A Business Model Essence, according to FourWeekMBA, is a way to find the critical characteristics of any business to have a clear understanding of that business in a few sentences. That can be used to analyze existing businesses. Or to draft your Business Model and keep a strategic and execution focus on the key elements to be implemented in the short-medium term.
What is and why a Business Model Essence is important
Not all businesses are born equal. We can categorize them based on several characteristics, and based on the level of granularity, we can find more or fewer differences.
A solo business isn’t as complex as a ten-person business, which in turn isn’t as complex as a hundred-person business. And the matter is complexity isn’t a simple game.
It works on exponential grounds. A group of ten people isn’t the same creature compared to a group of a hundred people. In short, in business, we have a problem with scaling due to the dynamics of complex systems.
Therefore, the system that I’m using here tries to reduce complexity by trying to find the essence of any business, which per se is a herculean task.
That essence might be useful for several reasons. For instance, as FourWeekMBA is followed by business students, professors, executives and entrepreneurs, each of those people will use a business model essence with a different aim in mind.
At the core, a business model essence wants to be a snapshot, yet it is essential not to take it too seriously otherwise, the risk is to make it become a cartoon.
A student or a professor of business will use it to summarize what she thinks a business is made of. An entrepreneur might use it to focus on how to grow their own business or how to compete with existing organizations in a specific industry.
Business models and their essence are made of assumptions. Assumptions need to be tested in the real world. And this is the whole point of business strategy.
A triad to find the business model essence of any company
Having specified the limitations of this approach, we can now turn to it and see what elements allow us to extract a business model essence.
In particular, I argue that there are three key elements any business will need to master to generate a successful business model:
Core product or service: the whole process of finding product/market fit is about “being in a good market with a product that can satisfy that market” (quote by Marc Andreessen). You can have the best distributionstrategy or sales team in the world, but without a product or service that the market needs (unless you have unlimited investors’ money), your company will go bankrupt.
Core distributionstrategy: while the product and the service matter. Once you do have a good product or service, the remaining success of the organization’s growth is a distributionstrategy that allows an organization to grow over time.
Core monetization strategy: what’s the part of the business that makes more money at higher margins? And who’s the customer (not the user) of a service/product? Thinking about the core monetization strategy emphasizes the customer rather than the user.
I use the term “core” as many companies (especially large ones) have a business model that is made of many products or services, delivered through several distribution channels, and where each of those might have a separate monetization strategy.
For the matter of finding the essence, we’ll look at the core product/service, distribution channel, and monetization strategy, as this is a good starting point to have a snapshot of a company.
Once we have figured out the essence of that company, we can understand what’s next and how the resources that are getting unlocked by their main products, distribution channels, and monetization strategies are getting used to create new ones!
Key Highlights About Business Model Essence:
Definition and Importance:
A Business Model Essence is a concise description that captures the critical characteristics of a business.
It helps to analyze existing businesses and formulate a strategic focus for short to medium-term implementation.
Addressing Complexity and Scaling:
Not all businesses are equally complex due to varying sizes and dynamics.
Complexity increases exponentially with scale, creating challenges in business growth.
The Business Model Essence aims to reduce complexity and provide a clear snapshot of a business.
Different Uses and Aims:
Various individuals, such as students, professors, executives, and entrepreneurs, use the Business Model Essence for different purposes.
It serves as a summary tool and a way to focus on growth strategies or competition within an industry.
Triad Approach to Extract Essence:
To extract a Business Model Essence, focus on three core elements critical for a successful business model:
Core Product/Service: Finding product/market fit is crucial, as a product that satisfies the market is essential for success.
Core Distribution Strategy: A good product or service requires an effective distributionstrategy for sustained growth.
Core Monetization Strategy: Identifying the part of the business that generates higher margins and considering the customer aspect.
Core Elements Approach:
The “core” elements emphasize the fundamental aspects of a business model.
Large companies might have multiple products, services, distribution channels, and monetization strategies.
For the purpose of identifying essence, focus on the core product/service, distribution channel, and monetization strategy.
Snapshot of a Company:
Identifying the essence of a company provides a snapshot that reveals its core attributes.
Understanding a company’s essence offers insights into its future directions and how resources are utilized to create new offerings.
Case Studies
1. Core Product/Service
The very foundation of a business is the product or service it offers to meet a particular need or solve a problem in the market.
Examples:
Apple: Their core product is the iPhone, a product that transformed the mobile phone industry.
Amazon: Started with books but quickly expanded to become the “Everything Store”.
Netflix: Began as a DVD rental service and then pivoted to online streaming, offering a vast library of movies and TV shows.
Tesla: Electric vehicles with a vision of sustainable energy solutions.
2. Core Distribution Strategy
Once you have a product, how do you get it to the consumers? This involves the channels or methods you use to deliver your product or service.
Examples:
Facebook: Their platform itself is the distribution channel, connecting advertisers to its massive user base.
Nike: Uses a combination of branded stores, online sales, and partnerships with retail outlets worldwide.
McDonald’s: Franchise model, allowing it to expand globally without directly managing every outlet.
Dropbox: Primarily digital distribution, leveraging word-of-mouth and a freemium model to drive user acquisition.
3. Core Monetization Strategy
How does the business make money? This could be through sales, subscriptions, advertising, or other revenue streams.
Examples:
Google: Primarily through advertising, with advertisers bidding for keywords.
Spotify: Freemium model where users can listen for free with ads or pay for a premium, ad-free experience.
Microsoft: Licensing its software, such as Windows OS and Office Suite, to consumers and businesses.
Airbnb: Takes a commission from both hosts and travelers on every booking.
Examples of Business Model Essence:
1. Uber
Core Product/Service: Ride-sharing platform connecting drivers with riders.
Core Distribution Strategy: Mobile application available globally.
Core Monetization Strategy: Takes a commission from each ride.
2. Adobe
Core Product/Service: Digital media solutions, like Photoshop.
Core Distribution Strategy: Primarily digital through online downloads and cloud services.
Core Monetization Strategy: Moved from one-time software purchase to a subscription-based model (Adobe Creative Cloud).
3. Starbucks
Core Product/Service: Premium coffee and a unique coffeehouse experience.
Core Distribution Strategy: Physical stores globally, with a few products available in retail and online.
Core Monetization Strategy: Sales of coffee, food, merchandise, and branded products.
4. Slack
Core Product/Service: Collaboration software for teams.
Core Distribution Strategy: Digital distribution through direct downloads and cloud access.
Core Monetization Strategy: Freemium model with premium subscription tiers for added features.
A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
A transitional business model is used by companies to enter a market (usually a niche) to gain initial traction and prove the idea is sound. The transitional business model helps the company secure the needed capital while having a reality check. It helps shape the long-term vision and a scalable business model.
The minimum viable audience (MVA) represents the smallest possible audience that can sustain your business as you get it started from a microniche (the smallest subset of a market). The main aspect of the MVA is to zoom into existing markets to find those people which needs are unmet by existing players.
Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable business model. And as the product is offered at wider and wider market segments, it’s important to align product, business model, and organizational design, to enable wider and wider scale.
The market expansion consists in providing a product or service to a broader portion of an existing market or perhaps expanding that market. Or yet, market expansions can be about creating a whole new market. At each step, as a result, a company scales together with the market covered.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
In the FourWeekMBA Revenue Streams Matrix, revenue streams are classified according to the kind of interactions the business has with its key customers. The first dimension is the “Frequency” of interaction with the key customer. As the second dimension, there is the “Ownership” of the interaction with the key customer.
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.
A pricing strategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
