
Your market position, organizational structure, potential partnerships, service offerings, customers, and other aspects of your business model will help you determine what types of assets and infrastructure you will need. You should work with your colleagues and partners to determine:
- What new, or upgrades to existing, information technology systems are needed to efficiently and effectively run the program?
- What investments in physical infrastructure (e.g., office space and equipment) are needed?
- What non-physical assets (e.g., market data, brand, consumer data) are critical to your success? For example, utilities typically have access to ratepayer energy-use data, which is a very critical asset for identifying target markets and selecting services to offer them.
- What in-house training and certifications are necessary within your program to provide services?
- If you will offer technical assistance to customers, will you need more subject matter experts to effectively service your customer base?
Your financial model describes your sources of funding, including initial grants or investments as well as ongoing revenue sources, and costs to operate your program. Because the funding to administer residential energy efficiency programs can come from multiple sources, the following questions will help you develop your financial model:
- What types of costs will you incur (e.g., operating expenses, labor, administrative costs)?
- If you are interested in access to utility funding – now or in the future – do the benefits and costs of your service meet your local utility’s cost-effectiveness test ?
- What are your forecasted costs and revenues, three to five years out?
- What sources of initial funding will you seek (e.g., grants, institutional investments)?
- What sources of ongoing revenue will you use (e.g., profit from services, long-term grants)?
- What major factors can influence changes in revenues or costs over time (e.g., number of customers, sources of funding)?
- What and how will your organization finance the investments that are needed (e.g., self-funded, via loan, grant, or foundation)?
- What are the expectations and commitments tied to the type of funding you choose (e.g., produce an annual report, pay loan back at what monthly cost and over what period of time)
- What are the consequences, based on your funding source, if your organization goes bankrupt? How much time do you have to prove financial viability?
See the U.S. Environmental Protection Agency’s three-part webinar series from May/June, 2012 on funding for clean energy programs ( Part 2 , Part 3 ).
Structure your assessment of costs in terms of fixed and variable costs to understand the variables of your financial model.
- Fixed costs are overhead costs incurred regardless of the volume of work performed. They include costs such as management and administrative staff salaries and benefits, information systems, office expenses, and branding.
- Variable costs change depending on the success of your program effort and the volume of your work. They include rebates, loan buy-downs, employee and contractor training costs, and salaries and benefits of employees providing direct customer services.
Nuances of Fixed and Variable Costs in the Utility Environment In the regulated utility environment, fixed and variable costs are defined in program regulations. Utility companies are allowed to set aside a certain percentage of total program funds to be incurred as variable and fixed costs. In some cases, the approach to defining fixed and variable costs creates a disincentive to invest in energy efficiency and conservation programs because utilities lose revenue when electric consumption declines while fixed costs remain unchanged. To address this issue, the Idaho Public Utilities Commission instituted a fixed cost adjustment mechanism to ensure that utilities recover the fixed costs of serving customers regardless of the amount of energy conservation.
The program your organization is able to offer will have limited growth potential without ongoing revenue streams. Organizations need to think broadly about potential funding sources. To date, many non-utility programs have used initial grant funding to distribute financial incentives directly to homeowners. These financial incentives or rebates drive down the cost of home energy upgrades to homeowners and enable program administrators to quickly drive demand and reach program targets. This reliance on grant funding, however, may have two unintended side effects:
- It limits program growth because programs that do not generate revenues from sales can provide services only up to the amount of their grant funding.
- By providing incentives to homeowners, programs spend their grant funding much more quickly than they might wish to if they are seeking a longer-term role in the market. This model is not sustainable if grant funding is not maintained.
A grant by nature has a defined end date or expenditure amount, which means additional funding sources may be required to keep essential operations running while additional grant or other funding is procured.
Life Cycle and Revenue of the Program Administrator Source: Better Buildings Neighborhood Program Business Models Guide , U.S. Department of Energy, 2012
While direct subsidies to consumers drive short-term demand, program administrators (and third-party implementers) should seek to implement programs that generate sustainable revenue streams. To create a sustainable financial model or structure, you need to evaluate your local market to determine what potential demand for various services can be used to create revenue. Key steps in this process include:
- Draw on your market research to identify service offerings that could be additional sources of revenue beyond grant funding (see below for sources to consider). These service offerings can either differentiate the organization from other industry players or complement existing products and services.
- Engage with local home performance contractors and other partners to ensure that your organization will add value to the local market rather than providing services that will generate little to no demand.
- Create a basic pro forma financial model , a forecasted financial statement designed to show future revenues. Use it to explore different scenarios to determine optimal use of funds.
Below are some revenue sources to consider.
Fee-Based Revenues
- Financing-based revenues from interest income (e.g., for referrals or loan management).
- An in-depth examination of selected program strategies implemented by the DOE Better Buildings Neighborhood Program (BBNP) grantees found that programs that continued beyond the grant period most commonly were receiving ratepayer funding – either by being incorporated into expanded utility (or energy agency) home upgrade offerings, or by remaining as a program implemented by the grantee as a third-party implementer to a utility or as a complement to a utility program.
- Recognize that ratepayer funding can change over time because budgets and allowable uses are set by state and local regulators and driven by factors such as political changes, economic factors, and policy changes.
- Research conducted for the development of the Better Buildings Neighborhood Program Business Model Guide suggests that leads cost contractors $100 to $400, or around $250 on average. Several Better Buildings Neighborhood Program partners are considering charging lead generation fees to contractors and note that the value of the lead to contractors is partially dependent on the quality of the lead and the number of leads that result in work.
- For example, Michigan Saves charges contractors a fee for quality assurance. For each project, contractors pay 1.99% of total project costs into a pool of funds for quality assurance services.
- Customer fees to pay for energy advising or quality assurance.
Other Funding Sources
- With this strategy, program administrators encourage other organizations to provide loans for energy efficiency upgrades through the program to their employees as a benefit; the loans are paid back via payroll deductions.
- For example, Community Development Block Grant funds from the U.S. Department of Housing and Urban Development provide communities with resources to address a wide range of unique community development needs.
Current residential energy efficiency programs are also looking into the viability of other creative sources of revenue. These often involve the sale of energy efficiency attributes, such as energy savings in forward capacity markets ( presentation , transcript ), carbon reductions associated with decreases in energy use, or the sale of “green power.” Note that entering these markets requires a thorough understanding of relevant policies, regulations, and measurement and verification protocols. The Federal Energy Regulatory Commission’s information about industry activities is a good place to start for information.
Potential Revenue: Streams and Generation Options Source: Better Buildings Neighborhood Program Business Models Guide , U.S. Department of Energy, 2012
Non-energy benefits of a residential energy efficiency program may resonate more with some funding organizations or potential partners. Residential energy efficiency programs also advance public health, safety, comfort, economic development, and other objectives. For example, partnering with low-income housing programs to combine and integrate energy efficiency services broadens the pool of potential funding sources to include funding allocated for the low-income housing market.
As you develop a financial structure for your organization, assess potential risks to costs or revenues. Consider whether a potential cost structure (especially high fixed costs) will be jeopardized if expected revenues (especially those based on customer volume) are lower than expected. Various options—such as pilot projects or staged investments—can help you mitigate these risks.
If your organization is already established and ready to provide energy efficiency services, than you will not need to spend time determining your governance structure. If, however, you are creating a new organization or considering a significant shift in governance as part of your business model, you will need to consider several questions to help determine the right governance structure for your organization:
- In light of your partnerships , who will be involved in developing your organizational strategy (e.g., assisting in developing goals and objectives) and making operational and other decisions about your organization’s energy efficiency service delivery?
- What is the institutional arrangement for making these decisions (e.g., executive director, board of directors, advisory committee)?
- Once a decision is made, who has responsibility for oversight (e.g., executive director, board of directors, advisory committee)?
- What are the opportunities and constraints provided by your governance approach, including any legal or regulatory opportunities and constraints (e.g., a NGO can raise outside money while a government agency cannot)?
Non-utility program administrators typically include:
- Examples include NYSERDA and Energy Smart .
- Private companies . Private companies (typically consulting firms) often contract with a utility or government agency to administer and implement a program, via a legally binding contract or under a grant agreement.
- Examples include: Enhabit , Greater Cincinnati Energy Alliance , and NeighborWorks of Western Vermont
Non-utility program administrators typically direct and oversee public and other funds to implement residential energy efficiency programs. They must often meet goals established with funding organizations, such as performing a certain number of home energy upgrades or achieving a certain level of energy savings in a particular area during a specific period. To date, many of these organizations have been grant funded and have needed to comply with grant requirements. Over time, as organizations shift away from grant funding, they will gain greater flexibility but will need to rely more on other types of revenues.
Source: Better Buildings Neighborhood Program Business Models Guide , U.S. Department of Energy, 2012
Governance models for utility programs vary, depending on utility type:
- Examples include Cape Light Compact (Cape Cod), the Sacramento Municipal Utility District , and Austin Energy .
- Examples include the Kauai Island Utility Cooperative (Hawaii) and Idaho Consumer-Owned Utilities Association , a utility composed of a group of cooperatives.
- Examples include Eversource , Southern California Edison , and PacifiCorp .
Utility Governance Models Source: Better Buildings Neighborhood Program Business Models Guide , U.S. Department of Energy, 2012
As regulated monopolies, utilities may choose to prioritize reliability and reasonable cost above clean energy, unless directed otherwise. Electric and gas utilities’ revenues—with the exception of those in decoupled markets—are directly related to their sales of electricity or gas. Thus, efficiency programs that result in selling fewer units of electricity or gas are in direct conflict with their business models, which understandably can cause concern. Regulated utilities are directly influenced by public utility commissions, which regulate these utilities and significantly influence their activities.
To facilitate the regulatory review cycle, many states have adopted a mandatory Integrated Resource Planning (IRP) process that their utilities must follow. Under the IRP process, a utility must submit a plan to its regulator that outlines the state of its current infrastructure and the projected future investments needed to maintain grid reliability. The utility must also meet any required renewable or energy efficiency targets. Influencing the development of an IRP is an important strategy that organizations can pursue to enhance utility energy efficiency programs. The schedule for IRPs varies depending on utility commission. See the Better Buildings Neighborhood Program webinar Exploring Opportunities for Energy Efficiency as a Revenue Stream in the Forward Capacity Markets ( presentation , transcript ) for more information on IRPs.
Another approach is to research and identify when the utility’s next rate case will take place. The rate case is the point at which most utilities make program decisions, such as whether to partner with or develop a new energy efficiency program. Organizations considering partnering with a utility should review the public proceedings of past rate cases to understand what programs are currently in place and what cost-effectiveness tests the utility uses to approve or deny programs.
Non-utility and utility programs have different advantages and disadvantages in the home improvement market, as outlined below.
Source: U.S. Department of Energy, 2014.
After identifying your customers, services, assets, and infrastructure; developing your financial model; and defining your governance structure, you are ready to pull all of that information together into a business model. The U.S. Department of Energy has developed a business model worksheet that you can use to help understand and describe key aspects of your business model.
The following sample business model schematics outline four different approaches that a program administrator might consider when developing business models. (In each case, the example program is transitioning from a grant-funded environment to a post-grant period.)
- A program seeking to continue operations in the post-grant period as a not-for-profit entity .
- A program that builds private-sector capacity then phases out and stops operating .
- A program seeking to continue in the post-grant period as a marketing contractor to a utility .
- A program that establishes itself as a government entity, then operates using a fee-based structure .
RePower Programs in Washington State Consider Business Model Options The RePower Bainbridge , Kitsap, and Bremerton programs in Washington state convened local community leaders, organizations, contractors, and program partners for a planning summit to consider the benefits and challenges of different business models for the post-grant period. Participants considered four models: nonprofit organization, utility, county or city government, and private sector.
From Non-profit to For-profit: Changing Business Models to Achieve Success When federal resources began running out to support Twin Falls, Idaho’s South Central Community Action Partnership (SCCAP), a low-income weatherization assistance program provider, the non-profit looked for ways to change its business model. The SCCAP developed a for-profit limited-liability corporation that allowed it to continue its mission. In order to make this happen, the idea first had to be presented in the form of a business model - covering what services would be performed, who would perform them, how it would be financed, and expected profits - to the SCCAP Board of Directors. After setting up the legal structure, creating an operating agreement and marketing plan, and setting rates, the Board granted final approval. The new social enterprise model of management provided the opportunity to generate the non-federal resources needed to continue providing energy efficiency services in the area.
After developing an outline of your business model, you need to step back and make the decision—ideally with the involvement of partners and stakeholders—about whether it will be viable. Then make the critical decision about whether or not to move forward. You should be open to the possibility that your market does not allow for a viable program, at which point you need to decide whether to revisit the decisions that make up this business model (e.g., costs, funding sources, governance structure, service offerings) to see if changes could be made to make it more viable, or to put your plans on hold.
Alternatively, you might determine that your business model is viable given market opportunities and constraints. If so, the next step will be drafting a more detailed business plan that outlines your assumptions and can enable fundraising.
In recent years, hundreds of communities have been working to promote home energy upgrades through programs such as the Better Buildings Neighborhood Program, Home Performance with ENERGY STAR, utility-sponsored programs, and others. The following tips present the top lessons these programs want to share related to this handbook. This list is not exhaustive.
To develop a successful business model, Better Buildings Neighborhood Program partners found it critical to have a strong understanding of the external environment within which they operated. This included who their customers were, who their competitors and partners were, what key policies governed their work, and what trends were likely to impact their ability to accomplish their goals and fulfill their mission. Understanding the external forces that affected their market allowed the organizations to better identify services that met customers’ and partners’ needs and develop a more robust business model. Many organizations adapted their business model to overcome challenges and leverage opportunities as local conditions and their understanding of how their business operated within the market evolved.
- When the New Hampshire Better Buildings program began, there were numerous energy efficiency programs operating independently in the state (e.g., by multiple utilities), and only informal coordination among activities was occurring. Customers were often overwhelmed trying to determine which programs they qualified for, how to fill out all the required paperwork, and which contractors they were able to work with. The program quickly learned that their business model needed to be well-integrated with other energy efficiency programs in the state, in order to provide value to customers and contractors while enabling long term growth for the efficiency market.
In response, the program took a collaborative approach to their business model design and partnered with the utilities’ rate-payer funded Home Performance with ENERGY STAR (HPwES) program. Combining programs leveraged the utility programs’ existing queue of upgrade projects, procedure for assessments and upgrades, and database for collecting information about each project. A single program and process also made the most sense for residential customers, who were more likely to move forward with a project if they did not have multiple programs and processes to figure out. The utility companies benefitted from the partnership because the additional funds from Better Buildings allowed them to expand their program’s reach. Combining efforts and utilizing each program’s strengths led to consistent marketing and messaging, more efficient processes for contractors, one-stop shopping for customers, and a streamlined approach to financing.
- The Neighbor to Neighbor Energy Challenge’s (N2N) original program design used community-based social marketing (CBSM) to acquire and feed leads into the existing ratepayer funded Home Energy Solutions (HES) assessment program. N2N expected that contractors would convince customers to take advantage of rebate programs to complete home energy upgrades; however, over the first two years of the program, they saw many of the leads they generated stall after the assessments. N2N realized that they had limited influence over the contractor network with this approach and that the HES program design did not incent contractors and customers to complete upgrades. They shifted their business model and focused marketing and outreach resources on new strategies, such as direct lead acquisition, in order to acquire customers who were more likely to proceed straight to completing upgrades.
In order to craft a sustainable financial model, organizations need to identify long-term sustainable revenue sources. As with the Better Buildings Neighborhood Program, grant funding can be a great way to get an effort off the ground; however, grant funding does run out, leaving the need to secure alternate revenue sources. Many Better Buildings Neighborhood Program partners overcame this challenge by aligning revenue opportunities with gaps or untapped potential for business in their local market. In some cases, several years were needed to gain trust and demonstrate results before funding was secured, so the sooner you begin considering options, the better the chances are of finding and securing one that is viable. Consider a wide range of options and pursue those opportunities that best match what your organization and local market have to offer. See a detailed list of potential funding sources in the Market Position - Develop a Business Model handbook .
- In 2010, St. Lucie County in Florida was awarded an Energy Efficiency and Conservation Block Grant and created the Solar and Energy Loan Fund (SELF), expecting that property assessed clean energy loans (PACE) would be an integral part of the residential loan structure. When Freddie Mac and Fannie Mae challenged the residential PACE system nationwide, SELF shifted direction. They evolved through a multi-year process into a certified community development financial institution (CDFI) focused on energy efficiency and renewable energy upgrades for the residential sector. They targeted low and moderate income populations that had been especially affected in Florida by the economic crisis in 2009.
- The change meant that SELF no longer had access to capital from investors seeking highly secured and profitable investments through PACE; however, becoming a CDFI allowed SELF to diversify its products and receive new types of support in the form of grants for technical assistance and loan capital. By becoming a certified CDFI, SELF was able to attract capital from banks as Community Reinvestment Act (CRA) investments and establish legitimacy in the eyes of other socially responsible investors. For example, in the last year of operating under the Better Buildings grant, SELF contacted faith-based foundations that seek to make socially responsible community investments. Over the year and a half after the Better Buildings grant, SELF raised an additional $835,000 from 5 different religious organizations.
- Under their business model, SELF faced some challenges limiting their ability to attract capital. For example, even though they implemented new policies to have Uniform Commercial Codes and a more strict collections process, capital providers are still wary of the fact they provide “unsecured” loans. Nevertheless, SELF’s portfolio results of less than 1% default and less than 3% delinquency helped prove that they had a good evaluation method and their risk management procedures were effective. The new CDFI business model allowed SELF to become self-sufficient by providing a platform to offer financial and non-financial services that could generate diversified revenue streams. These revenue sources include interest and fees earned on their investments; fees from off balance sheet portfolios such as commercial PACE; and fees from partnering with other financial institutions to sell their financial product and other activities such as contractor training.
The following resources provide topical information related to this handbook. The resources include a variety of information ranging from case studies and examples to presentations and webcasts. The U.S. Department of Energy does not endorse these materials.
A Business Case for Home Performance Contracting
This report contains information on the market for home performance upgrades and the opportunities that exist for new home performance contractors; start-up needs and costs for firms entering the home performance contracting industry; home performance business approaches; and how established home performance contractors attract customers. It also contains detailed profiles of eight successful home performance firms across the United States.
Making Nonprofit Work in a For-Profit World
Article on how one company added a for-profit weatherization business to its nonprofit organization -- and how they now work successfully together.
Greater Cincinnati Energy Alliance: Strategic Plan
What's working in residential energy efficiency upgrade programs: greater cincinnati energy alliance, repower considers business model options, best practices - sustainable revenue sources for local energy alliances.
Presentation describing sustainable revenue sources for local energy alliances.
"One-Stop-Shop" Home Energy Remodel
This presentation from Clean Energy Works Oregon (now Enhabit) covers their "One-Stop Shop" Home Energy Remodel process where customers were guided through a four-step process: apply, assess, finance, and transform. This simple process gave customers access to a comprehensive package of services that included assistance from an independent energy advisor.
Energy Upgrade California in Los Angeles County: The Flex Path Program
Cleveland energysaver pilot program (from pilot to permanent program).
Presentation on efforts of Cleveland to create a sustainable business model.
Better Buildings Pro Forma: Local Energy Alliance Program--Virginia
Think again a fresh look at home performance business models and service offerings (301).
This summary from a Better Buildings Residential Network peer exchange call focused on changing an organization's home performance business model and expanding the services offered.
Connect 4: Energy Efficiency in Relation to Other Program and City Goals (101)
This summary from a Better Buildings Residential Network peer exchange call focused on how energy efficiency could be used to achieve other goals. It features speakers from the City of Orlando and Seattle City Light.
Business Models 101 - Terminology and Basic Concepts
Transitioning to a utility funded program environment: what do i need to know.
Presentation that provides insights from a utility executive on how energy efficiency programs can effectively partner with utilities.
Staged Upgrades as a Strategy for Residential Energy Efficiency
This summary from a Better Buildings Residential Network peer exchange call focused on the challenges, requirements and opportunities to advance staged upgrades in the home upgrade market.
Staged Upgrades: Homeowner-focused Strategies for Encouraging Energy Upgrades Over Time (201)
This summary from a Better Buildings Residential Network peer exchange call focused on how to involve homeowners in staged energy efficiency upgrades and what information is appropriate to share with them at each stage.
Energy Efficiency: Serving the Cooperative Consumer/Owner
Presentation explaining the advantages and challenges of electric cooperatives, and discussing the implementation of an energy efficiency program operated by an electric cooperative in South Carolina.
Pay As You Save (PAYS) Tariffed On-Utility Bill Efficiency System
Presentation providing an overview of the PAYS financial model, including information on risks and how to manage them, and successful program examples using the PAYS model.
Business Model Worksheet
Sample business plan framework: not-for-profit (ngo) entity, sample business plan framework: building private sector capacity.
Sample business plan framework for a program seeking to build private sector capacity then phase out and stop operating.
Sample Business Plan Framework: Marketing Contractor to a Utility
Sample business plan framework: government entity operating using a fee-based structure, energy impact illinois reporting packet for whole home projects, pg&e whole house survey.
Homeowner survey created by the utility to inform their whole home upgrade program.
The Partnership Evaluation Framework: How to Evaluate a Potential Partner's Business Model and Identify Areas for Collaboration
Pro forma resources: draft contractor pro forma tool.
Tool to evaluate contractor impacts on program revenue.
Exploring Opportunities for Energy Efficiency as a Revenue Stream in the Forward Capacity Markets
Partnering with utilities part 1 -- successful partnerships and lessons from the field, partnering with utilities part 2-topics for local governments-creating successful partnerships with utilities to deliver energy efficiency programs.
This webcast focused on advanced topics for local government-utility partnerships, with presentations from local governments and their partnering utilities that have well-developed, multi-year relationships and programs.
Part I: Getting Started: Answering Big Picture Funding Questions
This webcast (Part I of a three-part series) covers the big picture questions that local governments should consider for funding clean energy programs. What resources are available? What are the program priorities? How can these programs pay for themselves? What funding is available? The webinar guides local governments through these and other questions in the context of their own unique circumstances and illustrates the concepts through case studies that explore how local governments have used both conventional and unconventional methods to gain support, line up partners, and design and implement their funding programs.
Part II: Getting it Funded: Finding Funding for your Clean Energy Programs
This webcast (Part II of a three-part series) discusses how climate and clean energy programs can find funding.
Part III: Keeping it Going: Financing Options for your Clean Energy Programs
Energy efficiency cost-effectiveness testing.
This webcast provides an introduction to cost-effectiveness testing for energy efficiency programs. It also covers key drivers in the cost-effectiveness results and cost-effectiveness tools developed for the U.S. Department of Energy.
Better Buildings Neighborhood Program Business Models Guide
This report serves as a resource for program administrators and building contractors who are or may be interested in starting or expanding their services into the residential energy efficiency market.
Accelerating the Delivery of Home Performance Upgrades through a Synergistic Business Model
The NorthernSTAR and U.S. Department of Energy Building America Program partnership investigated a new model to deploy building science-guided performance solutions to homeowners. This research explored three aspects to market delivery: 1. Understand the homeowner's motivations regarding investing in building science-based performance upgrades. 2. Determine a rapidly scalable approach to engage large numbers of homeowners directly through existing customer networks. 3. Access a business model that will manage all aspects of the contractor-homeowner performance professional interface to ensure good upgrade decisions throughout time.
How Our Medicines Pollute the Environment
Four examples of the best of the internet according to those who know the internet best, openmind books, the hidden side of conquering everest, featured author, latest book, what is a business model and how to make it effective.
The concept of business model changed substantially over the last few years. It can no longer be defined as the way a company generates money or a person attracts clients. Its definition has gone farther and now refers to the pure needs of users and clients.
How is it possible that the largest private transportation company does not own a single vehicle? How is it possible that the largest accommodation company in the world does not own a single hotel?
Alex Osterwalder, in his book “Business Model Generation” , states that innovation in business models consists in creating value for companies , clients and society in general, i.e. in replacing obsolete models.
“A business model describes the rationale of how an organization creates, delivers and captures value for the client”
Alex Osterwalder
These are some examples of the new business models: the digital player iPod and the online store iTunes.com , which Apple used to create an innovative business model that made it the undisputed leader in online music. Skype offered international calls at very low rates as well as free calls between service users with an innovative business model based on P2P technology.
With the help of Zipcar , residents in many cities no longer need to own a vehicle; instead, they can rent any car for a few hours or days in exchange for a membership fee. This business model results from the new needs of users and the worrying environmental conditions.
Three mandatory elements in a Business Model
- Profitability: No business is created to lose money; consequently, it must be profitable.
- Scalability: Being able to create one now, another tomorrow and so on and so forth until you have a model that takes over the market.
- Repeatability: Being able to standardize them to be able to replicate them anywhere, e.g. franchise products.
In other words, when you release a product or service , it must feature the three elements that should guarantee its market success: Desirable, Viable and Profitable.
How to create value with a business model
By being close to the client. By creating very close relationships from the very beginning so as to know the client’s needs or problems, while always listening to them and co-creating with them. And once the product has been released, it must be possible to receive feedback to be able to discern the model that allows clients to find the added value it brings.
“Customers comprise the heart of any business model. Without customers, no company can survive for long”
Alexander Osterwalder
Flexibility is the key to a business model’s success . For this reason, we highly recommend the Canvas Model because, using this method, you employ nine blocks to test whether you are targeting your product at the right segment or whether your value proposition really meets the needs of your clients.
How can I offer added value when compared to my competition? By providing a better solution to an existing need (adding value to your client) and improving how you deliver this solution. As a consequence, a good business model means finding a different way of competing.
9 Business models recommended by Guy Kawasaki
- Multicomponent. A good example is Coca-Cola , which is sold in supermarkets, neighborhood stores and vending machines. The same product is sold in different settings, for different prices and with different presentations.
- Market leader. Apple is the personification of a market leader that creates innovative and attractive products for its clients.
- Valuable component. Intel manufactures valuable elements for other products; these elements are not sold directly to the client but they differentiate the company from its competitors.
- Switcher. De Beers controls the supply of diamonds; this model involves several challenges: to win control of supply and to convince the consumers that this control is desirable.
- Printer and Toner. Also called Bait and Hook. This business model consists in selling a product that needs consumables, such as Nespresso machines.
- Freemium . Consists in giving services away up to a certain limit; after that, the clients need to pay. For example, Evernote, Spotify, Dropbox , etc.
- Eyesballs . Consists in offering a platform to create or share content that attracts visitors, normally selling advertising, e.g. Facebook, Huffington and Instagram .
- Virtual products. Consists in selling digital codes for products with almost nil costs and maintenance in terms of inventory. For example, Candy Crush and other videogames.
- Handcrafted. Furniture is an example of this business model that prioritizes quality and handcraftsmanship.
Other business models in the market:
- Affiliation: A company that wishes to sell a product and defines some kind of reward for suppliers, companies or people that attract clients or orders for its products.
- Long tail: The long tail business model is innovative because it offers a wide range of little sought-after items that may become profitable businesses and generate profit on the basis of a large volume of small sales.
- Franchising or licensing. This business model allows entrepreneurs to “exploit” a proven business that works and is replicated where it does not exist yet.
- Subscription. This business model consists in having the user pay a subscription in exchange for a value proposition. Classic examples are subscriptions for paid TV, magazines, newspapers and Netflix.
It should be noted that the axis of a business model is the Value Proposition , which consists in knowing what you have that others do not have and that people are willing to pay for. The best enterprises happen when the entrepreneur has first-hand experience of the need they wish to meet and offers a solution.
Consequently, if entrepreneurs and businesspeople want to dominate the market, rather than worrying about creating the ideal product they should worry about designing the “Business Model” that allows them to have profitable companies over time and that survives with residual income while making them the leaders in demand among their clients and consumers.
Guiovanni Quijano
@MktQuijano
Related publications
- Business Models for Clients of the 21st Century
- 22 Visions for Understanding the Company of the 21st Century
- Business Models, Information Technology, and the Company of the Future
- Business Models for the Companies of the Future
- Internet of Things: Opportunities and Challenges
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The primary aim of a business model is to create a sustainable chain, able to unlock value for several players in a market, industry, or niche. Therefore, this value chain will start from a value proposition, a promise you make to the key players and partners in that market, industry, or niche depending on where you start.
10 Steps to Developing a Business Model Now for the 10 steps to developing a business model. Throughout the process, stay at a fairly high level and focus on the most important attributes. It's easy to get lost if you get into every little detail. Choose a particular target segment and describe it.
Business Model Development is the design for the successful operation of a business that includes idenfying revenue sources, customer base, products, and details of financing. The Business Model is heavily influenced from the Customer Discovery, market research, and Market Requirements.
1. Acquire high-value customers. High-value customers doesn't mean rich customers, but customers who meet the following requirements: Are easy to locate Allow you to charge a profitable price Are...
How to develop a business model begins with having a clearly defined business purpose. The reason why you are starting your business in the first place should be obvious to you. It should be a company that can profit from a particular market or niche.
Start Here: Developing a Business Model - StartupNation How To Start A Business Business & Life Planning E-Commerce Funding Inspiration for Entrepreneurs Side Hustle Leverage Business Technology Grow Your Business Advertising & PR Branding & Marketing Management & Operations Sales & CRM Growth Hacks Video Books Experts Jeff Sloan Shay Berman
The term business model refers to a company's plan for making a profit. It identifies the products or services the business plans to sell, its identified target market, and any anticipated...
The pressure to crack open markets in developing countries, particularly those at the middle and bottom of the pyramid, is driving a surge in business-model innovation. The economic slowdown...
Hello Select your address All ...
When creating a business model, select key partners, like suppliers, strategic alliances or advertising partners. Using the previous example of Home Depot, key business partners may be lumber...
A business model is a blueprint that defines your company's mission, goals, operations and structure. It's essential as the foundation for a prosperous business, particularly if you intend to develop it into a franchise. Business models are concise explanations of how you plan to deliver goods or services, and attract and retain customers.
The landlord business model makes use of and controls financial assets (bankers and lenders), physical assets (houses and hotels), intangible assets (intellectual property) and human assets (contractors and temporary agencies). 9. Business models continues Broker Brokers perform a service by matching buyers with sellers of goods and services.
1. Collect information about your business and analyze it so that you can create a visual description of your company. Keep your business model simple. 2. Define your target market. Summarize...
1. Identify the primary business objectives. Determining the goals of the business analysis model can help create a unified vision between the business analyst, project manager and external funders. Considering why the project is important and how it can add value to the organization can clarify any confusion and maintain a focused objective.
Developing and visually mapping your business model lets you compare yourself with the market competition and identify underlying trends. A business model is an encapsulation of everything your business stands for and hence it needs utmost care and attention from your side to devise one. The Startup Process
Check your model. First, look over your model with a coworker or a group. Examine it for any potential holes or missed steps. Then, follow the actual business process and compare it to your model. Alternately, you can run the model in a focus group or meeting to see any steps that don't flow or are left out.
Your business model will document your understanding of critical market players and your organization's role in facilitating and growing the market for residential energy efficiency. This planning will help you demonstrate your organization's self-sufficiency while strategically securing partners for long-term market development and growth.
A business model is a key component of building a successful business. It can allow you to explore different ideas for selling services and products, implementing effective operations and developing strategies for future growth. A business model is essential for new companies.
Alex Osterwalder, in his book "Business Model Generation" , states that innovation in business models consists in creating value for companies, clients and society in general, i.e. in replacing obsolete models. "A business model describes the rationale of how an organization creates, delivers and captures value for the client".
As any entrepreneur will tell you, finding the right business model is imperative to building a sustainable business. Developing your business model is no simple task, as there are numerous types of business models that vary based on what the product is, how it is made, and who will be buying it. In fact, some businesses have multiple business ...
New York(CNN) Tesla is recalling 3,470 2022-2023 Model Y cars due to bolts in the second-row seat back frames not being secured properly. An estimated 4% of cars are affected, a recall report submitted in late February said.. The loose bolts could cause the seat belts to not work properly in a crash, "which may increase the risk of an injury for occupants seated in affected second-row seating ...