The term ‘Business model’ is often used by many, yet means different things to different people. Several individuals have tried to explain or define what the term business model means, but one I find simple enough to understand is;
‘’A Business model is how an organization makes money or plan to make money’’- The way in which your organization generate revenue and makes profit from its operation.
The concept is based on creating a plan for operating your business successfully. Business modelling is the process of identifying sources of revenue, customer base, partners, distribution channels, products and even financing options.
Research findings, assumptions (financial and strategic) etc., are the outcomes of business modelling that are documented in a business plan.
Below are 3 key thing you need to know about your business model:
1. Your business model cannot be static. Business modelling speaks to the revenue generation aspects of a business, and it cannot be static. The ability to constantly rethink the way you do business and make money is essential for businesses at all stages of growth. This is true because all business assumptions (about customer behavior, regulatory policies, pricing etc.) are bound to change.
2. Customers may not always/continuously react the way you predict. This type of change is what we see when a market leader suddenly becomes a laggard. Customers taste and preferences always change.
An example is Mr. Biggs, one of the pioneer fast food restaurant in Nigeria, which grew through rapid expansion and franchising to own 170 locations, including downtown cluster areas with high traffic. Their rapid growth suggests that they assumed low income earning customers would continuously consume fast food regularly, rather than occasionally.
In the long run, the assumptions did not hold. Customer patronage in their target areas became significantly lower than predicted. This led to declining revenue, and culminated in poor customer experiences in many of their numerous franchises. Eventually, many of these restaurants, especially those located in suburbs closed down.
3. Business Modelling will help you reduce business risks. By carefully designing your business model, weighing assumptions, proffering alternatives helps an organization predict & reduce business risks that could lead to failure or sub optimal performance.
Irrespective of size, stage and industry of your business as an entrepreneur, you must stay focused on changes that may affect your initial assumption of the business model. Finding the right business model is as important for early-stage startup businesses or projects as it is for in existing business and later stage organizations.
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