As a startup, you don’t need to worry so much about business model in the early days. But, even then, in the long run, you must have to figure out the appropriate business model for your company. It is therefore essential that you get a glimpse of what a business model is, and how to craft the right one for your particular business.
It is worthy of note here to state that business model and revenue model are related but are not the same thing, although most people use them interchangeably. A business model shows the logical connections of how a company runs its business in order to deliver value to its customers. A revenue model shows the structures of how the company generates revenue from the value it delivers to customers. As can be noted here ( and as we will elaborate on below), the revenue model is an intrinsic part of the business model.
According to the renowned business model experts, Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann, a good business model involves three simple steps:
- The first step is to realize that success starts by not thinking about business models at all. Success starts with thinking about the opportunity to satisfy a real customer need known as Job to be Done.
- The second step is to construct a blueprint laying out how your company will fulfill that need at a profit. That plan has four elements (as we’ll elaborate on below).
- The third is to compare that model to your existing model (in your case as a startup, you are comparing with incumbents or other startups who do similar businesses like you) to see how much you’d have to change it to capture the opportunity you are pursuing.
Business model, therefore, consists of four interlocking elements that work together to create value for the company and deliver value to customers, with the most important being the delivering of value to customers. They are;
1. Customer value proposition (CVP). You can only be successful as a company to the extent you are able to pin down a Job to Be Done or customer’s problem and designing an exact offering to help them do that job or solve that problem.
2. Profit formula. This is how you create value for yourself as a company while delivering value for the customer. It shows you how you can make money doing the job for the customer. If, in the long run, you can’t make money from solving customer’s problems, then you have a bad business. So, constantly think of how you are going to get paid, even though thinking of how to deliver the best value to customers is the first and foremost thing you should be doing.
3. Key resources. These are the assets such as the people, technology, products, facilities, equipment, channels, and brand needed to deliver the value proposition to the targeted customer. What matters here are the key variables that create value for your customer and your company, and the way those variables interact together to achieve this. So, constantly think of what elements or variables you might need to create the proposed value and how those variables will help you do that.
4. Key processes. These are the operational and managerial processes that allow you to create and deliver value in ways you can repeat and scale. They may include training, manufacturing, budgeting, planning, development, sales, service, company’s norm, metrics, and rules. All these must come together to help you in delivering value to customers as a startup.
Important things to note about the business model and revenue model:
- Start by doing what people want and figure out how to make money from it later, especially if you are in the software space where almost everything is malleable and launching is so cheap.
- Don’t sacrifice users for profit. Your goal should be to increase the number of users for your product. Once your users are growing fast, you can always figure out how to milk money from your startup. This is what most successful technology companies have done: Google, Facebook, Twitter, Instagram, etc.
- Decide how much customers are willing to pay, then work back to achieve that at a profit, by reducing costs as much as possible (This is especially important for those in less malleable industries.)
- Decide if you will be a high margin business, that is, a low number of customers (mostly B2B), or if you will be low margin, that is, a high number of customers (mostly B2C).
- Change or tweak your business model as much as may be needed over the course of the life of your company. Therefore, from day one, make room for flexibility in your business model.