The parts of the business model

A business model is essential in defining how a company operates and generates value. It delineates the target market, customer segments, and the value proposition offered to customers. It also explains how a startup captures some of that value for itself, thus determining the viability and sustainability of the business. The business model framework addresses both the internal and external processes of a company, including its interactions with partners, distribution channels, and customers.

Key Aspects of the Business Model Framework

According to Alex Osterwalder, there are four key aspects to any business model:

1. The Offering
2. The Customer Side
3. The Infrastructure
4. The Finances

Each of these components must be carefully considered to build a robust business model.

1. The Offering

The offering is central to the business model, focusing on the value proposition—the core value that a business promises to deliver to its customers. The value proposition is delivered through various means, such as products or services, and is communicated through distribution channels. The effectiveness of this delivery is influenced by the company's marketing activities and relationship management with customers.

A value proposition typically includes the following elements:

• What is offered: The products or services provided to customers.
• Value or benefit: The specific advantages customers gain, such as cost savings, time efficiency, or improved satisfaction.
• Differentiation: How the offering stands out from competitors in the market.

2. The Customer Side

Understanding the customer side is crucial to defining the target market segment and determining what motivates customers to buy. Key considerations include:

• Target Market Segment: Clearly defining who the ideal customers are and understanding their needs.
• Customer Relationships: Deciding the type of relationship to maintain with each customer segment, whether it’s transactional, subscription-based, or something else.
• Distribution Channels: Choosing the most effective channels to deliver the value proposition, which might involve balancing the complexity of the solution with the simplicity of the marketing strategy.

3. The Infrastructure

The infrastructure of a business model consists of the resources and processes needed to deliver the value proposition. This includes:

• Core Capabilities: The skills, assets, and expertise that the business brings to the table, which are essential for creating the offering.
• Partners and Allies: Collaborations with third parties and suppliers that complement the business’s capabilities and help deliver the offering effectively.
• Value Configuration: A description of how all the components—such as core capabilities, partners, and processes—work together to create, deliver, and capture value.

4. The Finances

The financial aspect of the business model is critical to ensuring the business's profitability and sustainability. It involves:

• Revenue Streams: Evaluating the ways in which the business generates revenue, whether through direct sales, subscriptions, licensing, or other methods. The key question here is whether the pricing strategy optimizes the volume and profitability of sales.
• Cost Structure: Analyzing the costs associated with running the business, including the infrastructure, production, and distribution costs. It’s essential to ensure that the cost structure offers a reasonable profit margin.