Why is it Important to Identify a Business Model?

Board of directors in an office meeting

For every aspiring entrepreneur, the "eureka!" moment – that critical juncture where a brilliant, world-changing business idea comes to light – is a game-changer. You may have identified a wide-open gap in the market, or devised a product so revolutionary that the consumers and investors of the world will be queuing to give you money. Yet this process is only one small part of the battle; before you can raise the financing and other resources necessary to convert this idea into an actual, viable enterprise, you need to come up with a business model.

Indeed, the importance of a business model cannot be overstated. It is the framework in which you will distribute and sell your product or service, and ensures that you are securing the most optimal and sustainable return on your investments. Yet there is no one absolute model that represents the right approach for every business, meaning that you need to research and understand existing models – or even innovate your own.

This process is increasingly pertinent in today's market, as industries become disrupted and new, technology-driven models change the face of how organisations operate. After all, you could have the best product in the world, but if you don't know the most effective to way monetise it, you're throwing money away.

With this in mind, let's look more closely at the importance of business models, and how your chosen approach can impact your operations.

The Many Interpretations of a Business Model

"How does your firm intend to make money?"

This is a simple question, and the answer is essentially the fundamental driving factor at the heart of your business objectives. It doesn't refer to what you are going to sell, though; rather, it is aiming to identify how you are going to sell it. In the past, the answer to this question would ultimately represent the starting point of your company's model.

In the 1990s, however, business theorists started exploring other dimensions beyond money, such as the role of customers, markets, specific goals, and compatible strategies.

As a result, the general understanding of business models expanded. Companies began to view their models as stories, which could be shared with others and used to explain how you intend to make money from your idea.

In today's market, this concept is even more prominent. Your story should be able to convince others of how your product or service will solve a particular problem for your customer, and identify how your firm will make a profit from this transaction.

This should not be confused with your business plan, which is the strategic approach you take to implement your business model. The model itself sits at the core of this plan, and guides your long-term strategies.

The Importance of a Business Model

To illustrate the various ways in which this can occur, consider the following benefits of having a defined, structured framework in place:

It Drives Strategy

As mentioned, business ideas can be quite brilliant, yet vague and, at times, impractical. Creating a coherent business model around this initial idea clarifies a lot of essential things. 

For instance, what is the aim of your business? Who is your ideal customer? What value will they gain from your product? And how do you plan to reach the customer? These are all questions you need to answer before a viable business plan can be created.

Of course, the only way to do this is by thrashing out a business model. This can be a fresh new take, such as a platform-based approach, but it is not always necessary to reinvent the wheel; you can take inspiration from existing models. Walmart did not invent discount retailing, after all; they just took the most productive elements from existing models and crafted something better. There is no reason why you cannot do the same thing.

It's Ideal Preparation for Entrepreneurs

Good business models take time to develop. You have to consider many factors, such as the specifications of the product, the actual manufacturing process, sourcing of inputs, pricing strategies, target markets, financials, and more.

Learning about all of this will take time and a lot of research, but it also allows you to gain a robust understanding of the risks you will be undertaking when you launch your new business. This allows you to plan for a wider range of eventualities and creates a more future-proof organisation in the long run.

It Attracts Investment

In business, great leaders are generally able to influence others and convince them to work towards a particular vision. This can include a wide range of different stakeholders, from your employees and business partners to investors and external stakeholders.

Indeed, a compelling business model is the least you will need to gain any kind of traction in the funding arena. With so many startups launching each year, banks and VCs have a surfeit of options, so if you are able to not just pitch a product, but an entire, well-researched ecosystem of selling and reselling it, investors are going to be far more confident about making it happen.

It is the Zeitgeist of the Digital Era

Zeitgeist is a German word that means "the spirit of the age" and, ever since the technology bubble of the early 1990s, innovation in business models has become one of the defining features of the most successful businesses and startups.

Take the established tech giants of our era, such as Amazon, Google, and Facebook. Each redefined or reinterpreted classic business models in new, innovative and – as some would argue – controversial ways, yet the core framework of each platform has changed little since their respective inceptions.

It's not just about crafting new business models, either. Many established corporations are redefining their models to keep up with changing markets and trends, while, given the fast pace at which technology is evolving, there are still as yet unexplored ways in which models can be tweaked to bring new value to customers.

If You Don't, Others Will

This is just a logical extension of the above point and, perhaps, the bluntest argument for creating a business model. Given the astounding success of tech unicorns, having a unique business model (or aspiring to one) has become the norm.

As a small business, you will be competing with other startups for funding and resources. If you do not have a business model in place, you will be at a significant disadvantage. If you are truly serious about your entrepreneurial vision, it is vital to research, identify and implement a model that is viable, sustainable, and cost-effective, and ensure that you are not missing an opportunity that somebody else will inevitably exploit further down the line. This is why it is such an important element of the business jigsaw puzzle, and why ignoring or overlooking it can be so costly to your entrepreneurial vision.

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