What Is a Business Model?


business model

At one level, a business model answers the question: “How will the business make money?” Beyond that it is also an idea, process, strategy and an insight that results in value creation for the customers and profits for the enterprise.

IBM, HP, Compaq and others were selling personal and business computers before Michael Dell thought of a new idea while sitting in his dorm room. He reasoned that costs could be reduced by selling directly to the customer and eliminating middlemen like Best Buy. The customer would pay at the time of ordering the computer. This money would be used to finance the inventory. By ordering the exact inventory required, the risk of obsolescence would be reduced. The resulting lower costs could then be passed on to the customer, which would lead to higher sales. This, in a nutshell, was Dell’s business model – new, clean, efficient and elegant.

What was Starbuck’s initial business model? It started off selling upscale coffee beans then pivoted to delivering an experience. It was a high quality, highly customized iteration of coffee and milk in a friendly environment. That is why Howard Schultz coined it “a third space” away from home and work. This allowed them to charge $4 for a product where the ingredient cost of coffee, milk and a paper cup added up to about $0.60.

Without the aid of any business books, The Grateful Dead developed a very successful business model in the 1960s and became one of the top grossing bands without ever having a number one hit. Since they did not like working with the record labels, they concentrated on doing live concerts where they encouraged people to record their music for free. They made their money from selling concert tickets, clothing and other paraphernalia to their intensely devoted following of Deadheads.

The profit component is an important part of the business model. Without profits, a business cannot survive for long; the law of financial gravity inevitably reasserts itself. New business models put pressure and sometimes obsolete even seemingly strong businesses.

Newspapers are a current example of such obsolescence underway.“Newspapers with declining circulations can complain all they want about their readers and even say they have no taste. But you will still go out of business over time. A newspaper is not a public trust – it has a business model that either works or it doesn’t.” – Marc Andreessen

The financial purpose of any business is to make money. You sell a product or service for a certain price, which creates Revenues. You incur Costs to generate these revenues. The difference between the two is Profit.

Revenue – Costs = Profit

This is the fundamental equation of a business. Making a profit is a necessary condition for a business to survive. Yes, there are a few details involved, but this is the basis of profitability.

A business model helps us examine and understand the key elements of the financial equation: how the revenues will be generated, what it will cost to provide the service, what support (overhead) structure will be required and how much capital will be needed to start the business. The goal is to both understand these factors and to find ways to improve the model.

We will discuss all this in greater detail in my subsequent posts. Till then, think about what your business model will be.

Verinder Syal, Author: Discover The Entrepreneur Within

Entrepreneurship is Everywhere!

Why do we always tend to look at the Silicon Valley when we think of entrepreneurship ? Undoubtedly there is a lot of energy, excitement and buzz around things that come from there. The Wall Street Journal published an infographic in 2015 depicting the 73 companies globally valued at over $1 billion. Yes, admittedly, tech unicorns like Uber ($41.2 billion) and Palantir ($15 billion) were in the upper echelons with possibly inflated valuations. But there were several non-tech companies too, such as a consumer good company – Honest Co., ($1 billion), a healthcare company – Theranos ($9 billion) and a real estate company – WeWork ($5 billion).

Silicon Valley has been the center of a great technological revolution. The tech valuations do sometimes defy imagination and their successes are not always easy to replicate.

None of this is meant to diminish what is happening in Silicon Valley, rather it is meant to assert that entrepreneurship is possible everywhere in every industry. Furthermore, businesses that tend to make money, rather than just hoping to make money, are more sustainable. So where should you look? Everywhere.

To help my students understand the breadth of possibilities, I have them read Rachel Bridge’s My Big Idea, which highlights 30 small entrepreneurial ventures across a variety of industries in the UK. Examples include companies offering hot dogs, coffee, baby foods, insurance and travel. There is even the story of the young lady who convinced the musical group Abba to support her idea of making the musical Mama Mia. Where did all these ideas come from? Often they arose from their passions, their life circumstances and their travels. The students breathe a sigh of relief because these are stories they can relate to and they can see themselves doing similar things.

I do not want to minimize the great benefits created by Silicon Valley type companies; they have generated enormous value and in many cases changed the way we live. But I do want to emphasize the fact that there are many ways to create value, in virtually every industry and in every country. Create a technology company if that is your passion, but using technology as a driver may open up even more opportunities.

 Problem – Solution, that is the real mantra of entrepreneurs . Understand the process, develop the discipline and see how your world changes.


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What Stops Us?

Isn’t it funny how we always find a reason to not do something? The known – as monotonous, unfulfilling, and lousy it may be – is preferred to the challenge and risk of doing something new. Most of us WANT to do something of our own; start-up our dream company. But alas! How can I do it alone? Isn’t becoming an entrepreneur asking for too much risk? I do not have it in me to become an entrepreneur! These are only few of the myths most of us believe in, blindly!!

There are many such myths that stop us from taking the plunge…

– Entrepreneurs are born – one cannot learn to become an entrepreneur.

– Entrepreneurs take huge risks.

– I have to do it alone.

– I have to have a large network.

– I must have a big idea.

– I must be lucky or a real genius to come up with a big idea.

– I need a lot of money to get started.

– Silicon Valley is where all entrepreneurship takes place.

– I have to be charismatic.

Can you identify with some/ all of them? How many of these fears and myths are accurate? Not many. Perhaps none of them are.

Entrepreneurship can be learned and if done right, you will reduce some of the risk before you embark on something.

You don’t need to do things alone. Form a team and divide the work and leverage each other’s strengths. It is strange how luck seems to favor hard work.

Also, you do not need to move anywhere to get started. If charisma is not your strong suit, be thankful.

A myth is a story often involving supernatural forces. It is generally a widely held belief that is not true. How then do we dispel our fears and myths? We wake up and take action!

For more, please check Discover The Entrepreneur Within