Sometimes in conversations about business, terms get thrown around that are meaningful to some people and completely meaningless to the rest. The one term I think fits into this category is business model, so today I want to explore what it is and what lies at the heart of a business model.

Type ‘business model’ into Google and you will be overwhelmed with all the possible definitions. I decided to sort through the rubble, and I came out with a gem by Alex Osterwalder which says:

“a business model describes the rationale of a how a company plans to create, deliver and capture value.”

I love this definition, and I think it can be further broken down into two essential ideas:

1) ‘the rationale of how a company plans to’

Implies that there needs to be some strategic thinking and foresight about how the company will go about executing its strategy.

2) ‘create, deliver and capture value.’

At the heart of the whole business model concept is value, but this definition takes it to another level by focusing on not just creating value, but also delivering and capturing it.

The word value represents the benefit the customer receives from the experience a product or service provides. Theodore Levitt puts value into context with his observation that “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole.” By focusing on what the customer needs to get the job done, rather than the customer itself, it becomes easier to create, deliver and capture value.

When thinking about a business in terms of a business model, we are able to identify new opportunities to exploit. Typically an entrepreneur only thinks about creating value, which occurs when we bring a new idea to market. Now, however, we can think about ways to deliver and capture value. In other words, instead of just thinking about the value of the product or service itself, think about ways to make it easier for the customer to extract that value. This is how a business can generate new revenue streams and open up new markets.

An example of an innovative business model that reworked the value equation to also capture and deliver value is software-as-a-service (Saas). Saas allows individuals and businesses to access a software application through a web browser and pay a small monthly service fee. Prior to Saas, software was only delivered in a box with a high upfront sticker price and required a full download onto the host computer. The innovators behind the Saas business model saw an opportunity to deliver software as service over the Internet in the form of a cheap monthly subscription, rather than a bulky, expensive product delivered in a box. This opened up the software market to numerous individuals and businesses that weren’t previously using Saas because the model focused on ways to reach both customers and non-customers in new ways. As proof that Saas companies have better business models than traditional software companies, the average Saas company will be bought out for almost 2x as much as a traditional software company with the same numbers.

Overall, it is the customers who will ultimately determine whether a business is adequately able to deliver the value they seek. As the business landscape becomes increasingly more competitive, it is imperative to not only think about the value the product or service itself brings to the equation, but also the mechanism for delivering and capturing that value. If you want to get creative and talk about your business model over a cup of coffee, give us a call. And stay tuned as we dive deep into business models over the upcoming blogs.

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