Reviewed by Aug 27, 2020| Updated on
A business model refers to a company’s business plan for carrying out business to earn profits. It includes defining products and services of the business, identification of markets, planning marketing strategies, and making forecasts. New businesses develop business models to generate interest in their business and obtain investments. Existing businesses restructure their business models to expand and obtain investments.
Understanding Business Model
Business modelling involves business planning for the entire business. It consists of a high-level plan for carrying out the business operations of a company. A broad plan is broken into small plans for shorter periods which may be half-yearly or quarterly. The plan is also made segment-wise or market-wise.
A business model should include the costs associated with starting a business, i.e. the cost of production, marketing and external funds, such as term loans and debt funds. The company should carry out a market survey of the target market and map the requirements of the customers, their preferences, and their close competitors.
A business model should also have a target break-even point (BEP). The BEP refers to a point at which the revenues cross the costs of the company. It is the point at which the company makes a profit. Hence, the company should have a plan to reach a target BEP.
The costs, including the fixed and variable costs, should be forecasted. The fixed costs include rent of the factory, plant, and equipment whereas, variable costs include raw materials, labour, and packaging, which varies with the volume of production.
The different types of business models include brick and mortar, e-commerce platforms, franchisee, and distributors. The traditional brick and mortar models come with extensive manpower, showroom costs, and marketing costs. The e-commerce platforms are relatively less expensive, leaving scope for higher profits.
The success of a company depends on its business model. An efficient business model enables an early recovery of costs, builds a brand through marketing and customer relationships, and leaves room for more profits. The company which plans well is better placed to grow among its competitors. Analysts in the financial market also study the different business models of companies in the same industry and report on their standards, efficiencies, and methods.