Understanding the concept of a business model
Simply put, if the idea is the ‘what’ part, the business model is the ‘how’ part of your plan. It is a clear statement of how you are going to make money from your venture.
In other words, it reflects your thinking on the following broad parameters. Of course, the parameters will vary by business:
- Who is your customer
- What are the revenue stream(s)
- How much will they pay for the service
- How much gross margin will you make on each sale
To illustrate with an example:
For an online toy store the business model can be as follows:
“We sell & deliver toys to consumers who order online from our website. Our target consumer is the affluent family with children below 7 years. Our average ticket size per transaction is INR 1000 and we expect our target customers to buy 2-3 times a year from our online store.
We have a 50%+ gross margin on our products. Thus, we expect to make about INR 1000 gross per customer per year.”
Note: Once you have your business model detailed out, you will need to check if your concept and business model has a business case. I.e. At the startup stage of low capital-intensive businesses, it will suffice to identify at what phase does the business become operationally profitable.
Business models could vary, even for the same concept different companies could follow different business models. Let us see with another example:
Possible business models for an outsourced HR management company:
- One-time engagement for setting up processes
- On-going, shared services model
- On-going embedded employees model
- Consulting services model