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Business Model

What is a business model?

The term business model refers to an organisation’s plan to generate sales and make a profit. Innovative business models are important for both established companies and new businesses.

What is a business model?

The term business model refers to an organisation’s plan to generate sales and make a profit. Innovative business models are important for both established companies and new businesses.

Business models help attract investment, motivate employees and management, and recruit talent. Established companies occasionally need to update their business model to effectively anticipate future challenges and trends.

Definition of business model

At its core, a business model is a description of how a company makes money. Therefore it is simply an explanation of how value is delivered to the customer at an appropriate price. Financial tools can be used to test how executives can best structure cost and income flows in a variety of ways.

Examples and types of a business model

There are various types of revenue and business models. Examples include direct sales to consumers (B2C) and companies (B2B), franchising, advertisements, etc.

There are also hybrid business models, in which organisations use a combination of, for example, internet retail and physical stores. How they structure the way in which profits are generated depends on the company.

A well-known example is the company Gillette. Gillette often gives away the razor handle for free, knowing that this will encourage sales of the razors themselves. This form of business model is also referred to as the razor-razor blade model.

Example Amazon

Amazon’s business model is also referred to as a platform business model. This is a hybrid of various business units. Each unit uses different revenue models. Examples include:

  • Commissions and fees from connecting buyers and sellers
  • Sale of advertisement space on the website
  • Product development such as Kindle and the related e-books market
  • Amazon prime services where users pay to stream online movies and series

Amazon therefore, consists of different revenue models. This makes Amazon a dynamic company that is able to adapt well to new market developments.

Example AirBNB

AirBNB is a platform where individuals can rent out their homes. These homes are often rented by travellers. AirBNB is part of the sharing economy. This model makes it easier for buyers and sellers to share human and physical resources with each other.

The main source of income for AirBNB is the service charge that is charged for each booking. Both the letter and the guests need to pay this fee. The costlier the reservation, the lower the service fee. The hosts also pay an additional 3 per cent surcharge on each completed booking.

Example Uber

Uber is also part of the sharing economy. Individuals can use their own car for taxi services for which Uber provides the software. Drivers pay 25% for this service. The company has more than 90 million active monthly users on the platform, and revenues exceeded 11 billion dollars in 2018.

In addition, Uber has a food delivery service, from restaurant to consumers, called Uber Eats. The company uses a network of deliverers and drivers to deliver meals.

Uber Freight is another branch of Uber, which is active in the logistics sector. In 2018 this branch provided a 125 million dollar revenue. In addition, the company invests in shared scooters and e-bikes.

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Over the years, various frameworks have been defined for business modelling. These frameworks are intended for defining value flows within an organisation. An example of such a framework is the Business Model Canvas (BMC) by Alexander Osterwalder, Yves Pigneur, and Alan Smith. The BMC is one of the most widely used models for describing the different elements of a business model.

Another well-known framework for defining a business model is the OGSM framework. The OGSM framework was developed by Marc van Eck and Ellen van Zanten. The model has been translated and spread all over the world. OGSM is an acronym and stands for: objectives, SMART goals, strategies, and measures.

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Alexander Osterwalder

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