Development of a business model

Development in the global economy has changed the traditional balance between customer and supplier. New communication technology and more open global trading means that the customer has more choices. Businesses therefore need to be more customer-centric and require them to re-evaluate the value propositions they present to customers.

This means that the companies need to consider not only how to address customer needs more accurately, but also how to capture value from providing new products and services.  Figuring out how to deliver value to the customer, and capture value while doing so, is the key issues in a business model.

The business model describes the benefits the enterprise will deliver to customers (what the customer wants and how they want it), how it will organize to do so, and how it will get paid for doing so and make a profit. It outlines the business logic to earn a profit, and defines the way the business go to market.  In other words; how your business is designed to provide:

  • Value proposition

The offer that makes the customer solve a problem or perform a job at a given price.

  • Value delivery

Resources and activities which able the business to deliver the value statement efficiently, trustworthy and over time.

  • Value capture

How to make a profit

You should think of a business model more like a conceptual framework, rather a financial model of a business. The more aware you are of your own business model, the more likely to create values. Without a well-developed business model companies will fail to deliver, or capture, value from their innovations so it is a very important part of your innovation process.

Examples of business models
Razor-blade model
one of the most well-known business models is the «razor-blade model»
. A business model which involves selling an item at a low price, sometimes even at a loss, in order to sell complementary or consumable products later. The name refers to the Gillette company who sell hand-held razor to a low price, and the make a high margin of profit by selling the blades. Another example can be found in the printer business, where the actual printers are sold very cheap in order to sell high margin of cartridges to the consumers. Other examples are the mobile phone and subscription.

Freemium model (free+premium)

In this business model the business gives away something for free in return for your personal details so they can market to you and hope to build an relationship  so you buy from them in the future. It is typically used in service-based businesses  where the lifetime value of the average customer is high and is increasingly popular  with internet services such as Spotify, Skype, Dropbox or Flickr. Many of these offerings have similar cost structures where the marginal cost of serving and additional customer  tends towards zero. The core free offering then act as a gateway to the paid service. For example Spotify, who offer the free version with commercials, the paid one does not.
It is important to know have many “premium” (paying) customers you need to finance the giveaways and make a profit.

Value proposition

The most important factor in a business model is the value proposition. It is a statement which clearly identifies clear, measurable benefits consumers can get when buying a particular product or service. It should convince consumers that this product or service is better than others on the market. This proposition can lead to a competitive advantage when consumers choose this product or service because they receive greater value.

Consumers are always looking around for the best possible deal at the best quality and how these products and services will contribute to their success. The value proposition is the promise that the business will give the consumer to assure best possible value.  The value proposition is the unique selling point, and without this you lose an opportunity to tell consumers why they should pick your product or service.

A product or service does not contain any real value until a potential customer perceives it to have so.  The customers don`t just want products/services, they want a solution to their perceived needs. This quote is another example to such an understanding;

“Last year one million quarter inch drills were sold. Not because people wanted quarter inch drills but because they wanted quarter inch holes”. President, Black & Decker.

 How successful the value proposition is, can be described by the 3 criteria:

  • How important is the “job-to-be-done” for the customers
  • How satisfied are the customers with the present solutions
  • How effective are the new product or service solving the job compared to other options

Activity 2:

How can your idea create customer value? Start to write down a description of your innovation `idea. You can use one of the ideas you have worked on in theme 3, or other ideas. Then you should use the questions below to find the most important customer value in your idea. This could be a conversation between you and a person not working in your business (he/she asking the questions until he/she understands the idea and how it creates value). Or you can just write down your answers in the reflection log.

Question 1:          Idea
What is the core of the innovation idea? What is unique with this solution? Why and how will this solution provide value for the customers?
Question 2:          Customer need
What “job” does the customer need to be done?
Question 3:          Insight
What kind of insight do you have, does it underpins the need?
Question 4:          Content of the solution
What do you offer, in terms of products and services?
Question 5:          Competitive advantages
What is unique and why will you succeed?

Designing a business model

In order to design a business model you have to consider the following questions:

  • How does the product or service bring utility to the consumer? How is it likely to be used?
  • What is the “deep truth” about what customers really value and how will the company satisfy those needs? What might the customer pay for receiving this value?
  • How large is your market? Could your product/service support a mass market?
  • Are there alternative offerings in the market? How is the offering superior to them?
  • What are the structures and resources needed to deliver value to the customers? Who will you collaborate with?
  • What will it cost to provide the product/service?

A good business model will provide a considerable value to the customer and collect a viable portion of its revenues. Having a differentiated (and hard-to-imitate), but at the same time efficient and effective, design for an enterprise`s business model is important in order to achieve a competitive advantage.

But developing a successful business model is insufficient to assure competitive advantage.  Once implemented, the gross element of a business model is often quite transparent, and easy to imitate. It is usually just matter of a few years (or perhaps months) before a successful business model is `shared` by your competitors. So companies should be seeking and considering improvements to business models – particularly within `difficult to imitate improvements` that add value for customers – continuously. This is how you reveal the strengths and weaknesses of your model, and form a better basis in the creating a profitable business.

Superior technology, excellent people and good leadership are unlikely to produce sustainable profitability if the business model is not adapted to meet the competitive environment.