When analyzing a Business Model
, analysts often compare a company’s gross profit, which is total revenue minus the cost of goods sold. Gross profit, in essence, indicates how effective a business model is. Besides gross profit, analysts also look at cash flow and net income, which is gross profit less operating expenses. A clear understanding of these areas’ numbers can help you determine whether your company is ready for a public launch.
What is a business model? It is a strategy that defines how a business makes a profit. It identifies the products or services that it sells, the target market, and its anticipated expenses. It also helps a company determine marketing strategies and project revenues and costs. An effective business model will be sustainable and able to sustain growth over time.
Define a clear value proposition. What makes your business unique? Is it specialized, or can others copy it? List both fixed and variable costs. Figure out how much to charge for each of those items or services. Consider whether switching costs will deter customers from churning or if the product or service will produce recurring revenue. If so, then your model is ready to go. If not, try tweaking your business model until it meets your goals.
A manufacturer sells finished products. They may sell to consumers or other businesses. For example, shoe companies sell to consumers directly, and dress manufacturers sell to other businesses. The latter sells the dresses to the public. The business model portfolio is an excellent example of an evolving model. A business model portfolio can help assess a company’s potential to grow and thrive. You can develop a profitable business with the right strategy and business model.