What exactly is a business model?

Every company has a unique business model. This is not a business plan, as a nonprofessional might think. One of the many definitions of the business model is: “‘The business model is a comprehensive model that describes the target market, defines and differentiates the company’s offering, defines activities, specifies activities that the company must perform internally and externally, defines and specifies the necessary resources, the path to market access, the benefit to the customer and the profit. It is a comprehensive system for delivering a certain value in the form of products or services to profitable customers ” (Jermol, 2003). Since the business model changes, develops and adapts to market conditions over time, a business plan is only a document that can describe the state of the business model at a given point in time.

I personally call a business model a recipe for how a company makes money. Since the business model is unique to each company, no one in the world can give an entrepreneur the recipe for the success of his or her own business. Furthermore, the business model is a living entity that changes depending on the growth phase of the company and market conditions. Therefore, the profession of an entrepreneur is also demanding, because every entrepreneur who builds a successful business must discover his or her own recipe that will ensure the successful growth and life of the business. However, the discovery of a recipe defines the process from a business idea to a successful company.

9 points of the business model

Apart from that, a business model is a company’s unique “recipe” for how it makes money. This means that it describes and defines practically everything a company does to manufacture products (products or services) and deliver them to customers who pay the purchase price for them. The business model also ensures that revenues are higher than costs, as this is the only way the company generates profit or value added. We call this a successful business model and it ensures that we can go from 1 € 2 €.

The most important part of any business model is undoubtedly the customers. They are the reason for the existence of every business unit, the source of all important information and, of course, the source of money. That is why the business model revolves around the customers and not around the product, as is generally assumed.

Point 1: Customers

The business model defines the customers of a company or the company’s ideal and best customer. Successful companies know exactly who their best customer is, what habits they have, what their needs are, what demographic trends they have, what market they are in etc.. This is why social networks are so successful today, as they allow companies to access the habits and details of their customers. The first step in defining a new business model is to define the ideal customer, because in today’s global world no one buys a product just because it is great, but because someone knows how to sell it right.

Point 2: Product demand

Companies are customers, individuals are customers –  we are all customers. None of us has ever bought a product if we did not need it. The customers we have defined in point 1 are defined by their need for the product we offer. If a person does not have this need, he will not be our customer. We must understand the need in the broadest sense of the word – this includes problems, wishes, emotions and impulses. If a person has such a strong desire for something that in their eyes it is an urgent need, they will be willing to solve this need by buying a product. This means that the need must be strong enough to trigger the buying process in the customers. The best customers identified in point 1 are the customers who have the strongest need. Therefore, the company usually focuses only on them. A good understanding of the customers and their needs is essential for an entrepreneur to discover a successful recipe or business model.

Point 3: Unique value

The concept of unique value is abstract and difficult to explain to some extent, but it is well understood by successful entrepreneurs. Basically, it’s about customers not buying products when buying, but the value they have from them. Take, for example, the fact that a person is renovating an apartment and wants to tear down a piece of the wall. He goes to the store where he buys a powerful drill. After using the drill, a large hole formed in the wall. The value a person gets from a drilling machine is a hole in the wall. It follows that customers do not buy drilling machines, but holes in the wall. The product, in our case a drilling machine, is just a medium to deliver value to customers. This means that the products are transient, as value can be delivered in many different ways. This concept can be applied to any product, and entrepreneurs usually already instinctively think about values, not products. We need to be aware of what value our customers have from our product.

Point 4: Solution / product

The quality of our product or service to our customers is defined by the features and functions of our product. Every feature or function is important only insofar as it is important to our customers, so when defining a product, it is important that we always proceed from the point of view of our customers. Usually, less experienced entrepreneurs are stuck with their solution and see countless opportunities for upgrades and new related products. Successful entrepreneurs, on the other hand, are in love with their customers and are critical of any functionality – whether their best customers would like it.

Point 5: Channels

We cannot sell our products to anyone (even if they are so great) if people do not need them. In today’s world, where everyone is shouting at each other with commercials, it is hard to get the attention of our customers. This point defines how customers will find out about us, how and through which channels they will perceive our offer and how we will convince them to make a purchase with us. Here, too, knowledge of knowing our best customers is essential, as it is the starting point for all entrepreneurial activities in the field of marketing and sales.

Point 6: Revenue

This point defines the company’s revenue, product price, and the model by which customers will make a purchase. Pricing is one of the most challenging tasks of any entrepreneur. The price must cover all costs of production and operation of the company. With it, we determine what the profitability will be. We also determine how we will be seen compared to the competition and whether we will be consistent with our customers’ perception – that our product is worth the price. The system of how the customer will pay for our product is also important. It is necessary to determine whether it is a one-time purchase, rent, subscription model or any of the many derivatives.

Point 7: Costs

At this point, we define all the activities and on this basis, the costs that the company will have in order to be able to achieve the objectives defined above. Most importantly, entrepreneurs start managing cash flow from day 0 and invest start-up capital in prudent activities.

Point 8: Metrics

When developing a business model and a company, entrepreneurs make many decisions and do not always have enough information to be able to make quality decisions. Therefore, they need to measure various factors in order to be able to monitor whether developments are moving in the desired direction. The most typical metrics are the number of products sold, the number of requests, the number of followers on a social network and the like. The possibilities are many and these vary from company to company.

Point 9: Competition

n the beginning, when we talk about a business idea and the company is not yet selling products, the competition does not care about any entrepreneurial initiative. The moment a company offers its product on the market and the first purchases are made, it means that the company may have discovered a business opportunity. This also attracts the attention of larger competitors, who will try to imitate the operation of the new company or even disable it. The newly formed company will be able to prevent competition only with its “unfair” advantage. This point defines what the competition will find difficult to emulate and will ensure the new company’s existence in the market.

What else is important?

This is the 9 basic points of the business model according to the Lean canvas method. These points are essential, at least at the beginning of the company’s development, and define the most important aspects. In addition to these, it makes sense to define the activities, suppliers and resources to achieve the company’s goals.

The quality of each business model is measured in two ways. The first way is undoubtedly its effectiveness, which is seen through revenue generation. The second, which is especially important when there is no revenue yet, is through the data we used. For the most part, we are referring here to customer data that we need to obtain from them, preferably in the form of personal interviews. We recommend that you read The Mom Test, by Rob Fitzpatrick.

When looking for an effective business model or recipe for generating money for your business, it is important to always look for a specific narrow niche of customers. If we define two or three niches, we build two or three business models in parallel. The same is true in the case of different products. Through development, we will find out which one is the best and always focus on only one niche and only one product.

If you are not an experienced entrepreneur, we recommend the book Running Lean by Ash Maurya – or attend one of the entrepreneurial programs offered by incubators or technology parks in your country. In the Goriška region in Slovenia, the Primorski Technological Park is in charge of startup entrepreneurship, so we will be glad to assist you if you contact us.