What Is A Business Model

What is a Business Model? Hearing this term quite often and not really finding in-depth information or a break down of it? This article will be breaking up business models: From defining what is a business model, to elements and types and examples of business models, as well as some of our in-depth and detail insights into business models for companies in Malaysia.

See our insights into business models here.

What Is A Business Model?

A business model is the first step, an idea and a concept at basically how your business will run its course and make money. A business model is an outline of how a company plans to make money with its product and customer base in a specific market. At its core, a business model explains four things:

  • What product or service a company will sell
  • How it intends to market that product or service
  • What kind of expenses it will face
  • How it expects to turn a profit

Testing Your Business Model

The key to preventing spending unnecessary amounts of resources and time on developing a business model is through the continuous testing of its most critical aspects. That way, companies get fast feedback from customers, users, and partners regarding the feasibility of the model. This guide will help you:

  • Understand the testing process step by step
  • Choose the right tools that can help you find the right questions
  • Understand the best test formats and setups for the successful development of your business model
What Is A Business Model
What Is A Business Model: Testing Your Model

Types of Business Models

The question is not only what is a business model, but it expands into types of business models as well. Below are listed some of the most commonly used business models in the business environment.

  • Subscription Model. A subscription business model can be applied to both traditional brick-and-mortar businesses and online businesses alike. Customers pay a recurring fee to use the services. Examples include Netflix, which is discussed in detail in the article below further.
1.-Subscription-Model
What Is A Business Model: Subscription Model
  • Freemium Model. The freemium business model has gained popularity with the prevalence of online and Software-as-a-Service (SaaS) businesses.

The basic framework goes like this: a software company hosts and provides a proprietary tool for their users to freely access, such as an app or tool suite. However, the company withholds or limits the use of certain key features that, over time, their users will likely want to use more regularly. To gain access to those key features, users must pay for a subscription. Examples of this model include platforms like Spotify.

What Is A Business Model
What Is A Business Model: Freemium Model
  • Franchise Model. Of all the different types of business models, the franchise model is perhaps the one that people are most familiar with. A franchise is an established business blueprint that is simply purchased and reproduced by the buyer, the franchisee. The franchiser, or original owner, works with the franchisee to help them with financing, marketing, and other business operations to ensure the business functions as it should. In return, the franchisee pays the franchiser a percentage of the profits. Examples are renowned to McDonald's, Starbucks and so on.
What Is A Business Model
What Is A Business Model: Franchise Model

Elements of A Strong Business Model

Creating a business model is not just about how your business will operate and make money, but it is also about how you can continue to create value for your customers with your products and services.

There are four key points/elements of a business model that will help you to create continuous value for your customers. Its starts with identifying what is a business model that you are willing to implement for your business-to-be.

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:

  • Identify Your Audience Specifically. Target a niche audience. A wide audience won’t allow your business to bring in the right customers who truly need and want your product or service.

    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.
  • Strong Value Proposition. Differentiate yourself from other businesses out there. How will your company stand out among the competition? Do you provide an innovative service, a revolutionary product?

    Establishing exactly what your business offers and why it’s better than competitors is the beginning of a strong value proposition and how you deliver your value proposition is what creates value for your customers.
  • Space To Innovate. 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.
  • Determine Your Key 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. For example, if you run a bakery, consider what is a business model for a baker, know who your key suppliers for your ingredients are going to be.

However, the elements are not restricted to those above mentioned to understand what is a business model. Below is a video on breaking down business models:

What Is A Business Model

Examples of Business Models

Creating a business model means planning the fundamentals and core principles of running your business. In order for you to have a better understanding of what is a business model, we took a local example as well as overseas business example and summarised their business models for your better understanding.

Grab

Grab is Southeast Asia's leading ride-hailing platform that offers the fastest booking service for taxis, private cars & motorbikes through one mobile application. Grab's growth has accelerated exponentially towards the end of 2018. With the sudden merge with them and Uber in March 2018, they now stand on top of the ride-hailing services within South East Asia (SEA).

Grab business model functions very similarly to its Western counterparts, Uber and Lyft. Below is an example of a business model for Uber, that is similar to Grab

What Is A Business Model
What Is A Business Model: Comparison to Uber

Based on the business canvas model provided, the common revenue stream ride-hailing services share is on a car rides per KM basis.

But the drivers are the ones getting paid for it. This is true for all ride-hailing services, but drivers are also being charged a commission for using the respective ride-sharing platform resources of pairing them and their customers together. This is one of the major strengths of the Grab business model.

Grab Business Model

Read more on detail about the Grab Business and Revenue Model here.

Netflix

To explain what is a business model, in this section we can use the example of Netflix. How does Netflix's business model work? As per the Netflix annual report:

Our business model is subscription-based as opposed to model generating revenue at a specific title level. Therefore, content assets, both licensed and produced, are reviewed in aggregate at the operating segment level when an event or change in circumstances indicates a change in the expected usefulness.

Netflix Annual Report

Their business model incorporates a subscription structure. With simple packaging and three subscriptions (basic, standard and premium) you can get the streaming of all the available series, movies and shows available on the Netflix library.

Currently, the subscription prices vary from a base plan to a premium plan

what is a business model
What is A Business Model: Example of Netflix

As of 2017 Netflix revenues were over $11 billion, with a staggering growth compared to just 2013, when the revenues passed $4 billion. We give for granted the on-demand business model of Netflix. Yet, back in the days, you could have movies “on-demand” only with the pay per rental business model. As technology has evolved, the on-demand model has been possible also for media companies such that of Netflix.

The Challenges in Business Model Development

Developing new business models can be hard, especially without the right tools and processes to guide you through the testing process. It's a great idea to test your business model with a prototype to a focus group. Inform your focus group in what is a business model that you have in perspective before testing.

The other important point in regards to the execution of tests is to get meaningful feedback. Often, testers are so focused on delivering the perfect test that they forget to ask for feedback. Before starting a test, have a clear strategy on the feedback. Have in mind the feedback format you wish to have, the timing of receiving the feedback, and the content of the feedback. A test without feedback is meaningless as you have only a limited possibility to verify or falsify your hypotheses.

The last step in the business model testing cycle is the analysis of the feedback and the integration of the feedback into your initial business model concept. After that, you can go ahead and compare the initial assumptions with the key learnings and update the section in the business model canvas.

How To Choose The Correct Business Model For You?

After knowing what is a business model, you will need to decide which one is the correct one for you. At the end of the day, there’s no absolute answer to this question. Instead, the business model that’s best-suited for you will depend entirely on the scope of your operations and the costs you may incur along the way.

Therefore, in order to narrow down your options, you’ll want to start with your small business idea and then ask yourself the following questions:

  • How will my product or service benefit the customer?
  • How will I generate revenue?
  • Who’s my target customer?
  • What startup costs am I looking at?
  • Which expenses will be fixed and variable costs?
  • Do I need support from investors?

With the answers to these questions, you’ll be able to gain a better understanding of how to structure your business model.

On A Final Note

Ultimately, mapping out your business model may feel overwhelming, especially considering doing so is just one piece of planning and launching your business.

It’s important to remember, however, that you can think of a business model simply as a plan that shows how you’ll make money. Plus, by putting the time and effort into outlining your business model now, you’re taking the necessary steps to set your business up for growth and success in the future.

References

13 Common Challenges When Developing Your First Business

Business Models Explained

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Written by Meerat Qureshi

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2 comments on “What Is A Business Model”

  1. It would probably be helpful to get a presenter who actually understands what a business model is. That was a fundamentally incorrect presentation.

    1. Hi David. Thanks to your constructive criticism, we have made amends to our article and we greatly appreciate your feedback.
      Just to inform you, we have not deleted any comments, the comments need to be approved first before appearing on the website.

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