Developing impressive technology or an innovative product is not enough to achieve success. In order to generate profits you have to understand who ideal client is for buying your product.
The answer to the question “what is my business model?” is simple, “how will we generate revenue?”. Many managers tend to talk about the classic business models studied in academia. Nonetheless, if you want to achieve good results, it is important to impose deep thought on creative ways to generate profits and to increase them.
Answering the following nine questions will constitute the critical building blocks in the construction of the business model:
1. What is the added value of your product to the target market?
2. What is the potential customer segmentation this added value is relevant for?
3. What are the communication and distribution channels through which you can reach customers and offer them the product and its added value?
4. How to create long-term relationships with these customers?
5. What are the resources needed to implement the business model?
6. What are the main activities required to implement the business model?
7. Who are the potential strategic partners for cooperation within the framework of the business model?
8. What is the revenue stream that results from the business model?
9. What is the structure of costs and expenses arising from the implementation of the business model?
After you have answered all the questions, you can think outside the box and figure out whether you have something which was not thought of before. Although it seems that everything’s already been thought of, it will surprise you to discover the most creative models, were born recently. Google was the first to construct the model of linking funded ads with online information search. Apple has made the innovative designs into a lucrative business model. What is clear is that any of the companies mentioned here, and many others, were able to leverage the added value their product has for the potential customers and maximize their earnings accordingly.
Revenue model as part of the business model
The revenue model is a significant part of both the business model and the business plan of the start-up. The revenue model is the process of generating revenue from users / customers (private B2C or B2B business). There are some common models of revenue:
- SaaS – Software as a Service. Billing for a subscription
- PaaS – Platform as a Service. Some of the cloud solutions
- Affiliation – Referring users to a third party
- Freemium to Premium – Billing for advanced features
- Pay per use
- Product Sale – Most Consumer Products
- Disposable – disposable parts such as razors or capsules for coffee
- Product as a service – mainly in IOT products, such as printers
A financial model as a quantitative expression of the business model
A financial model presents the business model numerically, using Excel spreadsheets linked by relevant functions. A financial model is composed of the following models.
- Capex – Investment in fixed assets. Technological infrastructure or infrastructure for production and development
- G&A – General and Administrative expenses, which include most of the expenses of the OPEX and the relevant part of the personnel.
- R&D – Development expenses include mainly the relevant portion of the personnel and outsourcing expenses
- M&S – Includes the marketing sheet and the relevant part of the personnel report.
- Revenue model
- Cash Flow = Revenue – (Capex + (G&A + R&D + M&S)
- Budget – Budget for 12-18 months of company activity
The financial model consists of sub-models and illustrates a company’s financial forecasts in quantitative terms. A financial model can simulate the impact of specific variables on company performance (sensitivity analysis). In start-up companies, the primary objective of the financial model is to present the expected cash flow and the budget requirements for defined milestones.