Components of a Business Model

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Characteristics of a Good Business Model**

Review of the business models of 70 companies finds no single model guaranteed to produce financially superior results; however, the more successful models do share three characteristics.

First, they offer unique value—sometimes in the form of a new idea. More often, it is a combination of product and service features that offers more value; lower price for the same benefit or more benefit for the same price. Home Depot, for example, combines the low price and selection of a superstore with the knowledgeable advice of a full-price specialty hardware store.

Second, winning business models are hard to imitate. By establishing a key differentiator, such as customer attention or superb execution, these models build barriers to entry that protect their profit streams.

Finally, successful business models are grounded in reality. They are based on accurate assumptions about customer behavior. Their cost structures fit their revenue streams, day in and day out. Obvious? Many firms, new and old, lack a clear understanding of where they make money, why customers prefer their offerings and how many customers actually sap revenues.

Since organizations compete for customers and resources, a business model must highlight what is distinctive about the firm—how it wins customers, woos investors and earns profits. Effective business models are rich and detailed and the components reinforce each other: change any one and you have a different model.