At the core of a great business model is the ability to generate superior profits. In order to generate the superior profits, you need to create a profitable revenue model. A profitable revenue model has two components:
Your revenue model should generate high gross margins.
The total gross margin generated needs to exceed your operational or overhead cost.
Ideally, your revenue model should include products with margins superior to competitors’ margins. BMW makes significantly more profit per car than General Motors or Ford. Starbucks makes much more profit per cup of coffee than Dunkin Donuts.
Your revenue model should ideally include proprietary revenue streams, margin, as well as avoid common pitfalls, such as technological obsolescence or an overcrowded marketplace.
There’s no such thing as a great business model with poor margins. Superior margins versus the competition are in large part what will make your business model great.
The standard for exceptional margin is determined by comparison to others in the industry rather than a generic profit percentage. If the average shoe manufacturer generates a 25-percent margin and you generate 35 percent, you have generated superior margin.
Exceptional margins do more for your business than generate a good bottom line. If your margins are superior to the competition you can
Hire better people because you can afford to.
Provide a higher level of customer service.
Have more room for sales negotiations.
Keep your bank and investors happy.
Engage in research and development.