A business model represents how a company intends to create value. A business model requires from a company to describe its approach to revenue generation. Revenue is a function of the product price and the amount of customers buying. So the company needs to specify what the product is, what customer benefit it has and how many customers are expected to buy it. The company further needs to define, how it plans to market the product, i.e. how to reach the customers and inform them about the product. Reaching the customer can be by means of branding or through channels.
The business model further requires from a company to formulate its approach to managing the costs incurred for operations and production, delivery, logistics and distribution, branding and marketing, sales and administration, as well as funding.
Finally, the purpose of a company is to continuously create valuable products that have customer benefit (the WHAT) from organizing the utilization of resources (the HOW). In order to achieve this the company management needs to decide which resources or functions are necessary internally or externally, and how to structurally organize all of these in order to reach the company objectives.
The Business Model Components Map (BMCM) has been designed as a map that displays the most relevant elements of a business model in an orderly manner. One can use the Business Model Components Map to benchmark one business model against another, to develop a business model for a startup, to further enhance an existing business model, or as a checklist to start the discussion of some relevant points within each element of a business model.
A Business Model is working if it eventually creates value and this value creation allows the business model to become self-sustained. The company that employs the business model is not burning equity and doomed to fail.
In contrast, a Business Model is not working if it fails to generate value. It either does not achieve significant revenue, or it does not succeed to attract a significant amount of customers such that the customer connections can be monetized in an overall satisfactory manner elsewhere.
To formulate and achieve a fully blown Business Model is a complex, cumbersome, and time consuming tasks. For that reason, it is important for a Startup to focus on the most relevant elements of a business model, which are the elements that are in connection with the customer.
The definition of the customer segments and the markets in which to target these customer segments, the core product and its customer benefit, the branding and marketing approach to reach the customers and for revenue generation the channels to be used and the corresponding pricing of the product.
The term Digital Business Models can mean several things:
Already existing business models, in which functions, processes, resources, assets, market access, etc. are enhanced or supplemented by digital technologies (e.g. automation, AI, robotics, [big] data collection and analysis). This is also commonly referred to as digital transformation of business models.
Business models in which companies offer services around or with digital solutions. The advantage of these business models result from economies of scope and is typically B2B. The expertise of the company is applied to many client companies. Since the products are digital the company must not be physically present at the client companies. If this is the case, travel expenses fall away and the services can be offered internationally. However, because the services are typically customer individual such business models are more difficult to scale because more customers generally require more employees.
Business models in which companies offer high quality open source, free or rather cheap solutions in order to attract a large customer base. Customers from the customer base can then receive group or individual services, coaching, consulting typically in conjunction with the free content.
Business models in which companies offer digital products. The advantage of these business models result from economies of scale. A principally identical digital product can be sold to many customers. Such business models are typically B2C.
Business models in which companies do not offer products themselves. Instead they offer platforms on which products can be traded, bought or sold. The platforms offer their customer an efficient access to a large market. In times of tight global markets the value of an increasing amount of companies results less from its ability to produce but more from its ability to sell. Therefore the advantage of these business models results from having a strong customer connect. Such business models can be both B2B and B2C.
According to the definition, the logic with which a company strives to create value is represented by its business model. The elements of a business model always the same. A new or innovative business model, therefore, is, when companies do at least one innovation in any of the components of the business model and if this eventually leads to the generation of value, to more revenue, or to less costs.
One example: classically, revenue is generated by selling products or services. In newer, but by all means not new any more, business models companies offer the product or service for free. The revenue is then created by help of monetizing the customer connection, e.g. through advertising or through the sale of insights from customer data.
The huge values of a now significant number of companies no longer stem from the value of their substance or from their ability to generate profits and cash flows, but from their large number of customer connections which are assumed to be monetized at some point in time in the future.