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Why Business Models Are Important to Understand

One foundational element that has a lot of influence on a company’s track is the business model it adopts. This is not a mere strategy or operational plan. A business model is a blueprint that determines a company’s core identity and competitiveness. The choice of a business model is therefore critical for entrepreneurs.

A business model provides a comprehensive representation of a company’s business logic, explaining how it operates, creates, delivers, and captures value. It pinpoints the products or services that the business will offer, its target market, anticipated expenses, and the strategies it will employ to generate profits.

The business model serves as the DNA of a company. Before you start your business, you’ve got to decide which business model you want to apply. Even if you’ve already started your business, you can still review it to know if it is the right fit. We’ll discuss in this article why choosing the right business model is so important.


Value Creation and Delivery

At the heart of every business model lies the fundamental process of value creation and delivery. This involves crafting a unique value proposition and delivering it to the target market in a way that distinguishes the company from its competitors. The business model outlines this process. When you have a clear understanding of your business model, you’ll know the means through which the company creates, markets, and provides its products or services to customers.

Value creation is what helps you sell your products and services to your customers. What value are you giving to the market? And, why should they choose you over someone else? A well-selected business model guides a company in identifying and leveraging its unique selling points. It helps to uncover the gaps in the market that the business can fill with its offerings. In essence, it’s about answering the question, “What unique value do we bring to the market that separates us from our competitors?”

Let’s use the subscription-based model, as an example. You may decide to start a subscription service that offers access to your service for a monthly fee. This removes the burden of the upfront cost of buying the produce. By doing this, it allows customers to enjoy a service or product for a longer period.

However, creating value is only half of the equation. The other half involves delivering this value to customers effectively and efficiently. In other words, not only do you need to create value, you need to deliver it. 

The right model enables a company to create unique value propositions and deliver them effectively to the right audience. Choosing the wrong model can lead to the business getting lost in the crowd and unable to distinguish itself from competitors.


Business Models and Financial Viability

When discussing the intersection of business models and financial viability, it is crucial to understand the fundamental role a business model plays in shaping a company’s financial health. Essentially, the business model serves as a blueprint for how a company generates, distributes, and retains its wealth. It outlines the key strategies for revenue generation, identifies the core cost structures, and lays out the financial mechanisms that sustain the operations.

Selecting the right business model is akin to setting a course for a ship. Just as a course determines whether the ship reaches its destination, a business model steers the financial journey of a business. An inadequate model can lead to a multitude of financial issues, including unsustainable costs, poor cash flow, and ultimately, insolvency.

For instance, imagine a business that opts for a low-cost leadership model in a luxury market segment. This choice would likely result in low-profit margins, inability to cover operational costs, and eventual financial instability. Conversely, a value-driven business model in the same market could justify higher prices, leading to better profit margins and financial sustainability.

In addition, different business models exhibit varying degrees of financial efficiency in different sectors. For instance, a subscription-based model, characterized by recurrent revenue and predictable cash flows, is a perfect fit for the software industry. However, applying the same model to a traditional retail business may not achieve similar results. This is due to inventory carrying costs and irregular purchasing patterns.

Understanding the financial implications and sector suitability of a business model is crucial for entrepreneurs. It enables them to anticipate potential financial bottlenecks. It also helps them plan for profitability and the financial sustainability of their business.


Attracting Investors with the Right Business Model

From an investor’s perspective, a well-defined business model is a strong indicator of a company’s potential for success. Investors examine a business’s model to evaluate its potential for returns on their investment. And, scalable business model can instill confidence in potential investors.

When the business model provides a clear picture of how a company intends to be valuable to the marketplace, it enables investors to assess the prospects for future profit. The model you choose demonstrates a solid understanding of market dynamics. If you choose the right model, you’ll attract the right investors

This is because investors are often interested in scalable models. This means growth without a proportional increase in costs. For instance, a software-as-a-service (SaaS) model is attractive because once the initial software is developed, it can be sold to many customers with minimal additional costs.

Investors also value innovative business models that disrupt existing markets or create new ones. These models show that the business can adapt to changing environments and seize new opportunities.

For instance, Uber disrupted the traditional taxi industry with a model that leverages modern technology to offer more convenient and efficient services. This type of innovative approach can attract investors who are interested in funding businesses with the potential for high growth and significant returns.



Ultimately, choosing a business model is not a one-time decision, but an ongoing process. Businesses grow and evolve. Also, markets shift and customer needs change. This means that adjustments or complete change of the original business model may happen. Entrepreneurs must invest considerable time and effort into understanding, selecting, and refining their business models.


Also read:

What is the Retail Business Model and How Does it Work?

What is the Peer-To-Peer Business Model and Does it Work?

Ralph Paul on Twitter
Ralph Paul
Ralph is the Managing Editor at StartUp Mindset. The StartUp Mindset team consists of dedicated individuals and is designed to help new, seasoned, and aspiring entrepreneurs succeed.

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Business Models · Find Your Way · Grow Your Business · Leading Your Team · Sales · Your Mindset

Ralph is the Managing Editor at StartUp Mindset. The StartUp Mindset team consists of dedicated individuals and is designed to help new, seasoned, and aspiring entrepreneurs succeed.

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