Business Model: What is It & Why is It Important? 

Business Model: What is It & Why is It Important? 

According to Joan Magretta in “Why Business Model Matter”, the term business model came into wide use with the advent of the personal computer and spreadsheet. These tools let entrepreneurs experiment, test, and model different ways so that they could structure their costs and revenue streams. In the simplest forms, business models can be broken into three parts: 

  • Everything it takes to make something: design, raw, materials, manufacturing, labour, and so on. 
  • Everything it takes to sell that thing: marketing, distribution, delivering a service, and processing the sale. 
  • How and what the customer pays: pricing strategy, payment methods, payment timing, and so on. 

In short, a business model is simply an exploration of what costs and expenses a businessperson has and how much he can charge for his product or service. 

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The significance of the business model is perceived due to the fact that it is a tool that helps the organisation to successfully achieve business goals. The following is reasons why business model is important, according to experts.

  • Define where the business is in the value chain
  • Determine what the customer gets out of it 
  • Determine the future of a business – whether it succeeds or fails 
  • Achieve success of any business 
  • Create a foundation for optimising innovative technology
  • Test out a new idea to see if it holds real promise of success
  • Create a clear statement of the business mission and vision
  • Create a set of values that can help to steer business
  • Create a clear-eyed analysis of the industry, including opportunities and threats
  • Create a portrait of potential customers
  • Create a roadmap and timetable for achieving goals and objectives
  • Form a description of the products and services that are offered
  • Form an explanation of marketing strategies
  • Create a handbook for new employees describing the company and its activities
  • Create a résumé that can be used to introduce the business to suppliers, vendors, or lenders.

Numerous researches in the area of entrepreneurship have shown that a company simply cannot be successful without a good and clearly set business model. Therefore, in the last few years, experts and owners of successful enterprises have dedicated a lot of effort and manpower in developing business models that are specially adapted to their goals and the desired impact of their businesses. 

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