Significance of Business Model in building Product
In the current world, innovating new ideas is not a big deal but converting such innovative ideas into products requires significant efforts.
A good business model remains essential to every successful organization, whether it’s a new venture or an established player. In my current blog, I try to explain the very critical, vital & primary step of building great products — the business model. Let us first understand the definition of a business model, a business model is a framework for finding a systematic way to unlock long-term value for an organization while delivering value to customers and capturing value through monetization strategies.
In the product world, there are more than 50 different types of business models that are successfully in use (I’ll cover them in my second part of the Business model blog series). In the current blog, I’ll cover the overall significance of the business model for product management & development.
Confusion between Business Model & Business Plan
First, it is very important to understand, Business Model is very different from the Business Plan. A business plan is a document with a specific aim. It contains a bunch of assumptions about your business. It also contains financial projections about the business for the next 3–5 years. However, those assumptions can be hardly tested. The business plan thus remains a document that lives in the imaginary world. However, a business model implies the understanding of operations, customer acquisition, retention, supply chain management, besides monetization.
The importance of Business model design
A business model describes the strategies and tactics a company pursues to achieve its goals. Therefore, business model:
- Describes how the company creates a product/service — Customer segment, Value Proposition, & Brand Value
- How the company communicates with its customers to provide this service — Distribution channels
- How the company makes a profit, etc. — Revenue Formula
The primary aim of a business model is to create a sustainable chain, able to unlock value for several players in a market, industry, or niche. Therefore, this value chain will start from a value proposition, a promise that an organization makes to the key players and partners in the target market, industry or niche depending on where you start.
Business modeling is the managerial equivalent of scientific experiments — one starts with a hypothesis, which then tests in action and revises whenever necessary.
Business model provides the flexibility to validate all the assumptions allows us to ask what-if questions about the critical assumptions on which business depends for example, what if customers are more price-sensitive than we thought? — and with a few keystrokes, you could see how any change would play out on every aspect of the whole. In other words, you could experiment with the behavior of a business — about both the motivations and economics — that are subjected to continuous experimenting in the marketplace.
Strategy, how important it is?
Every viable organization focuses on building a strong business model. But a Business model isn’t the same thing as a strategy, even though many people use the terms interchangeably. Business models describe, as a system, how the pieces of a business fit together. But they don’t factor in one critical dimension of performance: competition. Sooner or later — and it is usually sooner — every enterprise runs into competitors. Dealing with that reality is strategy’s job.
A competitive strategy explains how you will do better & different than your rivals — how you are going to do better by being different. Walmart & Dell greatest examples who are having the same business model as their competitor, but they apply different strategies to beat their competitors. The key strategy that Walmart used was building discount retailing stores in little one-horse towns which competitors were ignoring. While Dell builds a business model which acted like the strategy of direct selling to end customers and remove the dealers & resellers from the value chain. This model gives an added advantage to Dell over its competitor was of reducing the overall cost of the PC which they could directly pass on to the end customers.
Clarity about its business models has helped Walmart & Dell in many more ways: as a basis for employee communication and motivation. Because a business model tells a good story, it can be used to get everyone in the organization aligned around the kind of value the company wants to create. Stories are easy to grasp and easy to remember. They help individuals to see their own jobs within the larger context of what the company is trying to do and to tailor their behavior accordingly. Used in this way, a good business model can become a powerful tool for improving execution.
Further reading references:
https://todayfounder.com/what-is-the-business-model-life-cycle/
https://www.patriotsoftware.com/blog/accounting/what-is-product-life-cycle-management/
https://hbr.org/2002/05/why-business-models-matter
https://fourweekmba.com/what-is-a-business-model/
https://www.investopedia.com/terms/b/businessmodel.asp
http://canadianentrepreneurtraining.com/why-a-business-model-is-so-important/
