Again, just as with the post on understanding market demand, I know from experience that these concepts are best explained with examples, so here we go...
Choices facing the caffeine heroes of Premier Law School
Alpha and Beta have many, many decisions to make. Let's pick a few:
| Parameter | Options |
|---|---|
| Type of cup | Disposable paper OR reusable metal? |
| Customer choice | A single pot of pre-mixed coffee OR prepare each cup to order? |
| "Vibe" | Minimal chit-chat OR friendly banter with customers? |
Both Alpha and Beta could run their respective businesses with any combination of answers to the above questions, but there are certain combinations that that make more sense than others, because they tend to reinforce each other. As discussed earlier, it's these combinations of choices that effectively create distinct business models. Let's play this through:
Alpha's business model
Alpha is already establishing himself on a high-traffic pathway between the dormitories and the main campus. It's a crowded, busy pathway, and his customers will likely be on their way. Disposable cups are likely going to be more appropriate, so customers can grab their coffee and be on their way. It's probably a good idea to keep a pre-mixed pot so customers can be served as quickly as possible, and Alpha will probably do well to concentrate on making and pouring coffee as quickly as he can.
Beta's business model
Beta, by contrast, might find that if his clients are willing to take a small detour to sit in the shade, they are also going to appreciate a more solid cup that doesn't disintegrate after a few minutes. They might value the ability to tweak the amount of milk and sugar in their coffee, and they might enjoy a little bit of banter.
You can start to see how Alpha's coffee business is starting to look like a high-volume, low-cost B2C business model, and Beta's is starting to look like a service quality-focused B2C business model. But you could possibly create other business models using different combinations of choices. There is no single, right answer. Indeed, multiple businesses can coexist, competing, coexisting or even collaborating.
 |
| Cheap and disposable? Or rugged and reusable? |
What about Gamma?
Gamma faces choices of his own:
| Parameter | Options |
|---|---|
| Buy from whom? | Commit to one supplier OR shop around? |
| How much coffee should he buy at a time? | Exactly what Alpha and Beta need OR more? |
| What quantities should he sell? | By the bag OR by the kilo? |
| What should his payment terms be? | Cash only OR credit too? If yes, what terms? |
Gamma's options can also be clustered to create a couple of B2B business models. He could, for example, aggressively hunt for the best price, buy only what he thinks he can sell, and sell by the kilo. This just-in-time model has the advantage of low wastage, but if there is a spike in demand he might not be able to take advantage of the opportunity. Or he could try to lock in a longer-term deal with a single supplier, commit to purchasing a set amount per week, and also have a little extra stock on hand. That slightly more market utility type of business model might forgo short-term optimization for a more stable, long-term role in the ecosystem.
Beware, though: discerning what a company's business model is, is not always easy. Marketing hype, arcane pricing structures, leadership drama and the company's own desire to be seen as innovative, strategic and sophisticated, all add to the noise. But even the most complicated conglomerate, and even the most space-age start-up, can be disaggregated or abstracted to some basic inflows, activities and outflows. If you can identify what company's core value-creating activities are, and reason out why the company chose to carry out those activities in one specific way rather another, you will be well on your way to understanding their business model.