What Is a Business Model Change?
Entrepreneurs often struggle with trying to understand the concept of business model, which may seem abstract or technical. It can be simplified down to two basic components: how the company plans to generate sales revenue and the operational factors that will enable it to reach and maintain profitability. As the company proceeds from the startup stage, the model often changes due to new opportunities, new competitive threats or simply because the company learns more about what its customers truly need.
Defects in Original Model
One of the first tasks for a startup company is to design its business model. Many times this is done with limited knowledge of the market in which the company will operate — the management team may not even be certain the target customers will be willing to purchase the product. This original business model may prove to be flawed and changes must be made to it for the company to generate sales momentum.
Change in Value Proposition
Value proposition describes the collective benefits customers receive from using a product or service. The greater the value the customer perceives, the greater the chance he will choose to make a purchase. Companies don’t always know what is most important to their target customers. A restaurant may start with the value proposition of providing the lowest cost meals in its food category, but learn that what its customer base really wants is speedy service for takeout orders at noontime or after work. The business model will then be changed to focus on improving the production efficiency of the kitchen and reducing the food preparation time. The meal prices under the new model could go up.
New Revenue Opportunities
The company’s business model specifies what are the target customer groups. Marketing strategies are then formulated to reach these groups and persuade them to purchase from the company. New revenue opportunities often emerge as the company’s model proves to be successful. Management discovers that the products or services created for one group may be useful for these other groups as well. The business model is modified and expanded to include the new markets the company intends to reach.
Change in Competitive Environment
A business model is designed to help a company build a competitive advantage. Competitors respond by constructing their own models to create their own advantages. When an old model puts a company in an unfavorable competitive position, it has to be changed. This could involve a radical change such as discontinuing a product line that is no longer selling well, or it could be a matter of adding elements to the value proposition so the customers perceive they are getting more for their money than they did before.
As a company evolves from the startup stage to maturity, the business model usually changes with it. Companies might begin with a low price model to obtain its first customers. A new supermarket in an area could have a grand opening period when their prices are extremely low to get their competitors’ customers to come and see what the new store offers. If the new store has a superior value proposition in other areas, such as a much better selection of meat and produce, the business model can gradually be changed to prices that are comparable with competitors rather than substantially lower.