Business models

"The three pillars of business viability: marketing, operations, and finance."

The pandemic and the resulting quarantines resulted in many new home businesses. However, even prior to the pandemic, there has been a trend of individuals setting up businesses. Three factors contribute to this. 

First, internationally, governments realize that encouraging entrepreneurship helps build economies. Second, the available tools and services now make it much easier for individuals to establish and operate a business even for a very niche market. Advances in e-Commerce and global logistics mean that entrepreneurs can reach markets far from home. Third, the younger generation is much more comfortable online and is also much more likely to want to be independent and want to run their own show. So, I thought that an examination of basic business models would be a good way to end January.

The basics

First, a clarification. It must be clear that, for our purposes, the primary goal of business is to make money – that is to make enough of a profit on capital employed. 

This is important because there are many so-called businesses that are simply self-supporting hobbies. These businesses make the owner happy. The company does not lose money. However, the company does not make enough of a profit either. 

In the extreme situation, the owner does not even pay himself a salary. Many retirement businesses are like this. They are essentially hobbies. Some businesses are vanity businesses. They are less about allowing the owner to engage in a pleasurable activity. Instead, they exist so that the owner can point to the business and say they own it. Some restaurants and bars fall in this category.

I should point out that there is nothing wrong with either of these variants of enterprise. They are simply not what we will be talking about here.

Whether your business began as a hobby, a lucky accident or born of a well-researched plan, the early days of a business require the business owner to address a few key imperatives. 

Perhaps the easiest way to think about starting a business is to think of the three pillars of business viability: marketing, operations, and finance. Until these three critical building blocks have been sufficiently addressed, there is no real business being built.

Essentially, this means there needs to be a clear path to sustainable revenue, a method for producing the product or service at scale and at a profit, and a mechanism for ensuring that the capital required to keep the business running is available. For today, we focus on marketing, operations, and profitability.

Before the rise of online businesses and the occasionally irrational exuberance involved in corporate buyouts, the heart of business was relatively simple: generate sales. Offer a product or service that is appealing to enough consumers. 

In a competitive marketplace, this means that your product or service must be competitive, meaning that consumers choose your market offer over other alternatives. In business model lingo, this is called the unique value proposition. In the language of strategy, we expect this value proposition to stem from a sustainable competitive advantage. This means it is rooted in an asset or capability that the enterprise owns and that is difficult to copy or emulate.

Basic business models 

For many businesses, the simple transaction of product or service for revenue is still at the heart of the business model. These businesses can sell directly to the consumer, either individuals or institutions, or can go through distributors, including retailers but the heart of the business is the simple transaction. For these businesses, often referred to as pipeline businesses, the heart of operations lies in managing the supply chain efficiently to generate a profit. The ability to create relationships with the correct partners, whether suppliers or distributors, is critical to these businesses.

A slightly more complicated business model than the straight transaction model is the business that relies on advertising. For traditional media, the business model relied either on generating revenue from ticket sales (such as for movies) or on generating enough of an audience for advertisers. In the case of live shows such as for concerts, income revenue could also be generated through merchant concessions.

Where the business can create a franchise property, such as for example, the marvel universe, then licensing the rights to the use of character images also provides a potentially lucrative revenue stream.

In businesses reliant on advertising, revenue follows the size and quality of the audience. 

Revenue generally comes from advertisers who pay for the opportunity to put their message in front of an audience. In many ways, traditional media was also a pipeline business, relying on managing a pipeline of content to keep content consumers such as readers, listeners, or viewers coming back. However, one critical difference between media and traditional product businesses is the visibility of talent. 

While virtually all businesses rely on talent in some manner, in media, the talent is visible to the consumers and often determines the size and quality of the audience. This is especially apparent in entertainment where we see how important on-screen talent are to maintaining an audience. However, what quickly became apparent to major studios is that the individual who can generate the ideas and make them come to fruition are just as, and often even more important, than onscreen talent. 

For these companies, talent and relationship management is even more critical. While some television franchises end because the audience grows tired, some end simply because a critical actor decides to bow out of the series. 

What the internet has made possible for entertainment is consumption on demand. Whereas television relies on schedules, online streaming means that content can be accessed at any time. The beauty of this system is that the same content can continue to make money for years. 

For these businesses, there are generally two basic revenue sources: advertising or access for a fee. For many of these models, building an audience is key to success and creating a pay wall is a barrier to building an audience. To address this, businesses can resort either to the free trial or the two-level access (freemium) approach with some free content and some (premium) content behind a pay wall.

The critical matter to understand in these businesses is that the key to business success for these businesses is maintaining the audience. This, in fact, is the heart of the success of the building of platform businesses such as Facebook or Amazon. It is not simply about the technology. It is about creating and maintaining the community.

Next week, we discuss platforms.
 

Readers can email Maya at [email protected].  Or visit her site at http://integrations.tumblr.com.