The importance of your Business Model
“The best idea, technology, product, or service has a limited lifespan without a sustainable business model to support it.”
The business model defines how your venture will offer its product or service and generate income. It's as simple as that. Sometimes, it's so obvious that we don't even take the time to consider the various options.
In theory, the goal is to sell our product or service and generate income from it. Right? In theory, yes. However, there are many different ways to achieve that goal.
Let me clarify this with an example:
Let’s say you’ve realized there is an interesting market opportunity in selling unique, modern, and original party dresses for little girls. You’ve noticed that in your local area, the supply is very limited and unoriginal, and after doing your research and analysis, you’ve concluded that it’s a business opportunity.
Deciding how to obtain the product or service you will sell
There are many different ways to meet the need you've identified. And you must make decisions about many different elements of how to "build" that business. Here are some possibilities:
You could directly design and make the dresses yourself, if you have a creative flair, manual skills, and enjoy doing it.
Alternatively, you could think about designing the dresses and hiring a seamstress to make them for you.
You could hire a designer to handle that task and focus on managing the business.
You could look for designers who already have a product range and focus on marketing their brands, either by purchasing products locally or importing from another country.
You could choose to offer exclusive, custom-made, and fully personalized dresses, seasonal collections, or more mass-produced designs with a broader reach.
Deciding how you will deliver your product or service to your customers
And these are just some options regarding how you will obtain the product. Then, you must make decisions about how you will make it available to your customers. For example:
You could open a physical store where your customers can visit.
You could sell through social media platforms.
You could also create an online store and sell everything via the internet.
You could sell locally, nationwide, or globally.
Perhaps, it would be an option to acquire a franchise of an existing brand.
You could even consider offering the dresses as rentals rather than selling them.
Deciding how you will generate income
Regarding your business relationship with your customers and how they will pay, you also have decisions to make that impact your business model:
You may or may not offer credit.
You may or may not offer payment facilities.
You need to decide which payment methods you will accept: cash, credit cards, transfers, PayPal, Zelle, e-transfers. Today, there are even businesses that accept cryptocurrency. The more global your reach and as you venture into online sales or via social media, the possibilities are increasingly broad.
The importance of clearly understanding how to combine these elements to build your business model
As you can see, there are many ways to meet the need you found in the market and generate income. What’s interesting is that your selection on how you will implement your business will depend on many variables that are directly related to you as an entrepreneur, such as: your resources, your personal preferences, your skills, and abilities. Additionally, there are other factors related to the possibilities offered by your market, such as: your customer's purchasing power, regulations and taxes, the ease (or difficulty) of importing and transporting goods, and their costs. How you do it will affect your cost structure, competitive advantage, pricing, and your ability to generate customer preference. This is why it’s so important to correctly select your business model.
The specific combination of these elements that you will select to effectively make your product or service available, deliver it to your customer, and charge for it is what will form the specific business model you’ll be implementing in your venture.
How to choose the best business model for your venture?
Choosing the right business model is a critical decision for the success of your business. Therefore, it shouldn’t be taken lightly or impulsively; it should be based on an analysis of various sources of information.
Once again, we conclude that in order to successfully embark on a business venture, you must do your homework by researching, gathering market and consumer information, and analyzing the data you have.
What type of information should you consult?
Your customer or target audience: Who are they? What is their purchasing power? Where and how do they typically buy this type of product or service? What service experience do they prefer during their purchase process? What resources do they have?
Your competitors: What business model are they using? Is it successful? Is it beneficial for you to emulate it, or is there an opportunity to innovate with a different business model?
Your financial resources: What financial resources do you have? Do you have access to credit, investments, or financing?
Your personal resources, knowledge, and preferences: Do you have the necessary knowledge to implement the business models you consider most suitable? Are there any tasks or aspects that particularly excite you and could impact the business model you select? Do you need to study or prepare in any area to implement a specific business model?
Market conditions: Are there laws or taxes to consider? Do you have the necessary transportation, import, or export facilities? Is the technology required available?
Profitability: How do your costs change with each business model you're considering? Do you have enough margin to generate profits, considering market prices for similar products and services?
What types of business models exist?
Nowadays, the possibilities are enormous, and the potential business models are vast, as they stem from the possible combinations of the factors I’ve listed earlier. So, I'll just list a few of the most common ones. However, this list is by no means complete. Technology and advancements continuously allow for the emergence and development of new business models.
Selling products in physical stores / retailer
Selling products virtually / e-commerce
Subscription
Licenses
Affiliates
Custom manufacturing
Franchise
Professional services
Manufacturer
Distributor
Rental
The business model: a living, variable, and dynamic entity
Business models must be flexible enough to adapt to market changes. What works today may not necessarily work tomorrow. In this sense, the flexibility and adaptability of the business model you implement are essential for long-term business success.
You must develop a business model that has the capacity to expand or change as your customers and competitors evolve. Think, for example, about the challenges photo development stores faced when digital cameras became popular. In that case, the market, the technology, and even the essence of the service sought by the consumer changed. Or think about the challenges faced by the famous Yellow Pages when, thanks to the internet, now you can find contact information for businesses in any sector and location with just a few clicks.
It doesn’t have to be complicated adjustments; sometimes, the simplest is the most efficient
My husband currently runs a beverage and food distribution business. In its early days, a couple of years ago, they opted for a direct sales business model. They bought two vans and made daily routes visiting small stores, mini-markets, and supermarkets. During each visit, they would offer the product, deliver it, and collect payment. Soon, they realized this model wasn’t as efficient as they thought. Traffic, the time required to offer and sell products, and the time spent loading and unloading, prevented them from achieving the daily sales targets needed to be profitable.
As a result, they made an adjustment to the business model, implementing the “pre-seller” role. Now, salespeople move around on motorcycles, more agile and without needing to dispatch the products. The following day, the sales made are loaded into the vans, delivered, and collected while the salesperson continues with new routes. It’s an example of a simple adjustment that significantly impacted sales volume in a short period.
It’s a very simple example, but it shows how a small adjustment in the business model can positively impact a company’s sales and profits. The flexibility and adaptability of the business model you implement are essential for long-term business success.