What is Business Model? Definition of Business Model, Business Model Meaning and Concept
The business model of a company is a tool prior to the business plan, whose objective is to allow a clear understanding of the type of business that is going to be created and introduced in the market, who it is aimed at, how it is going to be sold and how revenue will be earned.
The business model is a document of business importance since it allows planning what is going to happen with the business that is intended to be carried out. They are used to describe and classify entrepreneurial businesses and also in the context of business.
History of business models
Its origins go back to the 20th century through small initial and basic projects. In the 1950s, more sophisticated business models emerged, such as McDonald's restaurants. Business models are growing progressively, especially in the US with companies such as: Amazon, Airlines, among others.
Technology is a key piece of business models. Internet has been used as a tool to reach customers massively at low cost.
How to design a business model
Defining the business type of a company is part of the process. For this, at least the following parameters are taken into account:
- Economic: The financial value is considered as one of the main bases that must be known in a business model. The costs, the selection of prices and the obtaining of income are key points in the design of a business model. A company must generate money and maintain the flow of income in order to remain actively in the market for a long time.
- Components: The activities, the clients, the human resources that the company will have, its offers, all of these are considerations that must be reflected in a business model so that the company can define its strategies in the next step.
- Strategies: They are designed as a result of previous research with the aim of creating a competitive business that will last in the market.
Importance of a business model
These are the main benefits of making a business model:
- Competitive advantage : It can be an advantage over your competition. Implement a new model that provides new ideas.
- Growth plan : A previously established business model will have an economic reserve to be able to expand.
- Investors: If the business presents the need to look for investors and patrons, it will be necessary to know in depth every detail to present it since it will have to answer each of the questions that are asked to know its profitability.
Types of business model
With the advancement of the internet and new technologies, a multitude of business models have appeared that had never been used before. Here we explain the most common business models:
- Manufacturing: It is a model in which the economic activity consists of producing certain products and selling them, generally, to wholesalers who market them.
- Distribution: Distribution companies buy the products produced in the factories and sell them themselves to the final consumer or to retail companies.
- Retail: These are all those companies that directly sell the products they have purchased from distributors to the public.
- Ecommerce: This business model is closely related to retail. In this case, it is based on the online sale of any type of product.
- Subscription: It consists of obtaining income thanks to a monthly fee that is paid by customers.
- Public contracting: This type of company obtains its income from the sale of its products or services to the public administration.
- Advertising: This business model establishes advertising as the main source of income, which is the case with many web pages.
- Patents: Research and development of exclusive products that can be patented are the source of income for certain companies.
- Franchise: There are companies with renowned brands that decide to grant certain licenses to other entrepreneurs to work under their brand. In this case, the franchisee must meet a series of requirements to be able to sell under a brand that does not belong to them.
Business Model Examples
Finally, we present an example of each of the business models mentioned above:
- Manufacturing: In this case we could mention the tire company Pirelli.
- Distribution: Let us suppose the case of the company that brings Coca-Cola to a restaurant as a distribution business model.
- Retail: In retail we can find Walmart or Lidl.
- Ecommerce: The example that we are going to mention also belongs to the retail business model but in the online world. Amazon is a great example of this business model.
- Subscription: Companies like Netflix or Apple Music base their business model on subscription.
- Public contracting: The ACS company receives most of its income from the public works it carries out.
- Advertising: This is the case of Economipedia! Thanks to advertising we can continue creating content so that you do not stop learning about the world of the economy.
- Patents: Pharmaceutical companies or exclusive parts for certain machines obtain their income thanks to having obtained a patent.
- Franchise: KFC is a company that works with franchises around the world.
In conclusion, a business model is the economic activity in which a company has specialized and how it will obtain its income.