The 7 keys to a successful business model
The business model is the company’s value-generating mechanism, your very specific way of producing performance. The construction of the business model is therefore absolutely fundamental, and I already spoke about it a little in a previous article which detailed my method for find the key information to build a powerful strategic analysis.
The first step in building a successful business model is the analytical phase. You start with diagnosing what you are already doing, and you absolutely have to keep in mind that you need to keep it simple.
Here are the 7 keys to a successful business model!
# 1 Create value for consumers
What is the perceived value of your product or service to consumers?
Always keep in mind that the market is always right, and consumers are the justice of the peace. So what matters most is the perceived value of your good (or service) to consumers. To do this, we use 3 dimensions:
- Price : is the price acceptable to consumers?
- Characteristics : are the characteristics of this good (or service) valued by consumers in comparison with competing products (and services)?
- Amount : is it easy to obtain this product (or service) compared to competing products (and services)?
# 2 Encourage consumers to pay for access to this value
How do you convince consumers to pay for this product or service?
You have designed a product or service; you have a population of consumers for whom your offer represents value: they love what you do. What methods do you use to get these consumers to get your product?
Do you open stores everywhere?
Are you creating a particularly attractive website?
Do you advertise on all digital media?
Do you hire the services of a movie star, a famous sportsman or a singer?
Do you have humorous videos made using your products by a collective of comedians, and you broadcast massively on YouTube?
What is the series of actions that you take so that the consumers you are targeting say to themselves: “I need this thing!”
# 3 convert those payments into profits
How do you turn these payments into profits?
And yes, if generating these payments incurs too high fixed and variable costs, you destroy your profit. You must therefore be able to control the structure of your costs. To do this, I recommend the use of the method ABC.
# 4 Define your own way of combining # 1, # 2 and # 3
How are you going to combine # 1 value creation, # 2 revenue generation and # 3 profit generation?
This is where strategy comes in. Strategy is the way in which you will combine the 3 key elements of the business model. The variations are endless, but let’s take two very classic illustrations.
- Cost domination strategy : you market a product (or a service) extremely close to your competitors, but your costs are lower. You can therefore either sell it at the same price with a higher margin; or sell it cheaper, and increase competition. In this strategy, you are looking for volume: low margin but high quantity.
- Differentiation strategy : you decide to market a product (or service) that is totally different from your competitors. This means that your offer is differentiated on the three variables: price, quantity, and / or characteristics (in general, we combine the 3). This differentiation, and the specific characteristics of your offer justify a higher price, but you know that you will not sell very large quantities of products. In this strategy, you are looking for value: high margin but low quantity.
Be careful, these two examples are a bit cartoonish, it’s not that simple, and there are many other strategies, some even allowing to combine Volume and Margin. However, the illustration allows you to understand the articulation of points # 1, # 2 and # 3.
# 5 Create a different business model per activity
Generally, the advice to keep in mind is the following: an activity, a business model.
If your company sells 3 very different product families, you need to deploy 3 different business models. Indeed, if we come back to points # 1, # 2 and # 3, it is clear that the value perceived by consumers will change depending on the type of products marketed, because consumers are different, just like technologies, communication channels, distribution methods, etc. Please note: some companies start from a business model that is already working before choosing new products or services to launch, within the framework of this business model. In this case, it is the business model that drives growth, and it is unified across all activities, but this is rarer.
# 6 Keep it simple!
How to express your business model?
If you can’t explain your business model in one sentence, it’s not ready. Keep in mind the Elevator Pitch. Imagine: you are in a hotel, you go into the elevator, the doors open and you come across the person you admire the most in the world: Bill Gates, Mark Zuckerberg or Nana Mouscouri. She will go down a few floors with you. You have about 30 seconds to convince her that you are interesting, and that drinking coffee with you won’t be a waste of time. 30 seconds, that means 6 to 7 sentences. Being technical while being understood in so few words is difficult. So what you need to do for your business model is to put it in a short sentence, write it down, and have someone read it who doesn’t know anything about it, then ask that person to tell you about it. ‘explain. If what she tells you matches what you do: Bingo!
# 7 A business model is not a business plan (the BM determined, the job begins)
No, a business model is not a business plan. No, these two words are not synonymous. No, the confusion is not “no big deal”.
The business model is your mechanism that generates value. Your business plan is the document that you are going to design, in which you detail all the springs of your business model, but not only, and that you will use to convince. Convince bankers or investors. To convince ! In short, you keep the details of the business model intimate to yourself, and you communicate with your potential partners armed with your Business Plan.
The first step is therefore to screen your business model with the 7 keys. And as you have seen, to carry out this diagnosis you need skills in strategy, marketing, accounting, finance… The business model is fundamental, it has effects on all aspects of the company. So take your time. With a solid business model, everything fits together logically. After this step, you are able to estimate the consistency of your reasoning, but also the avenues for improvement. In this case, there are 4 actions to take to make your business model innovative.
Jean-Philippe Timsit is professor of Competitive & Digital Strategy at ESC Rennes School of Business.
He specializes in competitive advantage and value creation, mainly in digital strategies, as well as in the areas of entrepreneurship and leadership. He regularly intervenes on these themes with companies through seminars, training and consultancy missions or with entrepreneurs in the creation phase.