Coming up with a good business model that avoids overly saturated markets and generates substantial income can feel like an impossible task. In this step-by-step guide, we’ll help you understand business models and show you how to make your own, easy as that.
A business model is a way of planning how your business is going to make money, and it helps you organize your ideas clearly. It’s also useful to have a business model to present your business to partners, investors or future employees.
Why does a business model matter?
- Clarity and focus: It gives you and others a clear understanding of how you’re going to operate and generate value for clients.
- Strategic planning: It helps you plan ahead and make good strategic decisions. You can align your activities, resources and marketing to reach the goals outlined in your business model.
- Communication and collaboration: A well-crafted business model serves as a clear and visual guide to the company, simplifying the communication of ideas with stakeholders, team members, partners, and investors. This shared understanding fosters collaboration and streamlines decision-making processes.
- Risk mitigation: A solid business model helps you identify potential risks and pitfalls. That means you can plan accordingly and implement risk mitigation strategies.
- Resource allocation: A business model also helps you allocate resources effectively, prioritizing key activities that provide value.
- Attracting investors: Investors and partners look to a business model to evaluate the viability and potential of a business. Being able to present a solid business model will instil more confidence in investors and partners.
How to set up a business model canvas
The business model canvas is a strategic management tool used for developing good business models. It is a visual chart with elements describing a business’ value proposition, infrastructure, clients, and finances.
The canvas was first created by Alexander Osterwalder and consists of nine building blocks that gives an overview of a business in one page:
- Customer segments
- Value propositions
- Channels
- Customer relationship
- Revenue streams
- Key resources
- Key activities
- Key partnerships
- Costs structure
The simple layout makes it perfect for sharing your idea with others, without having to create an extensive pitch or sifting through lots of papers.
This is an example of a business model made using the business model canvas:
Want to try it for yourself? Download the free business model template.
A business model is always changing
Nothing is set in stone, not even a business model. It captures your initial ideas and plans, but as your business grows and your goals change, the business model should evolve too. In fact, you should set aside time to review and update it regularly.
The aim isn’t to create a business model that will last for the next five years, but to reflect your current situation.
How to make a business model
1. Customer segments: Who are your customers?
A business idea often begins with a solution to a common problem or a way to make a task easier. It’s essentially about creating value for your customers.
Consider who you’re creating value for. There might be many potential customers, but it’s helpful to narrow it down by identifying your most important customer segments:
- Who are they?
- What are their needs?
It’s a good idea to have a brainstorming sessions or a workshop to come up with some ideas and create buyer personas for your company. A buyer persona is a fictional person who represents someone from your target audience. It should be based on research and knowledge about your target audience demographics, behaviour patterns, motivations, and goals.
See also: 10 things to do before starting a business
2. Value propositions: How does your business provide value to customers?
The second part of the business model covers how you plan to create value for your target audience. Answer these questions:
- How do we provide value to customers?
- Which problems do we solve for customers and how do we do it?
- Which customer needs are we satisfying?
These first two sections form the core of your business model and lay the foundation for the other sections.
3. Channels: Where do you reach your customers?
Once you know who your customers are and how your business can create value for them, you need to figure out how to reach them. How will they learn about your products or services?
There are a lot of options, so it’s important to consider the target audience you identified earlier. For example, if your target audience consists of retirees, platforms like TikTok or Instagram might not be the best channels to reach them. If you’re planning to sell clothes, consider whether you’re going to do it in a store or online, or both.
Additionally, think about how you’re going to deliver your products or services. For instance, an electrician has to be where the client is to deliver the service, while a graphic designer can send their work via email.
4. Customer relationships: How do you interact with customers?
In this section, explain how you’re going to interact with your customers and maintain relationships with them. Decide whether you’ll offer personalized service, self-service, or a mix of both.
What you choose depends on the type of product or service you’re selling. For example, a grocery store can function well with self-service, while a hair salon requires personal service. Also, consider how you’ll encourage repeat customers, if that’s your aim.
See also: Customer service tips for small businesses
5. Revenue streams: How does your business make money?
You might have noticed it already: Everything on the right side of the business model canvas are things that create revenue, while the left side shows costs.
In this section you should answer these questions:
- What is the customer paying for when they buy from your company? Is it a one-time product, service, subscription, rental or something else?
- How do you accept payment? Is it cash or card, invoice payments, bank transfers or something else?
It’s super important to have a clear path towards making money and ensuring a steady—and ideally growing—revenue stream.
6. Key resources: What resources do you have and how should they be used?
The next point to consider is which resources you need, which depends on what you’re selling, who your customers are, and what your value proposition is.
Resources can be anything from knowledge and expertise to physical materials. Identify what you need to deliver on your value proposition. It could be anything from a vehicle for delivering goods, to marketing expertise. If you want to start a retail business, your key resources can include stock, stores, and employees.
7. Key activities: What do you have to do to add value to the company?
Key activities are the things you need to add value to your products or services, in short, what do you have to be good at to get customers and keep customers happy.
If you sell goods, the key activity might be producing goods. If you sell services, it could be performing those services. Key activities often include marketing and logistics as well.
Once you’ve been operating for a while and need to update your business model, focus on how to make these key activities more efficient.
8. Key partnerships: Who are your partners?
As an entrepreneur, it is difficult to run a successful business without good partners.
Partners can include everything from suppliers to customers and investors. They ensure that you have the necessary resources for success. A great example is the partnership between Red Bull and GoPro.
In 2012, Red Bull teamed up with GoPro to sponsor a record-breaking skydive, capturing the moment with a GoPro camera. This collaboration evolved into a long-term strategic partnership, which led to the Red Bull Rampage, where GoPro cameras capture athletes’ point-of-view shots. The success of this partnership lies in Red Bull and GoPro’s shared audience of adrenaline enthusiasts:
9. Cost structure: What are the most important costs in the company?
You likely have some costs in mind already: resources like materials, rental costs, supplies, and personnel expenses. By identifying important costs, you can avoid surprises when bills start coming in.
Running a successful business comes down to generating more revenue than costs, so you should know how much your costs amount to. Strategic cost management involves categorizing expenses into fixed costs, variable costs, operational costs, distribution costs, and customer acquisition costs.
See also: How to set up a budget
Avoid one cost—send invoices for free
When you set up a business model canvas, you have to include key costs in your business. When you start a business, you might have to invest in customer relationship management software (CRM), design software and collaboration tools like Miro or Mural. However, one way to cut costs is to do your invoicing for free.
Forget about those paid options, try Conta and send invoices for free:
Hopefully this guide has helped you on your way to creating a business model. While a business model helps you plan and launch your new business, some companies need a more detailed plan for day-to-day operations. In that case, you can create a business plan.
