Business model

From Academic Kids

A business model (also called a business design) is the mechanism by which a business intends to generate revenue and profits. It is a summary of how a company plans to serve its customers. It involves both strategy and implementation. It is the totality of:

  • How it will select its customers
  • How it defines and differentiates its product offerings
  • How it creates utility for its customers
  • How it acquires and keeps customers
  • How it goes to the market (promotion strategy and distribution strategy)
  • How it defines the tasks to be performed
  • How it configures its resources
  • How it captures profit

Types of business models

Generally, the business models of service firms are more complex than those of manufacturers and resellers. The oldest and most basic business model is the shop keeper model. This involves setting up a store in a location where potential customers are likely to be and displaying a product or service.

Over the years, business models have become much more sophisticated. The bait and hook business model (also referred to as the razor and blades business model or the tied products model) was introduced in the early 20th century. This involves offering a basic product at a very low cost, often at a loss (the "bait"), then charging excessive amounts for refills or associated products or services (the "hook"). Examples include: razor (bait) and blades (hook); cell phones (bait) and air time (hook); computer printers (bait) and ink cartridge refills (hook); and cameras (bait) and prints (hook). An interesting variant of this model is a software developer that gives away its word processor reader for free but charges several hundred dollars for its word processor writer.

In the 1950s new business models came from McDonald's Restaurants and Toyota. In the 1960s the innovators were Wal-Mart and Hypermarkets. The 1970s saw new business models from Federal Express and Toys R Us; the 1980s from Blockbuster, Home Depot, Intel, and Dell Computer; the 1990s from SouthWest Air, eBay, Amazon.com, and Starbucks. Poorly thought out business models were a problem with many dot-coms.

Each of these business model innovations can give the firm a sustainable competitive advantage. But times are changing and companies must continuously rethink their business design. Companies must change their business models as value migrates from industry to industry. Ultimately the success or failure of a company depends first on how well its business design matches their customers' priorities.

Articles on business models

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