Business model what does it mean

Business plans help investors evaluate companies that interest them. A business model is a high-level plan for profitably operating a business in a specific marketplace. A primary component of the business model is the value proposition. This is a description of the goods or services that a company offers and why they are desirable to customers or clients, ideally stated in a way that differentiates the product or service from its competitors.

A new enterprise's business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy , a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies.

For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company. Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands.

When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company's business model. Admittedly, the business model may not tell you everything about a company's prospects. But the investor who understands the business model can make better sense of the financial data. A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable.

Counting costs to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses. One way analysts and investors evaluate the success of a business model is by looking at the company's gross profit. Gross profit is a company's total revenue minus the cost of goods sold COGS. Comparing a company's gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model.

Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income. That is gross profit minus operating expenses and is an indication of just how much real profit the business is generating. The two primary levers of a company's business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many analysts consider gross profit to be more important in evaluating a business plan.

A good gross profit suggests a sound business plan. If expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves.

When evaluating a company as a possible investment, find out exactly how it makes its money—that's the company's business model. That is it may be new in either end. That could be by offering a better business model — but it can also be by offering the same business model to a different market. Introducing a better business model into an existing market is the definition of a disruptive innovation.

Many writers have suggested signs that could indicate that your current business model is running out of gas.

You should also be worried, she says, when your own people have trouble thinking up new improvements at all or your customers are increasingly finding new alternatives.

Knowing you need one and creating one are, of course, two vastly different things. Any number of articles focus more specifically on ways managers can get beyond their current business model to conceive of a new one. In fractionalization, you are selling perpetual access to part of something. Leasing, on the other hand, is like renting.

At the end of a lease agreement, a customer needs to return the product that they were renting from you. Leasing is most commonly used for high-priced products where customers may not be able to afford a full purchase but could instead afford to rent the product for a while. With a low-touch business model, companies lower their prices by providing fewer services. Some of the best examples of this type of business model are budget airlines and furniture sellers like IKEA.

In both of these cases, the low-touch business model means that customers need to either purchase additional services or do some things themselves in order to keep costs down.

Marketplaces allow sellers to list items for sale and provide customers with easy tools for connecting to sellers. The marketplace model has been used for both products and services.

Instead of pre-purchasing a certain amount of something, such as electricity or cell phone minutes, customers get charged for actual usage at the end of a billing period. The pay-as-you-go model is most common in home utilities, but it has been applied to things like printer ink.

The razor blade business model is named after the product that essentially invented the model: sell a durable product below cost to increase volume sales of a high-margin, disposable component of that product. The goal is to tie a customer into a system, ensuring that there are many additional, ongoing purchases over time. Flipping the razor blade model around, you can offer a high-margin product and promote sales of a low-margin companion product.

Similar to the razor blade model, customers are often choosing to join an ecosystem of products. But, unlike the razor blade model, the initial purchase is the big sale where a company makes most of its money. The add-ons are just there to keep customers using the initially expensive product. A reverse auction business model turns auctions upside down and has sellers present their lowest prices to buyers.

Buyers then have the option to choose the lowest price presented to them. You can see reverse auctions in action when contractors bid to do work on a construction project.

You also see reverse auctions anytime you shop for a mortgage or other type of loan. Subscription business models are becoming more and more common. In this business model, consumers get charged a subscription fee to get access to a service.

First, entrepreneurs are notorious for not writing their business models down. These entrepreneurs often overextend themselves. As a result, it increases the likelihood that the company will lose sight of its mission. This is a serious danger but is not all-inclusive. Some entrepreneurs keep their business model in their heads and continue to deliver quality products. More often than not, however, entrepreneurs do not write their plans down.