What Is a Company's Business Model?

A company might use a facility for its own production.

There are many ways to define a company's business model. At the most basic level, a company uses its own formula of business strategies to generate a profit. The profit margin results from the difference between the company's sales revenues and its production and overhead costs. The business model also explains how the company markets its products and services to consumers.

Decisions

The business model includes core business decisions that the management team uses to create a profit. For example, the senior management sets a pricing strategy, determining how much consumers will pay for each product. Management makes decisions about costs, such as how much will be spent on each stage of production for each product. Management studies costs and reduces them when possible so the pricing strategy doesn't have to change. Consumers look for stable pricing in the products they regularly buy.

Production

Many of the costs that a company faces relate to the production life cycle. The company studies the cost of facilities, materials, labor, services and other items involved in a product from the beginning of production until it is ready to distribute to consumers. A company can raise its profits by planning for the maximum utilization of resources in the production process. Any waste or overlap in production makes the profit margin for a product less than it might otherwise be.

Value Proposition

A company business model must include a customer value proposition. This model is something that investors and lenders want to see before they will extend capital to a small business. You explain how your product or service helps a customer to solve a problem or derive a benefit. The business model must concentrate on the most important benefits so there is no confusion in the market about how the company's core business strategies create value for consumers.

Market Strategy

For external parties, a company defines its target market, outlining which types of consumers will benefit from core products and services. For example, a company might offer business-to-business sales or business-to-customer sales or offer both. The market strategy includes an analysis of how a company captures its market share in comparison to competitors in the same market. Strategy might also include expanding into new markets or redefining markets.

References

• Virginia Commonwealth University: Business Model Innovation
• "The Value Model: How to Master Product Development and Create Unrivaled Customer Value"; Per Lindstedt, Jan Burenius; 2003
• Business Week: Three Steps to a Sound Business Model