February 17, 2024

A business model is an outline for how your company plans to make money. In general, a business model explains four things: What product or service a company will sell. How it intends to market that product or service. What kind of expenses the company will face. How the company expects to turn a profit. What Is a Business Model? The term business model refers to a company’s plan for making a profit. It identifies the products or services the business plans to sell, its identified target market, and any anticipated expenses. Business models are important for both new and established businesses. They help new, developing companies attract investment, recruit talent, and motivate management and staff. Established businesses should regularly update their business model or they’ll fail to anticipate trends and challenges ahead. Business models also help investors evaluate companies that interest them and employees understand the future of a company they may aspire to join. Understanding Business Models A business model is a high-level plan for profitably operating a business in a specific marketplace. A primary component of the business model is the value proposition. This is a description of the goods or services that a company offers and why they are desirable to customers or clients, ideally stated in a way that differentiates the product or service from its competitors. A new enterprise’s business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy, a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company. Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands.When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company’s business model. Admittedly, the business model may not tell you everything about a company’s prospects. But the investor who understands the business model can make better sense of the financial data. Evaluating Successful Business Models A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable. Counting costs to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses.One way analysts and investors evaluate the success of a business model is by looking at the company’s gross profit. Gross profit is a company’s total revenue minus the cost of goods sold (COGS). Comparing a company’s gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model. Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income. That is gross profit minus operating expenses and is an indication of just how much real profit the business is generating.The two primary levers of a company’s business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many analysts consider gross profit to be more important in evaluating a business plan. A good gross profit suggests a sound business plan. If expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves. Types of Business Models Retailer- One of the more common business models most people interact with regularly is the retailer model. A retailer is the last entity along a supply chain. They often buy finished goods from manufacturers or distributors and interface directly with customers. Example: Costco Wholesale Manufacturer- A manufacturer is responsible for sourcing raw materials and producing finished products by leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods or highly replicated, mass produced products. A manufacturer can also sell goods to distributors, retailers, or directly to customers.Example: Ford Motor Company Fee-for-Service- Instead of selling products, fee-for-service business models are centered around labor and providing services. A fee-for-service business model may charge by an hourly rate or a fixed cost for a specific agreement. Fee-for-service companies are often specialized, offering insight that may not be common knowledge or may require specific training.Example: DLA Piper LLP Subscription- Subscription-based business models strive to attract clients in the hopes of luring them into long-time, loyal patrons. This is done by offering a product that requires ongoing payment, usually in return for a fixed duration of benefit. Though largely offered by digital companies for access to software, subscription business models are also popular for physical goods such as monthly reoccurring agriculture/produce subscription box deliveries. Example: Spotify Freemium –Freemium business models attract customers by introducing them to basic, limited-scope products. Then, with the client using their service, the company attempts to convert them to a more premium, advance product that requires payment. Although a customer may theoretically stay on freemium forever, a company tries to show the benefit of what becoming an upgraded member can hold.Example: LinkedIn/LinkedIn PremiumSome companies can reside within multiple business model types at the same time for the same product. For example, Spotify (a subscription-based model) also offers free version and a premium version. Bundling- If a company is concerned about the cost of attracting a single customer, it may attempt to bundle products to sell multiple goods to a single client. Bundling capitalizes on existing customers by attempting to sell them different products. This can be incentivized by offering pricing discounts for buying multiple products.Example: AT&T Marketplace– Marketplaces are somewhat straight-forward: in exchange for hosting a platform for business to be conducted, the marketplace receives compensation. Although transactions could occur without a marketplace, this business model attempts to make transacting easier, safer, and faster.Example: eBay Affiliate- Affiliate business models are based

Within the retail sector “hero items” or “destination items” are the standout products that attract customers to specific stores and drive additional sales, whether those are discretionary purchases or the weekly supermarket shop. The challenge for retailers is how to effectively measure performance to successfully identify these items, and what marketing strategy and tactics they should then apply to attract more customers and drive sales. What is a Hero Product? The hero product of the brand is usually its best seller, and one that takes pride of place in displays and presentations. If you could only sell one product from your brand, this is it. Or perhaps your brand only has one product. Don’t Have a Hero Product? Don’t Worry There are two options at this point: either you don’t know which of your many great products you should position as your hero, or else you have yet to create your hero product. If you are in the first camp, ask around, get people to try all your products, and figure out which is the best contender. Make sure it fully aligns with your brand and represents you well, and then commit to its new position as hero! If you are ready to create your new hero products, here’s a quick guide to designing a new product, without getting too specific for each type of cosmetic. Start by clearly defining your brand message and values. If you are all about organic, make sure your hero product is organic too. Write down the key points to uphold the brand promise. What problem do you want this product to fix? Be clear about the pain point you or your customers face that requires the help of this product. For example, targeting fine lines and plumping skin may be a better and more specific goal rather than simply “anti-aging”. Don’t get carried away trying to fix too many things with this product, unless what makes it a hero is that it’s a one-stop shop. Make sure that every part of your product is worthy of being the hero. This includes design and packaging, the name (choose one that can expand—see point 5), the price point, the ingredients, its retail location(s), etc. This can take time, but it’s important to get it right. Be strategic in making it the star. Give it top billing, and be aware that if you execute its rise to fame correctly, the hero product may turn into the leading product of your hero line. If the original product is good enough, then you should consider creating products embodying the same ideals that flesh out a whole routine or similar. Market the Hero Product Marketing your hero means having a beautiful product, with appropriate packaging, that can do most of the talking for you. Your goal is to get your hero everywhere, in front of everyone who might use it. Having just one product to promote is often easier than promoting a whole brand. Some concrete steps to increase awareness include: Request reviews from happy customers and publicize responses Send to social media influencers to get honest reviews and create peer trust amongst their followers (social proof) – Conduct trials or studies if relevant to back up any claims (but be careful with FDA regulations) Create samples and provide to any willing participant, requesting feedback or a mention on social media Invite customers and friends to build a focus group. This can give you important outside information and opinions if you feel too close to the project. How to Identify Your Next Hero Product You’ve had success with your Hero Product, but now it’s time to expand your product line and improve your profit margin. With the success of your Hero Product, you’ve been able to build your company and your team, but you might be starting to get concerned that you are hitting a ceiling for that product’s market size. It’s getting harder to sell your Hero Product, and your Return on Ad Spend (ROAS) to drive new customers to your brand isn’t yielding the same returns that it used to. You know that there is still plenty of headroom for your company to grow into, but you aren’t sure that it is going to come from your existing product line. At this point, customers are happy with their current products, and they have submitted plenty of feedback and feature requests. While you believe that your Hero Product will continue to drive your business forward, you also realize that it is time to start adding other hit products to your catalog. So, the real questions you are asking yourself are:  What product do I make next? Will my customers love it as much as they loved my first Hero Product?  If you want to create another Hero Product, and many more after that, here’s what you’ll need to know: How to understand and analyze the data you already have How to use customer data to your advantage How to get customer input on new product development through effective surveys Getting More out of Your Data- Sales data on your current products will be one of the best ways to find out easy wins in new products. Off the cuff, you’re probably very familiar with how your products are selling, but have you taken a deep dive to really understand how each product is selling?   You may have other questions. Why are some products outselling others? Why do some older products continue to outsell new releases? Why do I keep having to discount some products just to get them out of our warehouse? Deeply analyzing your data with this sort of questioning will be necessary to help you paint a picture of what makes your Hero Product so popular and what makes your Slow Movers struggle in comparison. Focus on understanding what makes your Hero Product so successful and try to identify what were the misses with your Slow Movers. It can be tough to identify the exact causes, but customer reviews