How to describe and create a business model

This article outlines an elegant approach to breaking a business model into four parts: customer value proposition (CVP), profit formula, key resources and key processes.

Business models fascinate me; how businesses define, reinvent or change their business model is one of the most interesting parts of business strategy.

I recently read an article called Reinventing Your Business Model by Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann, which in my opinion had an interesting approach to describing a business model.

Business model – four elements

A business model consists of four interlocking elements that, taken together, create and deliver value:

1. Customer value proposition (CVP)
2. Profit formula
3. Key resources
4. Key processes

Customer value proposition (CVP)

A CVP is the way you create value for customers, it’s the way you solve a customer’s problem. This element of the business model is by far the most important. Coke’s CVP focuses on its unique flavour that no one else can copy, where as Dell’s CVP is a low-cost, customised computer direct to your door.

Profit formula

The profit formula shows how you will make profits for your company while still providing value to the customer.

• Revenue model = price x volume
• Cost structure = Direct costs, indirect costs and economies of scale
• Margin model = Given the revenue and cost structure how much profit do we make

Key resources

The key resources are assets such as the people, technology, products, facilities, equipment, channels, and brand required to deliver the value proposition to the targeted customer.  This will heavily influence your cost structure.

Key processes

Successful companies have operational and managerial processes that allow them to deliver value in a way they can successfully repeat and increase in scale.

Complementary decisions

You need to make sure that these four elements are consistent and complementary. For example you shouldn’t have a high service CVP and then not invest in staff training and service processes. Conversely for a low-cost provider having fancy offices and labour-intensive processes is probably not the best approach.