How to Learn Business Models
Understanding the business model for a company you plan to start, buy or invest in is fundamental to ensuring its success.
The vast majority of businesses fall into a fairly small number of basic categories. Some sell objects, some sell services, some rent property, some make things for others to sell, some sell a specific product or service that can only be created by a very small number of people.
Each category of business has a set of rules that govern it. For example, a successful business that sells objects must be able to buy the objects at a lower price than it sells them for. A business based on selling skilled services provided by employees must ensure that skilled employees are always available, and that skilled employees do not take away customers to start their own businesses. A business based on the work of one man, like a movie star or a sports star, is limited by what that man can do over the course of his working life.
In the following set of steps, you learn how to derive business models by examining businesses. This will give you a new way to evaluate the businesses you buy, build or invest in.
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Instructions
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Learning Business Models from Real World Examples
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Identify exactly what a business sells in order to earn income. Some businesses, like retail stores, sell objects. Some businesses, such as hair salons, sell services. Some business, like subscription-based websites, sell information created by writers and sold over and over again. In some cases what a business sells can be difficult to identify. Many blogs deliver information but sell advertising. In some cases a business will give services away for months or years before it can effectively sell something to recoup the investment it has made. This is the case with many successful Internet based services. Manufacturing businesses usually have to purchase equipment and facilities in order to build what they sell. They must also determine how to promote and distribute what they make to wholesalers.
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Identify where a business gets the resources it sells. For retail establishments, most of their purchases are made with wholesalers. In some cases they may build their sales based on objects they sell on consignment. Services are generally provided by skilled professionals who come from a pool of labor. Businesses that rent property purchase it on the open market then make it available for rent.
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Consider the risks and costs associated with acquiring those resources. Objects can be purchased for too much, or they can rot after you have purchased them. Employees may leave you when you need them, forcing you to pay more for a replacement. They may become well known and popular and cost more to retain than you can afford to pay. They may ultimately leave to start a competing business. Information you collect for distribution via the Internet may become more expensive if the content providers become so well known and so well liked that no one else will do.
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Identify how a business reaches its customers. Retail establishments usually do it through acquiring a good location with enough foot traffic to guarantee they will have the business they need to survive. They may also advertise in the phone book or in newspapers. Many, but not all services, follow a similar location-based strategy. Some businesses, like doctors and lawyers, may count on word-of-mouth or membership in an association to survive.
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Identify the risks associated with how a business finds its customers. Retail sales and services establishments may find a good location becomes a bad one if construction is started near them. A doctor may find that bad word-of-mouth can take away business faster than he can rebuild it. An in Internet business based on advertising may find that ads posted on other sites stop working as a draw, or that changes to how search engines look at websites can make their site impossible to find.
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Evaluate the data you have collected about the business you are considering. You will see that it has a set of absolute requirements and risks that determine whether it is profitable.
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Evaluate the remaining businesses on your list. You will see that they begin to fall in clear categories. What they sell may change, how they get their customers may very slightly, but by and large businesses fall into broad categories with similar costs, risks, structures, profit levels and requirements. Those categories are business models. Having studied several businesses and derived their business models, you should be comfortable evaluating any business you plan to start, purchase or invest in.
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Tips & Warnings
If you are planning to start a business, study several businesses similar to yours, and make sure your plan addresses the same risks and requirements.
Do not believe that just because a business appears to be in business, that it must be profitable. Many businesses, especially those financed by outside investors, do not represent sustainable business models. Those businesses, in truth, survive by selling the hope of future value to their investors. That hope is their product and the investors are their customers. In order to become successful they must develop a new product and reach other customers.
