Every business needs to have its vision (or purpose) and its mission (the ‘how’) but the way in which each business goes about achieving these very much depends on the ‘business model’.
You may have heard people talk about a business model but what is your business model?
For many, it the way in which your business goes about doing its work and the processes and systems used however, these are just the detailed workflow processes that are needed to produce the products for the customers.
You might think that the business model for selling and building new homes for customers would be the same for every residential builder. In a broad sense, yes however, your USPs and your strengths can differentiate your business model from other residential builders.
There’s a reason why I started to help you develop your vision, mission, core values and USPs first before anything else since you need to understand these before you can develop your business model as they will help determine some of the aspects of your business model.
The best way to describe what your business model ‘looks’ like is by using a concept developed by Alexander Osterwalder back in the early 2000’s and published in his book ‘Business Model Generation’ in 2010. Since then, the business model canvas has appeared in many forms as a tool to help you build up your business model.
Over the years, I have helped many businesses create their business model canvas into a strategic tool that helps the business understand where they want to be in say 3- or 5-years’ time, and the strategies and goals that need to be put into action to achieve the strategic plan that fits with their vision and mission.
The most common comment I hear from business owners when the business model is created is that for the first time, they can ‘see’ their business and understand how it all works together.
While this article is not going to complete your business model for you, it will explain all the parts of the business model and some tips on helping you develop each of these components and give you a better understanding of the various parts of your business and how they interrelate to one another.
Your business model is broadly divided into the Customer Management and the Operational Management sides of the model. You will need to focus on the Customer Management components first because you will have no idea what to include in the operational side until you know what you are focussing on with customers.
The Customer Management side of the business is broken into the following components:
· Target Markets
· Distribution Channels
· Customer Relationships
· Revenue Streams or Structure
Let’s discuss each of these in more detail.
Target Markets -The different groups of people or organisations a business aims to reach or serve.They could be grouped by demographics, common needs, common behaviours. E.g.
· Baby boomers – born 1945 – 1963
· Professional families
· Custom residential builders
· Couples aged 25 yrs – 35 yrs -first home buyers
Different customer segments can be defined if:
· Their needs require and justify a distinctly different offer;
· They are reached through a different “Distribution” channel;
· They require different types of “Relationships”;
· They have substantially different revenue streams; or
· Customers are willing to pay for different aspects of the offer.
Who are you creating value for?
Distribution Channels – These are the channels or how a company communicates with each “Market” to deliver its “Value Propositions”. The “Distribution” channels are the customer touch points in the overall customer experience.
The “Distribution” channels can serve to:
· Raise awareness about your “Value Propositions”.
· Help customers evaluate your “Value Propositions”.
· Allow customers to purchase specific products and services.
· Deliver a “Value Proposition” to a customer; and
· Provide post-purchase customer support.
How do you want to reach your “Markets”? Channels could be direct or indirect through “Partners”. “Distribution” needs to be integrated to be efficient and cost effective. How can you integrate the channels with the customer journey?
Customer Relationships - This describes the types of “Relationships” a company has with its specific customer “Markets”. You will need to clarify the type of relationship you want to have with each “Market” segment.
Each “Relationship” could be driven by:
· Customer acquisition;
· Customer retention; or
· Boosting revenue (upselling).
The “Relationship” deeply influences the customer experience. How are your “Relationships” integrated with the rest of your business model?
Revenue Streams or Structure - The “Revenue” streams are the cashflow/s created by each customer “Market”. “Revenue” streams could have different pricing structures such as fixed prices, volume dependent, market dependent, or negotiation.
Revenues could be one-time payments or recurring revenues. What “Value Propositions” are your customers willing to pay for and how much?
Once you can decide on each of the four Customer Management components, you will be able to determine what is required on the Operational Management side to deliver the aspects of the Customer Management side of the business. The operational aspects usually come with a cost and so it is this side of the business model that produces the cost of sales and overheads involved in operating the business model.
The Customer Management side of the business is broken into the following components:
· Resources
· Functions
· People
· Partnerships
· Costs
Let’s discuss each of these in more detail.
Resources -The “Resources” are the key assets required to make the business model work.
They can be physical, financial, or intellectual, owned or leased. The “Resources” allow the business to create and offer the “Value Propositions”, reach the customer “Markets”, maintain the “Relationships” and earn the “Revenues”.
The “Markets”, “Value Propositions”, “Distribution” channels and customer “Relationships” and “Revenue” streams all require “Resources”.
Functions - The “Functions” are the most important things a business must do to make the business model work. The “Functions” create the “Value Propositions” for the customer “Markets”
The “Functions” or activities are required to reach the target “Markets”, maintain the “Relationships” and earn “Revenues”.
People - “People” are a separate “Resource” that are required to drive all the components of the business model. “People” are highlighted separately to ensure a deliberate focus is given to the management of the most important “Resource” of a business as without them a business fails.
“People” are operational, but some will focus on the Customer Management side. They can be categorized under the “Functions” or the Customer Management areas.
Partnerships - The “Partnerships” describe the network of suppliers and other businesses required to make the business model work. Partners are acquired to optimize the business model, reduce risk or acquire resources.
“Partnerships” could be:
· Strategic alliances– between non-competitors;
· Joint ventures – to develop new business; or
· Buyer-supplier – to assure reliable supplies.
Costs - The “Costs” describe the costs incurred to operate and make the business model work.
All costs can be calculated from the “Resources”, “Functions”, “Partnerships” and “People” on the Operational Management side which in turn create and support the Customer Management.
Some business models could be ‘cost’ driven and therefore the ‘cost structure’ drives all the other components of the business model.
All of this is great, but you will need to put a goal or time related focus on where or what you want the business to be in say 3 or 5 years’ time and what the aspects and components of the business model that need to be in place to achieve that goal or strategy. Once that is determined, you can make some decisions about what your business model needs to look like.
The next step will be to work out what you already have in place and what is missing and needs to be achieved, created or put in place to achieve the ‘ideal’ business model.
This step highlights some more goals and actions you need to take to build the ideal business model. You have created your action plan for the next three years and hey presto, you have a Strategic Plan.
If all this sounds too hard, Alpha Edge can run a one-day workshop to help you build your ideal Business Model with our ‘Strategic Focus’ workshop. Contact us to book in your workshop and find out what your business model ‘looks’ like.
The whole purpose of The 3C Mentor and Alpha Edge is to help create really great businesses in the residential building industry and delivered by our unique ‘Four Pillars to Your Success’ – Business Coaching, Business Consulting, Business Resources and Construction Software.
For an overview of these four pillars go to Alpha Edge here. To find out more about our Business Coaching go to The 3C Mentor here, for further information about the services Alpha Edge can provide go directly to Alpha Edge here and to access the many documents and resources you need as a residential builder, go to our Builder’s Business Resource Centre here. For more information on the construction software and how to ‘Be a Better Builder’, click here
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