Nobody talked much about business models until suddenly a lot of businesses, which were valued for a lot of money, didn’t have them.

For almost any traditional business, the business model is so obvious that you don’t have to talk about it. Stores sell goods. Restaurants sell meals. Hotels sell lodging. Airlines and taxis sell transportation.

Think of the business model as how you make money. How you get money out of your customer’s pocket and into your bank account.

The new businesses, mainly Web businesses, need to explain how they make money. Some of the most highly valued businesses in the world–Facebook, for example–don’t have an obvious way to make money.

Some businesses still get away with generating traffic, so-called eyeballs, but not money. The underlying assumption in these cases is that the traffic means a likelihood of being able to generate money somehow, some day.

And if you want to be really trendy, use the phrase “business model” to mean type of business. This can get really interesting. Take a look at Alexander Osterwalder’s Business Model Design and Innovation, for example, a blog focusing on new ways to do business. Here’s how he defines the business model:

A business model is a conceptual tool that contains a set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing and delivering this value and relationship capital, to generate profitable and sustainable revenue streams.

Along with that he adds nine points:

  1. The value proposition of what is offered to the market;
  2. The target customer segments addressed by the value proposition;
  3. The communication and distribution channels to reach customers and offer the value proposition;
  4. The relationships established with customers;
  5. The core capabilities needed to make the business model possible;
  6. The configuration of activities to implement the business model;
  7. The partners and their motivations of coming together to make a business model happen;
  8. The revenue streams generated by the business model constituting the revenue model;
  9. The cost structure resulting of the business model.

This is perhaps a bit thick in language, but still, a nice summary of a business. It’s a good list.

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Tim BerryTim Berry
Tim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Follow him on Twitter @Timberry.