Business Model

What is a business model?

The term "business model" describes the process of creating and delivering a certain value to customers. In terms of a business, it focuses on the process of delivering products and generating profits.

According to Clayton Christensen of Harvard Business School, a business model includes four elements: a value proposition for a customer, a profit formula, key resources, and processes.

Some managers think that a business model is a particular pattern of an organization's operation, which you adopt and implement in a company.

Is it enough to introduce a subscription fee in exchange for providing a service to consider it a subscription model? Or is this just a form of online company offer?

A 2011 study by Ramon Casadesus-Masanell of Harvard and J.E. Ricart of IESE Business School found that managers' choices are an essential component of a business model.

Managers' choices have consequences. Pricing policy, a choice, influences sales volume, on which the scale and strength of a company's business depend.

Managers' choices stem from their values. And the consequences of these choices impact how a company creates value.

This means that business models are made up of managers' choices and their consequences.

Business model researchers have found that managers make three types of choices.

Choices regarding a course of action determine the steps taken by a company in every area of business operations.

For example, by hiring only Warsaw University of Technology graduates or locating the company's offices in smaller cities with lower resident incomes and higher unemployment rates.

Choices regarding assets refer to the material resources used by the company, such as server infrastructure.

Meanwhile, choices regarding supervision refer to the company's determination of decision-making powers regarding the previous two types of choices.

Should we buy servers or use AWS cloud services and pay only for the used server resources (AWS works on demand)?

The consequences of decisions have huge implications for customers, the cost of business operations, and the company's personnel policy.

It seems like a lot of difficult work. Right?

Business model canvas

The business model canvas allows you to think through your business model concept and describe the most important elements of your business.

Alexander Osterwalder made a real breakthrough in popularizing business models. He developed a business model canvas, a tool that significantly simplifies the topic.

This tool makes it easier to understand the mechanism of designing a business model for any business or digital product.

It can also help with business model innovation—a process that aims to change already functioning business models or create new business models.

However, the model won't work without the elements necessary to deliver value, such as channels to reach customers, customer relationships, activities and resources crucial to business success, partners, and an appropriate cost and revenue structure.

What is a canvas?

It's a sheet of paper divided into parts necessary for the construction of the tool.

The presentation of the canvas allows for a better understanding of the model and the information it contains. Furthermore, it helps you create a competitive business model that will give you an advantage over your competitors.

The best business models create value spirals.

In other words, a value spiral is a feedback loop that reinforces itself. It's among the most critical aspects of a business model.

According to the researchers, this is the most neglected business element in recent times. The competitive advantage mainly comes from accumulated assets.

Take a look at an example.

The Polish studio Platige Image decided to partner with CD Project on the Witcher game in 2007. If not for this decision, would Platige Image have been a co-producer of Netflix's The Witcher series in 2019?

How did Platige Image, through its previous work, convince CD Project that it was worth engaging them for animation work on a popular game?

The consequences of the choices made by Platige Image's managers created a value spiral that today provides the studio with a unique competitive advantage.

Is it possible to copy another company's business model?

No, and there is no such tool that serves this purpose. Thanks to thinking in terms of value spirals, copying a business becomes impossible.

No company can accurately reconstruct the path of events, decisions, and choices that led a given company and its business to where it is today.

Different business models for digital products

Several types of traditional business models exist, such as direct sales, advertising, or franchising. These models usually refer to the sale of physical products in brick-and-mortar businesses.

Digital products, on the other hand, utilize different types of business models.

Several business model patterns are currently being used in digital products:

• Subscription model
• Freemium model
• Marketplace model
• Access-over-ownership model (using instead of buying model)
• On-demand model
• Ecosystem-based model
• Free model

Subscription model

The subscription-based model has gained popularity in recent years. It's a convenient business model where customers pay an established monthly, yearly, or weekly fee. Customers often have the choice of renewing the subscription automatically or only when they feel the need to.

This business model relies on good customer relationships to generate continuous revenue. Customers also benefit from the ability to repurchase the product at convenient intervals. In terms of your business, you can retain customers more easily and ensure that your business can stay afloat.

It's also worth carefully considering the choice of this business model because it may not work for all types of products.

We collect knowledge about the subscription business model in the Journal:

• Subscription model. Where conversion begins and what to watch out for
• Subscription for sanitary pads and shoes. How the subscription model is changing the market

Freemium model

Freemium business models allow customers and users to access some features free of charge while offering premium access to others. In other words, in the free version of the software, users can use certain functionalities at no charge and buy additional, more advanced features for a fee.

The freemium business model allows your business to grow its customer base by offering free access so that users can familiarize themselves with a product. For this model to work, you need to ensure that the premium options are more advanced, facilitate the work, or offer additional desirable features.

Marketplace model

The marketplace business model involves creating an online marketplace that will attract sellers and buyers. The marketplace owner is responsible for providing the infrastructure that will enable the purchasing process by handling payment processing, customer service, deliveries, and more.

In the marketplace business model, you generate profit by charging fees and commissions on purchases made through the platform. A marketplace doesn't have to focus on one category of product; it can offer a variety of them.

Some examples of this business model include Amazon, eBay, Etsy, and Alibaba.

Access-over-ownership model

This type of business model focuses on providing customers with access to a product but not transferring ownership to them. An example of this can be leasing equipment for work or other purposes. This model enables you to reuse your products and lower the environmental impact.

The customer benefits from being able to pay for the product when they need it instead of buying it permanently. This allows them to reduce spending and provides more flexibility.

Great examples of this model are Uber and Lyft.

On-demand model

As the name suggests, the on-demand business model aims to provide customers and users with products when they need them. By using digital technology, business owners can satisfy customer needs almost immediately after they emerge.

The on-demand business model makes your products and services more accessible, convenient, and tailored to users.

The most popular examples of on-demand business models are services, food, and goods delivery services.

Ecosystem-based model

The ecosystem-based model involves creating several complementary products or services to offer more value to customers. This model also focuses on cooperating with different businesses to widen the range of solutions offered.

The benefits of the ecosystem-based model include increased reach, faster sales cycles, and improved credibility.

HubSpot and Microsoft are prominent examples of the ecosystem model.

Free model

The free business model provides customers and users with access to products and services at no cost. This usually means that the business generates profits differently. Often, this takes the form of advertisements, and advertisers pay the product's owner based on the number of users. In other words, you rent advertisers the space on your product in exchange for access to your customer base.

This model can also evolve into the above-mentioned freemium model.

Naturally, these are just some business model types functioning on the market.

How to design business models?

1. Identify your target audience.

To create a successful business model, you need to know who your target audience is. Dividing your potential audience into customer segments will enable you to identify their needs and expectations, which will later help you develop products.

2. Discover what problems your target audience has.

Once you establish customer segments, you should gain an in-depth understanding of your customer base's pain points and needs. You need to know what problems customers and users want to solve and how your business can help them.

3. Think about what you have to offer.

When you identify the target audience's problems, consider how your product or services can help them solve them. What does your product do, and what value does it offer? This will help you adapt the product and communication to customers' needs.

4. Document your needs and challenges.

Document what is needed for the product to function and what kind of features it needs to offer to meet customer expectations. Additionally, write down what challenges your business may face during the development and after launch. This will allow you to be prepared and reduce the time and costs of changes.

5. Depending on your business, find suitable partners.

Depending on your business, you may need to establish cooperation with third-party entities, whether these are component suppliers or venue owners. Consider what types of relationships will help you grow and distribute your products.

6. Establish how you will generate profits.

One of the tasks of the business model is to help you establish how your organization will generate profit. That's why, in this step, you should carefully consider what strategies will be the most effective and suit your products.

7. Test your business model.

You should perform tests to determine the effectiveness of your new business model. You can do that by conducting surveys among your target audience and gathering their feedback. You can also give early access to your product to a limited audience to determine its users' feelings. This will help you discover whether customers are willing to pay for your services in the current model.

Business model in product design

For The Story, our client's business model is a crucial element of a project. We can divide projects we carry out into two types: We create a digital product for a client (if it's a startup) or tailor a solution to fit an existing business model.

In the latter case, we need to understand the client's operating model; in the former case, we often advise on which model to choose and participate in the design process.