How To Create A Business Model

All business operations can be reduced to three words: people, product and profits. And your business model is how you profit from what it is you're selling (your product) to the people you're selling it to (your customers). Here's everything you need to know to create a business model.

In a hurry? Skip ahead to your favourite part:

- What is a business model? - What is a business model canvas? - The 9 parts of a business model - The 30 most common business models - How to create a business model - How to analyse a business model - How to make a profit - How much can you sell your product or service for? - How much profit will you make? - What is the difference between bottom up and top down business model? - Profit vs passion

Your business model is arguably one of the most important aspects of your business, because it's not only how you make money, but how you stay in business. Without profit, you have no business. And profit in business comes from repeat customers, customers that boast about your product or service and bring their friends with them, as well as your ability to operate the business efficiently.

So what is a business model? Your business model is how your business will capture revenue and spin a profit. Even if you're a startup chasing venture capital and you're reinvesting into the business so aggressively that you technically aren't "profitable" now, your business will need to have a cash-flow-positive (profitable) business model at some point, after all, investors want a return on their money.

You know when you're telling someone about a crazy new business idea, they turn to you and say, "hmmm, I'm not sure about that one. Sounds risky. I can't see it working. No one will ever buy that…" And all of a sudden the wind has been knocked out of your sails and you start to question everything. Well, being able to build a profitable business model around your idea is the perfect way to validate even the most far-fetched of ideas and get buy-in from partners, stakeholders and investors alike. And the sooner you can piece it all together, the better.

## What is a business model?

Your business model is your business's plan for how it will generate profit. Because if you can generate profit, your idea can stand on its own two feet. Usually this is by selling something of value to customers who will pay you for your product or service. You'll know you've got a successful business model when you're able to deliver real value while keeping your costs low, you get overwhelmingly positive reviews and your product or service sells itself, or even better, your customers refer you to new customers.

## What is a business model canvas?

One of the best ways to map out your business model is to build a business model canvas.

A business model canvas summarises what would normally be in your 100-page business plan into a simple one-page snapshot of how it'll all come together.

## What are the 9 parts of a business model canvas?

**Customer segments** — who your customers are and the pain point your business solves. And while it sounds obvious, your solution needs to be valuable enough that they'll want to pay good money for it, and your customers need to have the money to pay for it.

**Value proposition** — this is the product or service of value that you're selling, or your solution to your customer's pain point.

**Channels** — the various touch points or avenues you will sell your product or service to your customers through. For instance, online, in-store and over the phone.

**Customer relationships** — the relationship you'll have with your customer while you deliver your value proposition.

**Key activities** — the operations you'll use to create and deliver your value proposition. These are generally the essential operations that must take place in order to generate revenue.

**Key resources** — a list of the key people and assets that are essential for the operations to work reliably and sustainably.

**Key partnerships** — a list of who outside of your organisation is required to do business. For instance, suppliers, distributors, outsourced marketing agencies or hosting services.

**Cost structure** — a summary of what it costs to reliably deliver your value proposition to your customers.

**Revenue streams** — how your value proposition(s) is priced and the different forms you may sell it in, in order to capture that value from your customers.

## What are examples of business models?

The 30 most common business models:

1. **Advertising** — You're an attention merchant. This is an evolution of the print business model, which is simply where readers pay a dollar for all the content within and that supports the enterprise. Nowadays, most commonly, you're a media publisher or content platform and you derive revenue by providing free access to content which attracts your audience, and you make money by charging advertisers to market their business to your audience. Sometimes you might also offer an "ad-free" subscription model as an alternative. In this business model you'll monitor your daily active users (DAU), monthly active users (MAU) and usage metrics like logged-in user percentage, average session duration and pages per session. 2. **Subscription / leasing** — You sell your product or service to your customer on a recurring, automated basis, like Netflix. And you'll track your monthly recurring revenue (MRR), compound monthly growth rate (CMGR), user churn, CAC and the lifetime value (LTV) of the average customer. 3. **SaaS** — Software as a Service works much like a subscription model, but what you're specifically selling here is software which is usually in the cloud, so the business model has many nuances unique to software. Your measure of success will be your monthly and annual recurring revenue (MRR and ARR), churn, CAC and LTV of the average customer. 4. **Marketplace** — You provide a platform for people to buy and sell. Sellers bring their goods or services and list them for sale on your platform, and buyers browse your listings to find the item they want to purchase, like eBay or Amazon. You track gross merchandise sales, net revenue, net revenue CMGR, user retention and CAC. 5. **E-commerce** — You list and sell your physical products online, and you usually ship the product to the customer. Your KPIs will be gross monthly revenue, CMGR, gross profit margin and CAC. 6. **Usage-based** — Similar to a subscription model, only this time, your customers pay you per number of units of your product or service they use within that billing cycle. It scales with your needs so you only pay for what you use, such as a mobile phone plan, car rentals that charge per mile, or API providers that charge per query. 7. **Enterprise** — You sell services or software to enterprise businesses on a single-licence, usually contractual basis, with terms and deliverables that are usually specific to the customer's needs. Usually your KPIs will be based around bookings, customers and top-line revenue. 8. **Hardware** — You sell hardware (physical) products to your customers, like Apple, Fitbit or Nike. And like ecommerce, you'll monitor your gross monthly revenue, CMGR, gross profit margin and CAC. 9. **Donations** — You run a charity or organisation primarily focused on helping others, but it still needs to operate like a business in order to be sustainable, efficient and productive. Your primary source of revenue is from donations, particularly repeat donors, so you track gross monthly donations, average donation per donor, cost to acquire a new donor and the lifetime value of each donor. 10. **Auction-based** — Your buyers have the opportunity to bid on what it is you're selling, with the highest bid winning. The auctions may be automated, live and real-time, like keyword bidding on an ad platform, or run over a period of days like bidding on an item on eBay. 11. **Reverse auction** — Your buyers typically post a job request, and your sellers bid for the job. Most often this results in the lowest bidder winning, however, sometimes experience and expertise may also play a part in the selection process. 12. **Razor-blade** — You sell loss-leader products, often with minimal profit margin, like a computer printer or a new car, but you make larger profits on upselling and cross-selling after-sales services and parts. 13. **Pay-what-you-want / donation-based** — Buyers donate an amount of their choosing to support your operation, but payment isn't required for customers to access your product or service. Often they are given a suggested price range, and they can opt to pay what they want. 14. **Nickel-and-dime** — Your revenue model starts by selling a customer a free or cheap product that requires paid add-ons or upgrades, which is what you make the bulk of your profit from. 15. **Discounter** — You heavily discount your products and position yourself as the cheapest on the market, or best value, and you derive revenue by selling high volumes, rather than high profit margins. 16. **Aggregator** — You bundle products or services and sell them under one banner instead of singularly. 17. **Distributor** — You buy and import products in bulk from manufacturers, your business is large-scale warehousing and logistics, and you sell wholesale to retailers, who then sell to the end consumer. 18. **Data broker** — You're a merchant of data of various types, including personal data, purchasing data, property data etc., and you sell it in one-off transactions as well as via licensed access, or via an API. 19. **Affiliate / referral-based** — A spin-off of the advertising model, you typically operate a brand or channel that attracts an audience, and refer that audience to retailers that sell a product, earning a percentage of the sales from those retailers. 20. **Consulting** — You have acquired expertise in a field and you sell your knowledge and skills as a service to your customers, usually charged out on an hourly basis. 21. **Agency model** — Similar to consulting, only your team of talent usually executes on the advice, which means your revenue is derived from a combination of being paid by the hour, based on deliverables, or on a project basis. 22. **Franchising** — You've built a brand of significant value and you sell the rights for others to operate under your brand in exchange for paying you royalties, such as McDonald's. 23. **(API) licensing** — You own a specific database or digital asset that can be accessed via an API, and you license the use of that access, usually charging a fee per query, or per bulk queries of the API. 24. **Drop-shipping** — Drop-shipping is most often an ecommerce business model, only you sell products you don't necessarily warehouse. You market the product, process the transaction, and only then do you place the order with your supplier, who invoices you, while the supplier ships directly to the end customer. This model has much lower start-up costs than traditional ecommerce. 25. **Value-added reseller** — You purchase multiple products, combine and create bundles to increase their overall value, before selling them to the end user. 26. **Revenue sharing** — You partner with other businesses to facilitate a sale and split the profits in proportion to the agreement or contribution. 27. **Barter** — You exchange goods of value rather than money, like an influencer taking free product in exchange for promoting it. Keep in mind, you still pay tax on the value of the goods. 28. **Trash to cash** — You purchase waste or undervalued goods relatively cheaply, overhaul or refurbish them, then sell them for a profit. 29. **Results-based** — You charge based on your performance. For example, as a percentage of gross sales, and often, the percentage may be on a sliding scale that varies as revenue scales. 30. **Crowdfunding** — You're primarily financed by fans who are also your first consumers.

## How do you create a business model?

It's often said when building a business that you shouldn't be a driven businessman, but instead a driven artist. Don't focus on the money, focus on creating something truly beautiful, remarkable, and valuable, remembering that beauty is in the eye of the beholder. Because it's only when something is truly remarkable that your customers will bring you new customers, and as we know, this is how you generate profits.

Creating a business model can be a little overwhelming at first, especially if your idea is new, but it doesn't have to be difficult. It's a heck of a lot easier if you map out your business model using a business model canvas.

And just before you get started, consider these top tips:

- Focus less on your idea and what you want, and build your business (your solution to your customer's problems) around what your customers want. - Write down what reputation you want your business to have, and script the ideal conversation between an existing customer and a new customer. What will your customers boast about? - Build talk triggers into your business operations so you give your customers reasons to talk about you. - Always put your customer first. It's not necessarily always the case that your customer is right, but they are the reason you're in business.

## How to make a business model for a startup