Business Models For Dummies
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A business model is like a lump of clay that you can mold into many different shapes and sizes. This pliability is a powerful feature, enabling entrepreneurs to craft their models to fit their business needs. Yet, despite all this potential for variety, all business models have a set of shared characteristics.

These commonalities are what set business models apart from other business tools, such as business plans, strategic plans, and operational plans.

Whether your business model is cutting edge or based on 100-year-old principles, all business models answer the following questions:

  • What problem are you trying to solve? People don’t need a new widget; they need the new widget to solve a problem. No one asked for an ATM. Customers wanted additional banking hours. The ATM solved this problem. Start with the job the customer is trying to accomplish, but without a good solution. These unserved or underserved markets provide the best opportunity for a great business model.

  • Who needs this problem solved? The answer to this question is the customer you’ll be serving. In the case of the ATM, the market is very large — everyone with a bank account. In the case of pet cloning, the market is much smaller — people with $50,000 who loved their deceased pet enough to recreate it.

  • What market segment is the model pursuing? A market segment is a group of prospective buyers who have common needs and will respond similarly to your marketing. Nike makes shoes for many market segments, among them running, basketball, aerobics, and hiking. Traditional marketing focuses on demographic segments while modern marketing focuses on buyer behaviors.

  • How will you solve this problem better, cheaper, faster, or differently than other offerings? Duluth Trading Company offers “ballroom jeans” that offer extra room in the right places so you can crouch without the ouch. Clever, unique offerings like these are superior to a better mousetrap.

  • What is the value proposition? What problem do you solve for the customer in relation to what you charge to fix it? Ballroom jeans have a clever niche and solve a problem for a defined segment; but if the price is $250 per pair, the value proposition would be weak.

    Your product solves a problem for the customer. Hopefully, the customer values the solution and will pay you much more than it costs you to make the product. The larger this spread, the greater your value proposition.

  • Where does your offer place you on the value chain? Many creative business models — like Skype, ProFlowers, and eBay — have redefined the value chain by eliminating or shifting the partners that contribute to the final offering.

  • What is your revenue model? Factors such as how you’ll charge for the product, how much you’ll charge, and which portions of your offerings will be the biggest money makers all determine your revenue model.

    For instance, most airlines have radically changed their revenue models to charge for items that used to be bundled into the ticket price, effectively making them free. Items like checked bags, extra legroom, in-flight food, and even carry-on bags now generate billions of dollars in revenue for airlines.

  • What is your competitive strategy? You don’t want to just jump into the shark tank. You need a plan to differentiate yourself from competition — via marketing, sales, and operations — that allows you to effectively outshine the competition

  • How will you maintain your competitive edge? After you distance yourself from competitors, how will you hold off their attempts to copy your winning strategies? The best business models create barriers to maintain their hard-earned competitive advantage.

  • What partners or other complementary products should be used? Henry Ford was famous for creating companies to make everything included in his cars. Toyota relies on a partner network to engineer and manufacture most of the components for its cars. Savvy relationships with partners can enhance your business model.

  • What network effects can be harnessed? If you owned the only fax machine, it wouldn’t be worth much because you couldn’t send or receive a fax. Network effects enhance the value of everyone’s purchase when the network of users grows. Nightclubs and Facebook rely on their large network of users to increase the value of their offer.

The best business models aren’t merely an idea. A great business model solves problems for customers creatively and generates more profit than was previously thought possible.

About This Article

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About the book author:

Jim Muehlhausen is the founder and President of the Business Model Institute as well as consultant and speaker to businesses large and small. He is the author of The 51 Fatal Business Errors and How to Avoid Them and a frequent contributor to Entrepreneur, Businessweek, and dozens of other publications.

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