Apr 2, 2012

Reference framework to analyse and design business models

A ‘business case’ for a particular business venture quantifies its financial profile and net present value taking account its inherent level of risk. This is essentially an exercise in projecting future costs and revenues based on assumptions about products and services offered to targeted customers, and the investment in equipment and operations necessary to achieve this.

‘Business model’ is a term that describes the how an organization captures commercial value from a particular business opportunity. In other words, what are the different elements that an organization employs to deliver a valued product or service to a target customer group in a commercially sustainable manner?

Popular discussions on the topic of business models often define approaches using 'sound-bite' labels such as 'freemium' and 'subscription' for example. In the M2M market, business model discussions, notably with mobile operators, come down to a particular data pricing model (.e.g. shared data plan for multiple devices, set fee for month-to-month data allowance etc.).

In practice, business models are composed of several elements that can be tailored to create new sources of value and/or competitive differentiation. The following illustration shows a general business model framework based on nine key elements. 

  • Value proposition - this describes the product or service being offered in a way that explicitly considers the customer and benefit that is delivered. 

  • Customer segment(s) - businesses may target several distinct customer groups in many ways such as through different service offerings, a range of pricing plans and via alternate distribution channels. 

  • Distribution channel - products and services may be distributed directly to customers or through intermediaries and via physical or eCommerce means. 

  • Customer relationship - a variety of approaches can be applied to customer interactions across new product identification, in-service support and problem resolution areas of activity. 

  • Key resource, key partner and key activities - these three elements define how the value proposition is delivered to the customer. 

  • Cost structure - the investment, operational resources and third-party suppliers needed to deliver the product or service offering all contribute to the cost base of the business model and its evolution over time. 

  • Revenue streams - variants in the product or service offering to different customer segments combine to produce an overall revenue stream which itself will change over time as a result of product-, service- and operational innovations.
 SOURCE: GSMA: Connected Life – The Need for New Business Models (2012)

The way to interpret this model is to start by considering a particular product or service. This is also referred to as the value proposition because the product or service delivers some value in the form of cost savings, convenience or enhanced productivity, for example.

This value proposition is targeted at a specific customer segment taking account of how the customer relationship is structured and managed. For example, a firm may interact directly with its customers, indirectly through re-sellers or using hybrid approaches.

Products and services are supplied to customers through one or more distribution channels e.g. direct, re-seller, on-line etc. The customer relationship and distribution channel processes depend on key resources, partners and/or activities. This set of factors determines the business model’s cost structure.

Finally, the value proposition may be delivered in several variants or using multiple tariff structures to generate multiple revenue streams. The forward projection of revenues and costs is what eventually constitutes the business case. 

I use this framework routinely for client projects and will refer to it in future posts about practical business model innovation.

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