Tomorrow Marketers – Business model is a company’s plan to make a profit. It identifies the products or services the business will sell, its target market, and its estimated costs.

Viewing: What is a Business model

A growing new business needs a business model to attract investment, recruit talent, and drive management and employee motivation. Established businesses must review and update their business plans regularly, or else it will be impossible to anticipate trends and challenges ahead. Investors also need to review and evaluate the business plans of the companies they are interested in.

How does a business model work

?A business model is a high-level plan for operating a profitable business in a particular market. The key component of a business model is the value proposition. It is an introduction to the goods or services the company offers and explains why customers and clients need them – by emphasizing the difference in their products/services compared to competitors’ products/services.

The business model for a start-up business also includes start-up costs and expected financial resources, target customer base for the business, marketing strategy, assessment of competitiveness, forecast of revenue (revenue) and expenses (expenses).

A common mistake when creating a business model is to underestimate the importance of starting a business before it becomes profitable. It is not enough to just calculate the cost of introducing the product. A company must stay in business until its revenue exceeds its expenses.

A business model can also identify opportunities for this business to partner with other businesses. For example, an advertising agency would benefit if it was referred to a printing company, or connected by that company to other companies.

Types of business models

There are many different types of business models as well as different types of businesses. Direct sales, franchising, advertising-based, and brick-and-mortar stores are all examples of models. traditional business models. There are also hybrid business models, such as businesses that combine Internet and brick-and-mortar retail, or sports organizations such as the National Basketball Association. Association – NBA) in the US.

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Among these model groups, each model corresponds to a unique business plan. For example, in the razor industry, Gillette applies a business model called the “handle-blade” model with the goal of achieving higher profits, based on selling hand products. grips attached to Mach3 razor blades at or below the cost of production. This business plan helps Gillette reach a steady stream of customers using higher-end blades, from which to increase profits by increasing blade sales. The “knife-handle model” model can be applied to companies of any type: selling one product cheaply, then offering another bundled product at a high price. significantly more.

Important: When evaluating investing in a company, find out exactly how it makes money – or the business model of that company.

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Advantages of the business model

Successful businesses have adopted business models that allow them to meet customer needs at competitive prices and at sustainable costs. Over time, many businesses modify their business models to reflect changing business environments and market needs.

Evaluating a business model is a way to help analysts and investors better understand a company’s operations. Often, they compare a company’s gross profit with that of a major competitor or against the industry as a whole to shed light on the performance and effectiveness of that company’s business model.

However, considering only gross profit can be misleading. Analysts are also interested in either the cash flow or net income of a company.

The two main levers for a company’s business model are price and cost. A company can increase selling prices and reduce inventory costs – both of which help increase gross profit. If costs are out of control, there’s a good chance the company’s management makes a mistake. This also explains why many analysts believe that companies are fully capable of running their operations if they adopt an appropriate business model.

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For evaluating a business plan, many analysts still consider gross profit as index is more important. A good gross profit indicator usually comes from a sound business plan. If costs are out of control, it is very likely that the company’s management has made a mistake but still finds a way to fix it. This also explains why many analysts believe that companies are fully capable of running their operations if they adopt an appropriate business model.

Examples of business plans

Compare two business plans of two companies A and B both renting and selling movies. Before the Internet, both companies made $5 million in sales after spending $4 million on inventory (which were movies).

That means each company generates a gross profit calculated as follows:

Gross profit = Sales – Inventory costs = 5 – 4 = 1 (millions of dollars).

The two companies also have the same gross profit margin, which is calculated as follows:

Gross profit margin = Gross profit ÷ Revenue = 1 ÷ 5 = 20%.

After the advent of the Internet, Company B decided to offer streaming movies instead of renting or selling copies of movies. This change breaks the old business model in a positive way as licensing fees remain unchanged and holding costs drop significantly. In fact, this change resulted in a $2 million reduction in storage and distribution costs. Company B’s new gross profit is now: $5 million – $2 million = $3 million, and the new gross margin is: $3 million ÷ $5 million = 60%.

Meanwhile, Company A lagged with lower gross margins, and its sales soon slipped. This company failed because it refused to renew its business plan, while company B did not earn more revenue but revolutionized its business model, greatly reducing costs.

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An investor’s point of view

What does a business model assessment mean for an investor? When considering a company as a good investment choice, investors should find out exactly how that company makes money. That is the company’s business model. While a business model review doesn’t tell investors everything about a company’s prospects, it does give them a more accurate sense of that company’s financial data.

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Things to Remember

The business model is a company’s core strategy to ensure a profitable business. The two levers of a business model are price and cost. When evaluating a business model as a business model. investors, ask yourself if the business idea makes sense, and whether the investments in the company are worth it.

Conclusion

Finding a suitable and effective business model is always a difficult problem for every business owner when starting a company. Business models are the directions that business owners need to outline to guide the company in a certain type of business, helping every member of the company to form a thought, purpose and action. in general, thereby maintaining and developing the company stronger and stronger. Join Tomorrow Marketers’ Marketing Foundation course to better understand how a business works, and at the same time cultivate more knowledge and methodical marketing thinking with Brand Managers!