Business Model Choice

A business model to be adopted for the venture idea is an essential choice that an entrepreneur has to make. In most cases, however, this choice is not thought through. Business models are an abstraction of how a specific venture engages with various actors in its ecosystem. In essence, it emphasizes the choices and the activities performed in creating value for the various actors. Despite its importance, entrepreneurs imitate a business model from a different domain, for their own business, without enough application of their mind.

To simplify the choices, it is vital to understand the nature of business prevalent today. We could classify most businesses today as either pipeline businesses or platform businesses. A pipeline business is built along the traditional supply chain from the source of resources upstream to the end consumer downstream. For example, consider iron ore being mined at one end, then sent to the mills to be converted to steel, which is then taken to the construction site as one of its uses. Platform businesses, on the other hand, act to facilitate multiple entities to transact at a single place. A typical example would be the traditional marketplaces, where sellers dealing in different commodities, aggregate at a single place from where buyers/customers come to purchase the various commodities.

Choosing a platform business model requires the entrepreneur to focus on multiple entities that need to be engaged to create and capture value. The reasons why each of these entities would be part of the platform becomes the central question. Subsequently, one needs to engage with various means to onboard the different entities. For example: if you are starting a cab-aggregator service – you would need to engage with both the cab-providers and the cab-users simultaneously. Only onboarding either of the two sides would not be enough for the other side to pick up. Further, one would often need to incentivize behaviour that would increase the use of the platform and iron out the various glitches that one may encounter in the usage of the platform.

If one were to think of a pipeline business model, it would begin with positioning the business at the right place in the existing supply chain. You could choose to be at the retailing end of it or move upwards in the chain and engage at the raw resource stage. The position in the existing supply chain of the industry you operate in would give answers to the next level of business model choice to be made. In this case, the choice of the business model can be specified with the nature of the entity in the pipeline you are dealing with, as the consumer of the value – businesses, government, or individuals. When the venture creates and delivers value for another business, it is business to business (B2B); business to the government is (B2G); to individuals, it is business to customer (B2C).

The above discussion should give one clarity of where, what, and how you would have to engage with the venture you intend to build. However, the next choice is to identify the subservient choices one would need to do in building the venture. We will explore this further in the section on canvases.

Ask yourself:

Have I chosen the right business model to generate and capture value from the business I intend to start? Or am I merely imitating a business model without applying my mind to it? Do my assumptions stand the test when I think through the venture idea and the business model I have chosen?