Understanding Business Models

Get Results: business model graphic
Get Results: Business model

A business model is an abstract view of a company’s commercial activities: how it generates revenue by providing value to its customers, how it converts that revenue into profit and handles its costs.

 MIT Business Model Archetype

When I first started to think about business models I came across this model developed by MIT which provides a good foundation for a systematic study of business models, by defining business models and distinguishing their different types. Their model consisting of two elements:

(a) what the business does, and

(b) how the business makes money doing these things.

It uses two fundamental dimensions of what a business does. The first dimension—what types of rights are being sold—giving rise to four basic business models: Creator, Distributor, Landlord, and Broker. The second dimension—what type of assets are involved—distinguishes among four important asset types: physical, financial, intangible, and human.

Get more information (takes you to mit pdf) it is a great basis to start from ….

Another Approach

Another business model, which takes a different approach, by looking inside a business, at the relationship it has with its customers, in terms of transaction frequency (either once only or recurring), or revenue contribution (being small or large)

Get Results: Business models
Get Results: Business models

There are four types of business models here.

  • Customer group A – once-only transaction, small contribution purchasers.
  • Customer group B – are large contribution, but once-only purchasers.
  • Customer group C – provide small contribution, via frequent transactions
  • Customer group D – provide large contribution, via frequent transaction.

It doesn’t matter if the business is traditional (brick and mortar) or Internet-based. It makes no difference if the business sells a product or service. The size of the business doesn’t matter, either. The only difference between a small business and a large one is the number of business models contained within the enterprises.

  • Transaction Frequency: Some customers /customer groups provide “recurring” revenues. Their business repeats from period-to-period. Other customers may be, in contrast, one time purchasers.
  • Contribution to Total Revenues: Some customers contribute only a tiny portion of the total annual revenue. In contrast, others contribute a substantial slice. You might find that other customers are a mix of the two. providing small individual contributions but, over the year, they might account for a significant portion of total annual revenue.

To illustrate this, in my photography business, we provide products that require return visits, such as our baby packages, were newborns are brought back 3 times throughout their first year, to complete their package. Some of these customers may not spend as much per visit, but overall our average sales per customer (not transaction) are higher than most of our one-off sessions. These customers fall into either group C or D.

Otherwise most other photography customers come in maybe once every couple of years, if at all again (group A or B).

In contrast our nurseries and school clients use us twice a year every year, but average sales per transaction tend to be much less than our studio customers (falling into group C) but if you group these individual customers collectively per school (as they are taken on mass in one day) then they move into group D .

This business model offers a different dimension of analysis than the first (MIT model) but both are equally as valid, depending on your requirements.

Business Model Generation

I love the book “Business Model Generation” which is a great resource for anyone looking to further understand the construction of business models. The slideshare presentation below outlines the main points, you can purchase the book below. Please note this is an affiliate link and if you click through and purchase I will earn a commission, but this is not why I am providing a link here, I am doing so because I genuinely believe it is a good source of information on the subject of business models. If you do click through, I would like to thank you for your support of the site via its affiliates, it helps us provide free information on the site.

The book goes into depth on how to analyse you business into segments,

  • key Partners
  • key Activities
  • key Resources
  • Cost Stucture
  • Offer
  • Customer Relationships
  • Customer Segments
  • Channels
  • Revenue Streams

Each of these help to make up the “business model canvas”, which is a great framework for formulating a comprehensive model. I would highly recommend it.