A New Framework for Business Models
By Mark Johnson
Quick: Describe your company's business model.
Having trouble? That wouldn't surprise me. In reality, there isn't really any consensus about what the term "business model" even means. Suggestions range from the all-encompassing, everything-in-your-value-chain approach to the reductionist "A business model is nothing else than a representation of how an organization makes (or intends to make) money."
That latter definition is from Peter Drucker. And while I applaud his attempt to reach for the essence of the idea, I think he went too far. A business model has to specify more than just how a company intends to make money. It also needs to include some information about why a customer would ever want to give the company any money.
As something of a middle ground, I've proposed (in both an HBR article and in more depth in my book Seizing the White Space) a framework meant to be specific enough to overcome the reductionist problem but selective enough to overcome the unwieldiness of the kitchen-sink camp. I've broken it out into four boxes that answer the following questions:
- Why would someone want to buy something from you?
- How will you make money selling it?
- What, exactly, are the important things you need to do to pull off the plan?
(I know that's three questions, but the answer to that last question comes in two parts, so the model requires four boxes.)
To answer the first question, you need to construct a customer value proposition (CVP)—not by trying to convince customers of the value of your products but the other way around, by identifying an important job a customer needs to get done and then proposing an offering that fulfills that job better than any alternative the customer can turn to. Generally speaking, the more important job is to the customer, the lower the level of satisfaction with current alternatives and the lower the price, the stronger the CVP.