What is a Business Model? – A Very Easy to Understand Guide
What is a business model? Osterwalders business model canvas

What is a Business Model? – A Very Easy to Understand Guide

Wondering what is a business model? Let’s understand exactly what business models are and how you can create a business model of your own. Let us dive right into the concepts and understanding of business models.

First of All, What is a Business Model?

A business model is a revenue model for your business. It helps you understand how and where the money to run your business is going to come from.

In simple terms: A business model tells you how your business generates profits.

It doesn’t matter what revenue source you decide to start with. If it is sustainable, you’re on the right track.

Now that we know what is a business model, let’s break them down to smaller pieces

What makes up a business model?

Osterwalder's Business Model Canvas
Osterwalder’s Business Model Canvas

Think about it for a second…

You get a brilliant idea and you want the world to know about it. You know it’s an amazing idea and people are going to love it!

You begin to plan how the idea will be executed, how you’ll put some money into advertisements and branding, and how the product/service will be created.

But most people forget the essentials of any business:

  • Product/Service – What problem is your product/service going to solve?
  • Customers – For whom are you solving the problem. Where do they hang out, what do they like
  • Profits – How much can you charge for solving that problem, and how much profit can you generate

Ever seen a business succeed without either of these two elements? I haven’t, and understanding businesses is pretty much my day job!

And this is exactly what is a business model.

It helps you understand where your customers are, how much are they going to pay, how much markup you can charge to them. There are many such small elements that essentially create a revenue model and help build a strong foundation for you.

An overview of a business model in easy language:

ElementDescription
ProblemBusinesses solve problems. What problem are you planning to solve?
SolutionWhat is your solution? Is your solution better than what’s available (ask strangers, don’t decide this yourself)
Customer PersonaWho are the people facing this problem, and where do they hang out?
Cost of Reaching CustomersThis comes under marketing and how you plan to reach your customers
Cost of creating the solutionHow much is it costing you to create the solution for that problem?
Price to charge – ProfitsWhat’s the price your customers are willing to pay, and how much profit can you generate with it. Is the profit sustainable, and will your business run with those profits?

What makes up a business model

Since we now know what is a business model and the parts that make it up, let’s create one for ourselves.

How to create a business model for yourself?

Businesses are unique and there are no two businesses that can be the exact same and grow really big. So I’m going to keep this section hypothetical and build a business model of my own to demonstrate it for you.

Step 1 – Identify a Problem

What is the problem part of a business model
What is the problem part of a business model

The world is full of problems. Philosophers always call life as a “struggle”. But for opportunists, where there’s struggle, there’s a way to create a business.

How do you identify a problem that you can solve?

An annoying problem is a good problem to solve. Because that means people would be excited that you created a product for it. Try finding problems that are really annoying for you and the people around you.

Observe your day-to-day activities. Is there something, no matter how insignificant, that is really annoying and you’d love to figure out a solution for it?

For me, it’s crumpled clothes.

Don’t you hate it when you have that really important meeting at the end of the day, and you’re looking like you just wore a shirt right out from the dryer? Me too!

So we found a problem that’s crazy annoying and just about anyone who wears clothes would LOVE to have a solid solution to this problem.

All you have to do is look around your day and figure out annoyances.

Step 2 – Plan a Solution

Find a solution for your business startup
Find a solution for your business startup

Great! We have a really annoying, painful problem to solve. How do we find a solution?

  1. Find a solution that’s very general, to begin with.
  2. Narrow down from there into the technicalities

To create a solution, you need to know what exactly will solve the issue for everyone. For crumpled clothes problem, the obvious solution is to have a piece of cloth that retains its original state.

Now that we know what to find/create, begin by searching for existing solutions and see what’s being done. Don’t waste time recreating something when there easily could be something that’s ready.

Step 3 – Identify Your Customers

Identify your customers of a business
Identify your customers of a business

Now that you understand the first two parts of what a business model is, let’s move on to the third part which is Customers.

Your job is to find exactly who are the people that are interested in a product that you’re planning to sell.

If we niche down into creating formal wear that won’t wrinkle, our potential customers are people working in the upper management positions in the corporate world.

So where do they hang out in real life and on the internet?

  • Expensive bars
  • Websites which are related to management
  • Tony Robbins or Simon Sinek videos and workshops

These are some of the things that are off the top of my head. But it’s a good start.

Create a comprehensive list of places that your target audience hangs out and then move to step 4.

Step 4 – Calculate Marketing Costs

Calculate the Cost of marketing your business
Calculate the Cost of marketing your business

The next part of understanding what is a business model is to figure out the costs of reaching your audience. You have figured out the places where your customers hang around. Now you need to reach out to the people who own those places and ask for advertising and outreach costs.

This generally will depend on the niche you are in. But if you do not have the money to put in for marketing, you can become part of the community and start adding value by answering questions and becoming a member of their group.

It will take much longer than the instant results that advertising offers. But is good for the brand over the longer term.

Step 5 – Cost of Building the Solution

Calculate the Cost of building your business
Calculate the Cost of building your business

We have the problem, the solution, hangout places of your customers, and marketing costs down on an excel sheet. Now let’s get in touch with some people to check how much do the raw materials for building the product cost. If it’s an online product that you’re planning, it will usually be cheaper than a physical product.

For example, an online product will have development, hosting, and domain costs while a physical product will need employees for manufacturing, raw materials, a factory that allows you to build custom products, etc.

You could also build a business that lies in the middle of these two revenue models which is called drop-shipping. This is where you sell someone else’s finished non-branded product with your custom branding via online platforms.

The margin you add to the product on top of the cost of the finished product is what your profits will be here.

Step 6 – Revenue and Profits

Revenue and profits of a business model
Revenue and profits of a business model

Finally down to the good stuff. The profit! Who doesn’t love having a healthy profit on their businesses? We all do!

So make sure you have a health mark up added on top of the costs so you don’t suffer the cut-throat pricing competition that other competitors keep playing.

How can you survive in a market that wants to simply slash prices?

By adding a lot more value! If I have to sell shirts that don’t wrinkle up, I have two broad choices:

  1. Create a cheap product so the prices are the lowest among the competition.
  2. Create a combination package for the product where the higher markup doesn’t really seem like much (even though you earn higher profits on the products individually)

I usually suggest taking the combination package route. For a shirt that doesn’t wrinkle, add a complete “Outfit” or “Buy the look” button so you end up selling more products at a higher price while your customers still love you.

Finally…

I am sure this simple article must have given you a brief idea of what is a business model and how to create a business model in general. This article was created to be easy to understand and implement.Stay tuned since there is a lot more content that’s already planned and I’m sure you’re all going to love it! Start with finding out the Sodexo business model or how MEGA makes money