What’s a business model?

Its not a plan, and all to often I see these ideas masquerading as business models.

The purpose of a business model is to concisely describe the function of your business within the overall market landscape and how you plan to add create value. This includes details such as business inputs and dependencies, target customer base and the value being created on behalf of those customers. By using such a conceptual construct for evaluating a business, strategists are able to more easily understand the function of the business, as well as identify strengths, weaknesses and opportunities by comparing the attributes of other similar businesses which may use a similar structural model.

I believe there are fundamental components of a business and these provide an excellent structural base from which to identify the spectrum of possible business models.

There are three primary components that describe the fundamental interests and activities of every business. And,  three secondary archetypes are derived by combining attributes of the three primary archetypes:

• Product – one-time purchase of a tangible thing or an artifact, for a one-time payment
• Service – manually doing something intangible and charging a one-time fee for doing it
• Trade – connecting buyers and sellers of things for commerce

• Brokerage – providing trade as a service
• Subscription – productizing and semi-automating a service and charging a regular payment for it
• Marketplace – productizing trade with a self-service platform
• Ecosystem – creating a user or creator (developer) platform for others to build businesses around (combines all three)

Business Model Archetypes

Image excerpted from The Smarter Startup by Neal Cabage and Sonya Zhang. Copyright © 2013. 

These seven archetypes are high-level abstractions that describe basic truths about categories of businesses and how they add value and make money. This can be helpful for identifying a generalized context from which to determine where in the spectrum of possibilities to focus your efforts, but it is not specific enough to be actionable. So two real-life examples were added to each of the model archetypes.

To demonstrate this idea, the ‘trade archetype’ has two prototype examples: e-commerce and lead generation. Both are examples of sourcing something of value and bringing it to the market for sale. In both cases, money is made on the spread between the cost of acquiring the item and what it can be sold for by the trader by taking it to market and promoting it- called arbitrage. Similarly, software and content are the two most common types of products to sell if you are an online business, but it could easily be a bottle of beer.

Each of our business model archetypes has strengths and weaknesses, and just about any business you might be considering would give you the option to pivot in at least three different directions as you discover the best opportunities in your market. To demonstrate, let’s say that you were interested in developing software and wanted to build a business around that. You might consider developing a software product, something that you buy and download, such as a premium plugin for a popular CRM or eCommerce platform. You could then pivot to Software as a Service, or SaaS, subscription model, in which you manage and continually improve the software and sell the right to use it on a monthly basis, rather than selling it outright as a product. Or, you could think about creating a software service agency that develops custom e-commerce or CRM solutions for other businesses.

Each of these options would be viable and suitable to a team with a software development background. Which option is best for your business is an important question that depends on the timing and competition of your market, your ability to obtain capital to quickly scale your business, and the competitive advantages you may have going in. The product archetype is perhaps the most scalable and profitable option, and often allows you to sell your service into a specialized marketplace. But it’s also highly commoditizable, so you must be careful to look at timing and competition closely. By contrast, the service archetype is more difficult to scale, but involves a lot less risk and isn’t as vulnerable to market consolidation.

Whichever archetype you settle on, you should consider the options and put yourself through the exercise of considering your competition, your sourcing, and your target customers. Once you have a solid idea of which archetype you want to leverage for your business, you can look at other popular business model frameworks, such as Alexander Osterwalder’s Business Model Canvas, which will walk you through articulating the important dynamics of your business.

However you go about it, the important point is simply to do it–take the time to understand your strategic options and to articulate your business’s foundational strategy. It will give you the clarity you need to understand how to position yourself in the marketplace, and optimize for efficiency and profits.