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What Is a Business Model? A Simple Definition For Dummies

I bet that everybody has heard about business models and even many use these words. Many think of them as beautiful sweeties dressed in suits (okay, probably I just do…), others think about handsome guys in suits 🙂 … But most probably very few of you fully understand the real meaning… So, here you will have the chance to go through a simple explanation answering the question: “What is a business model?“. Let’s start with a

Definition

As I promised to give you a very simple explanation, I would not go through the details here. I want to write a “dummies” type of an article. I want neither to confuse anyone here nor to hold a complex business lecture (I am not that smart anyway…). I like simple and straight stuff so, here is a simple definition of this term:

A business model is the way a business creates, manages and delivers value. This is basically the way an organization is doing its business, or the way it finds sells to and retains its customers.

That’s it! No fancy and complicated stuff. And here are some more detailed things you should know about business models.

Such a model consists of nine different components or parts. So, to build one, you have to describe these parts. Here they are:

What Is a Business Model

Components of a Business Model

So, to make a business model, one should gather the answers to the following questions:

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1. Customers – For whom we are creating value – this is the fundamental of every business, customers are the most needed part, no matter if you sell vegetables or luxury cars for millions of dollars. which are the important customers and customer segments.

2. Value proposition – How is the value in the business created? – Every business has to add value for its customers. This is a basic economic law. What exactly is this value? How is it created? Which customer’s needs are satisfied and how. This part consists of the answers to all of these questions.

3. Channels for reaching our customers – I call these “marketing channels” because the market for a business consists of its clients and these are the channels for reaching them. To build this part of the model, we have to answer the questions: “What are the ways the different segments of clients are reached?”, “How exactly are the clients reached?”, “Which are the most effective ways and why?”.

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4. Customer Relationships – What are the relationships with our customers? – Customer relationships are a really important part of every business. Many of the greatest businesses out there rely on really strong relations with their clients. The try to build such and make them as stronger as they can.

5. Key Resources – Which are the key resources that are needed for the business to operate and grow? Why are these resources so important and how? A key resource is something that the business can’t operate without.

6. Key Activities – Which are the key activities needed for the business to run successfully?

7. Streams of income – What are the income streams of the business? What do the customers want to pay for? Which are the most important ones and which are the most profitable ones?

8. Key Partners – Who are the key partners and what are the key resources the business acquires from them? – Every business relies on its partners, more on some of them and less on some others. And few of them are key partners, which means that the business would hardly operate without them. They could be key suppliers, key customers, key subcontractors, etc.

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9. Cost Structure – What are the most important expenses and costs in the business and why? In this part should be explained the cost structure coming from the business model.

These are all of the main parts. Knowing them, you should be able to create a simple business model of an organization.

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