The devastating impact of Covid-19 on commercial activities is a jolting reminder that the best intentions in the world amount to nothing in the face of a business that fails to adapt to changes in its operating environment. A business that aspires to survive and thrive amidst the challenges of these times must re-think and re-energise its business model.
What is a business model? Your business model drives how it delivers value to its customers, and how it makes money. If your business is not making the kind of money it is capable of making, it is time to tune up your money machine, so that it can start making money again. Here are nine elements that can move the needle and determine the financial success of your business:
- Customer Segments: The customer segmentation process divides customers into groups according to characteristics that are common to each group. This enables the business to appropriately and effectively market and sell its products or services to each group.
Segmentation allows a business to create and communicate targeted marketing messages to specific groups of customers, and select the best communication channel for each segment. This requires the business to gather, analyse and act on specific customer information through face-to-face or telephone interviews, surveys, focus groups, published sources, etc.
- Value Propositions: The essence of a value proposition is to offer a product or service that solves a problem and satisfies a need for customers of the business. It cites the unique value of the product or service, and makes the case for why a customer should pick it instead of its competitors.
The elements of a value proposition could be newness (a hitherto unknown technology), price (cheaper than existing options), safety (peace of mind), performance (lasting longer than similar offerings), customised (built to fit end-user), design (superior make) or branding (confers status). The range is wide as each offering seeks to make a product or a service more appealing to its customers.
- Channels: A business must adopt marketing, distribution and sales channels for reaching and offering its value proposition to its target customer segment. For example, a distribution channel can be direct, by selling directly to customers, or indirect, through intermediaries that represent it.
A business may combine both channels. In so doing, the business must consider its customer segments or market size, level of investment required, whether product or service is standardised or customised, control needed to make it work and relationship with channel partners.
- Customer Relationships: A business must create demand by establishing and maintaining relationships with its customer segments. The growth of the customer base of a business, and its ability to retain the loyalty of its customers, are boosts to its ultimate profitability.
- Revenue Streams: A business only makes money when there is a surplus after it subtracts its costs of operation from the revenue it generates from its customers. The revenue streams of a business must be clearly defined. Beyond listing the various revenue streams of the business, it is equally important to evaluate if it is profitable for the business to opt for a revenue stream.
- Key Activities: These are tasks that are critical to implementing the business model. These activities directly relate to delivering its value proposition, reaching its customers, maintaining customer relations and creating sustainable revenue streams.
- Key Resources: These are inputs that the business needs to provide value, satisfy customers and deliver its product or service. These could be physical and tangible assets like buildings, equipment, inventory, buildings and distribution networks that enable the business to function. They could be intangible and non-physical resources like patents or copyrights. They could be such human resources as engineers or sales representatives. They could also be financial resources like cash and loans.
- Key Partnerships: A business partnership comes to life when two or more commercial entities form an alliance that empowers the parties to make their key activities possible. Partnerships can be beneficial to a business.
In the search for efficiency, a business may seek key partners to help it achieve its goal, especially when the business does not have the resources to conduct all key activities in-house. Partnerships leave room for the sharing of resources and outsourcing of selected activities to more cost-effective options. The resulting strategic alliance frees the business to focus on areas where it can create the highest value.
Whether a partnership is with a business or an individual, the relationship must be based on the right agreement. Each party must understand its rights and duties under the partnership. This must be put in writing and executed by the parties under the guidance of a legal counsel.
- Cost Structure: Each business model implies a cost structure for creating and delivering the proposed value, generating revenue and acquiring customers.
Business incur costs that remain fixed regardless of volumes of products or services. Some costs vary with production volumes. There are also operational costs associated with the daily activities of the business. Economies of scale equally dictate that higher volume lead to lower overall cost per unit, which reduce variable costs arising from synergies and increased efficiency.
In essence, to improve the performance of a business, there must be a re-think of the assumptions underlying how the business makes money. This re-thinking process involves re-engineering each of the nine keys of your business model. The leadership team must vigorously debate how to tweak any one or a combination of these keys, and create a new model of how the business makes or intends to make money, failing which the business may become another statistic of failed enterprises.
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