What is a business model?
A business model describes the value creation and revenue model of a business. The key factors of entrepreneurial success become visible from the business model. Attractive products and convincing services are often no longer enough to be successful in highly competitive markets. A product that meets customer needs does not guarantee business success unless the product is integrated into an overall process in a way that makes economic sense. For example, the following questions remain open:
- How is it ensured that customers learn of the existence of this product?
- How is it ensured that they pay a cost-covering price for the product?
- How is it ensured that the product can be produced and marketed at a reasonable cost?
- How is it ensured that competitors cannot simply copy the product?
- How do you secure their position in the market?
The business model is supposed to provide for this overarching view. The business model is becoming an increasingly important differentiator and success factor.
What forms of business models are there?
With your business model, you first define whether you want to be a producer, service provider or trader. If you want to be a producer, the next question is whether you want to be a serial producer or a single-item producer. If you want to be a trader, you should define whether you want to be a wholesaler or a retailer.
However, business models can also evolve and “survive”.
Example 1: Some manufacturers grow into retailers via trade components; some trade companies develop into manufacturers. Both initiatives can have good, sensible reasons.
Example 2: Apple was a hardware manufacturer with embedded software, but has evolved into a software app retailer and is now moving into the entertainment business.
The following questions should be answered with the business model:
- What kind of product do you offer? Do you primarily offer physical products, services or digital products?
- To which target customers do you want to sell these products?
- Do you act as a manufacturer, a wholesaler, a trade intermediary (agency) or a retailer of the product?
- What is your revenue model: Do you charge for each product sale? Do you offer a rental model? Are you thinking of a subscription model (such as Software-as-a-Service, Infrastructure-as-a-Service, etc.)? Do you work with long-term contracts?
- How do you secure lasting competitive advantages (Unique Selling Propositions USPs)?
- What key activities do you need to carry out in order to create your offer at a reasonable cost and sell it to the target customers in line with the market?
- What key resources do you need to do this?
- What are your logistics? Which partners do you work with? How is the cooperation regulated economically?
- Which distribution channels do you use? Which points of sale do you offer? Do you maintain your own shops? Do you cooperate with retailers – if yes: with which ones? Do you deliver to wholesalers? What does the discount system look like via the multi-level sales channel?
- Do you offer services? If yes: which service? How do you carry out the services? Do you work with partners for this? How is the business model defined with these partners?
- What is the cost structure of your business? How does the cost structure change with the growth of the business? Which fixed cost items does your business include?
- How do you finance the business? How do you structure the payment terms? Do you work with advance payment?
You can gather the necessary market information for a good and robust business model for your company through an ongoing Corporate Foresight Process and update it regularly. Economic environments change. Therefore, please do not view business models statically. Business models also need to be dynamically adapted on an ongoing basis. The ability to change business models shows the design competence of organisations.
How do you arrive at a good business model? There are several procedures that have been tried and tested in the meantime that can be used to develop coherent business models. One of these procedures with which business models can be coherently developed is the Business Model Canvas, a procedure with which approaches to business models can be aligned in terms of content is the St. Gallen Business Model Navigator. Incidentally, both procedures complement each other perfectly.
Examples of successful and adapted business models
The retail and logistics group Amazon works with an extremely agile business model. Every sales event that takes place has a marginal influence on the business model. If certain items sell better than others, these items and similar ones are promoted. Through this incremental, open-ended approach to the business model, the entire company naturally adapts to changing demand on an ongoing basis. In this way, Amazon always offers exactly what the market demands.
The automotive industry has worked for decades with branded car dealerships that sell new vehicles to end customers. They also work with car rental companies that buy large contingents at big discounts, rent the vehicles for a short time and then resell them at a low price. This has been the established, proven business model. Since 2022, many car companies have been working to change their business model. They want to keep the margin that the car dealers earn themselves. Therefore, many car companies are changing the contracts with their car dealerships. In future, they want to sell directly to end customers. To do this, they use the car dealerships to demonstrate vehicles in their stores, offer test drives and hand over sold vehicles. The car dealers are paid for these services on a case-by-case basis, but no longer receive a margin from the vehicle sales. This changes the revenue and profit model for both the car manufacturers and the car dealerships. In addition, manufacturers have recognised the business potential with rental vehicles, especially given the end-customer trend towards more flexibility. Many car manufacturers now want to carry out this attractive business themselves instead of strengthening rental car providers. How a corresponding, nationwide infrastructure can be built remains to be seen.