It is useful to build a business model in stages.
Stage 1: Identify the entrepreneur’s position in the value chain
The first step in developing a business model is to identify the entrepreneur’s place in the value chain. If the entrepreneur’s company is a supplier or producer of raw materials, it will generally be at the top of the value chain and upstream from manufacturers. Intermediaries, such as distributors and retailers, will be downstream from manufacturers. Where accompany is located is normally a function of its capabilities and the desire of the entrepreneur for a particular type of business.
Selling a business concept takes the least amount of investment and requires the least time commitment from the entrepreneur. Conversely, starting a retail business requires a huge time commitment, demands substantial capital, and generally carries with it a higher level of risk.
Stage 2: Determine Who pays Whom
Once the business is located on the value chain, it is easier to recognize who pays whom and to determine costs and pricing. The value chain illustrates the various markups, which is helpful in determining the lowest price possible for the product. The highest price possible is determined through market research with potential customers. The markups on the original cost reflect profit and overhead for the channel intermediary and are determined by what is typical in the industry. Every product or service has more than one channel option, so it is a good idea to depict distribution options graphically to compare their effectiveness. Graphing the value chain makes it possible to do the following:
- Measure the time from manufacturing to the customer on the basis of the lead time needed by each channel member.
- Determine the ultimate retail price on the basis of the markups required by the intermediaries.
iii. Figure the total costs of marketing the product. For example, manufacturers have to market to distributors, but to support their distributor; they may also market to retailers and even end-users or consumers.
Stage 3: Calculate the impact on the consumer
It is important to determine whether the proposed business model will force customers to change the way they use or find a particular product or service. Will that change benefit customers in a way that they can really see? For example, many computer users have not switched to the latest Window Operating System they can’t really see what benefits it offers over the system they are currently using. N In other words, the basic functionality has not changed substantially, but the cost to the customer in terms of time and money is too high to warrant switching. It is also important to determine whether the learning curve for the customer will steep. If customers see that learning to use the new product or service will take some time and require them to change old habits, they will think twice before purchasing.
Stage 4: Identify multiple revenue streams
One of the most important components of the business model is identifying the revenue streams that will flow from the products and services being offered. A healthy business model always supports revenue streams from multiple types of customers and multiple products and services. Relying on one revenue stream from one type of customer is dangerous. What happens when the market shifts and that customer goes away?
A few years ago, Edmund Publications, publisher of automotive information, saw the internet as just another marketing vehicle, Today, the Internet is the business. Edmond’s website produces independent ratings, reviews, and pricing data for every make and model of car, in addition to a variety of other interactive features. Edmund’s basic business s model is to make its money through ads placed by manufacturers, parts dealers, and others in the automotive industry. Books now account for less than 1% of its revenues. Changing its business model with the changing times, Edmunds.com now has revenue streams from books, from advertising, and from selling and licensing information to other companies.