A business model outlines how a business plans to generate a profit. It encompasses the methods for creating revenue, identifies the target market and how to reach them, expenses, type of people the company should hire, and more. The two main components of a business model are pricing and cost. The gap between pricing and cost is profit.
The business model is a roadmap that shows how to put the business together and keep it going. From the business model, various financial projections can be made. This allows startups to attract investors and talent. Without a business model, founders will have a difficult time communicating how their company plans to turn a profit.
Value Proposition And Competitive Advantage
Some other important parts of the business model are the value proposition and competitive advantage. The value proposition is a description of the products or services being offered and why they appeal to the target market. A competitive advantage is what separates the company or its products apart from the competition. Companies with a competitive advantage can create a similar product to that of competitors but at a lower price or create a higher quality product. Either way, the company’s product appeals more to customers than that of competitor products.
Business Models Are Dynamic
Business models are not meant to be static. They must be periodically revised. As the market or technology changes, the business model needs to be updated to reflect shifts or advances, which the company should be able to take advantage of. Otherwise, competitors will seize on changes in the market and outpace the company.