A business model describes the goods or services a company produces, the processes of production, and the goals the company has identified. The model is necessarily shaped as well by factors external to the company. External factors include an identified customer base, competitors, and the marketing approach to reach the customers.
Identifying Potential Customers
Goods and services do not exist in a vacuum. They are designed to meet the needs of a particular population. The size, scope, and purchasing power of this population correspondingly informs how the business should operate. A manufacturer of aftermarket automotive accessories, for example, sells primarily to hobbyists with incomes over $150,000 a year. A vegan restaurant, by comparison, may target a customer base focused on lifestyle with annual incomes of $45,000 or less. Similarly, a business to business company must gauge the health of its chosen industry, and choose the retailers that will market its goods or services for the greatest return. Selling to retailers with a bad reputation for customer service will not benefit the goods or services.
If another business provides the same goods or services as your company, its actions will directly affect your business model unless you differentiate. In the case of the automotive aftermarket company, if a competitor has priced the same goods at a 15% reduction, your business model will have to come up with a way to either justify your higher costs or slash prices to remain competitive. For example: a manufacturer who can sell an antique radiator to a jobber (or a B to B) for $297.50 will directly threaten the pricing infrastructure of another manufacturer who sells an antique radiator to a jobber for $350.
Marketing costs are an external factor that directly impacts the overall business model. Because marketing expenses can change rapidly, based on how fierce the competition is and where your ideal customer base is located, a business model should plan on spending the maximum amount for marketing over a multi-year period. If you are selling to a local market, you will concentrate your marketing budget in local media and word of mouth. If you are selling to an international market, you will need to spend money on advertising in international publications. Additionally, if your competitors are advertising special sales or rates, you will need to match their campaigns.
- "Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers"; Alexander Osterwalder, Yves Pigneur; 2010
- "Guide to Business Modelling"; John Tennent, Graham Friend, Economist Group; 2005
Julia Lai is a frequent contributor to Los Angeles-based arts and literature publications. She graduated from University of California, Los Angeles with a bachelor's degree in history and has been writing professionally since 2008.