The Business Model

A business model refers to a company's plan for making a profit.

  • It identifies the product or service
  • The target market
  • Anticipated expenses

A business model helps developing companies to attract investment, recruit talent, and motivate management and staff. Established businesses should regularly update their business plans to help anticipate trends and challenges ahead.

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Business Model Definition

investopedia.com

  • The primary component of the business model is the value proposition. A value proposition is a description of the goods or services a company offers and why they are desirable to customers or clients.
  • A new enterprise's business model also covers projected startup costs, financing sources, the target customer base, marketing strategy, a review of the competition, and projections of income and expenses.
  • When evaluating a company as a possible investment, the investor should find out exactly how it makes money by looking through the company's business model.

A common mistake companies make in their business model is that they often underestimate the costs of funding the business until it becomes profitable.

Many analysts believe that companies that run on the best business models can run themselves.

  • One way analysts and investors evaluate the success of a business model is by looking at the company's gross profit - the total revenue minus the cost of goods sold.
  • Analysts also want to see cash flow or net income - the gross profit minus operating expenses.

There are many types of business models for every kind of business.

  • Traditional business models include direct sales, franchising, advertising-based, and brick-and-mortar stores.
  • Hybrid models include businesses that combine internet retail with brick-and-mortar stores or sporting organizations.

There are two critical factors in judging business models. When business models don't work, it is because

  1. the story doesn't make sense anymore, for example, the airline industry;
  2. the numbers don't add up to profits, that is companies that suffered heavy losses or bankruptcy.

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