Carolyn Elder

Carolyn Elder

Coach & Content Strategist

The Most Complete Primer on Business Model Innovation for Service Businesses You'll Ever Read

A commodity is probably the last word you'd use to define your professional service business. You may not think of what your consultancy or firm offers as “basic goods and materials that are widely used and not meaningfully differentiated from one another,” as Investopedia defines a commodity . 

And whether you believe us or not, the reality is that professional services are increasingly being commoditized, as clients expect standardization across service offerings. Even while more consultancies compete for top talent and butt up against difficulty proving their offerings’ return on investment. 

Meanwhile, online systems and products are threatening to eliminate the need for professional services altogether. Take Amazon's Alexa who can now answer economic questions for Swiss global clients. And looking into the future, it's only a matter of time before AI will be booking appointments, managing complete client relationships, buying and selling stocks, and even analyzing markets. 

As technology enables our clients to do more on their own, and searchable information and databases within Google’s vast knowledge graph make it easy to outsource less mission-critical tasks, it's time for professional practices to step back a moment and really think about their service differentiators. (Else risk losing clients or be forced to lower rates to keep them.) 

So, how do you differentiate your team of consultants or solo consulting practice amid these evolutionary digital and other disruptions? 

Let’s get to answering just that while we discuss innovative ways to re-think about your business model.

But First, What Defines a Professional Service?

A professional service relies on professional service providers to create and deliver value to clients (who typically pay for the perceived market value of that service).

Illustration professional services shapes and forms: knowledge, skill, data or insight-sharing | Profi technology for consultancy firms

Professional services can come in many shapes and forms, including knowledge-sharing, skill-sharing, data-sharing or insight-sharing. It can also take the form of a digital or physical product, a process, approach/methodology or any of the above organized as a course or a program.

The skillset of the firm's service professionals affects its:

  • choice of clients and 
  • ability to deliver value to the said clients. 

And your clientele base affects the firm's development and its evolution of professional skills (which, in turn, affects the type of clients the firm can retain now and well into the future). 

While your professional practice can take many forms, getting serious about keeping a sharp focus is crucial. With focus comes clarity. And clarity begets:

  • prospects who will know what services you offer
  • leaders who are clear about which business performance levers to prioritize
  • and professionals who will recognize the type of work to do. 

Besides, our natural urge for specialization (as solopreneurs or service team/firm managers) is a key reason why professional practices even exist. We get really excited about creativity and innovation! And, since no single human, business or society can know everything about a topic,  specialization (preferably combined with practical experience and some hard-won wisdom) organically emerges to help and guide our communities, systems and cultures.

To succeed make space for innovation. 

Now, digital technology is drastically changing the way our clients use professional services. Some even predict that technology will (at some point) replace professional practices.

To succeed, then, you must make space for innovation.

“But how?!” you ask. Join us and we’ll learn together.

What Does it Mean to be Innovative? 

Business innovation often sparks the creation of new services or processes to effect a positive change in your service business. It can center around:

  • Optimizing existing channels 
  • Finding new revenue opportunities in new channels, etc. 

Ultimately, the outcome of your efforts at innovation should do one of three things:

  • reinvigorate your practice (whether by productivity, process, mindset or culture), 
  • create new value 
  • and boost growth.

Whether your particular efforts at business innovation are a case of necessity as you transition into a new industry or a reassessment of the ways your practice generates revenue — it really does pay to understand different business innovation models you might want to consider. 

3 primary business innovation models to consider for your service business | Profi platform for Teams and consultancies

Revenue model innovation 

When looking to increase profit, changing your revenue model should be the very first place you look for innovation opportunities. This can involve re-assessing your pricing strategy or re-evaluating your service offering, offers and conversion paths. 

Industry model innovation 

Industry model innovation involves redefining an existing niche/industry, moving into a new one or creating a new industry altogether. What a concept, right?! But again, this kind of blue sky strategy innovation is what empassions and ignites our inner-fires as consultants and coaches, no?

Business model innovation 

Involves re-assessing your entire operational approach (and potentially your service offerings as an outcome) to boost your business profitability, reduce system bottlenecks or engage your team and/or clients in totally new ways. Think of reconfiguring your service design and delivery or specializing your practice to deliver the best value to your clients. 

As indicated by its name, business model innovation is a pretty flexible and creative process. It's unique to your business and market. So, it can take different forms like: 

  • outsourcing specific tasks and functions, 
  • assessing services or product features based on a decision matrix, 
  • forming new partnerships or 
  • deploying new technologies. 

So, how innovative is your practice or your firm? 

Overall, practice leaders should foster an innovative work environment — which we realize is always easier said than done. But, it starts at new employee onboarding and extends into your firm’s values, vision, mission and organizational culture. Besides recruiting people with the right subject matter expertise, tech aptitude and soft skills aligned with your particular industry, fostering innovation should be modeled top-down, but stay open to ideas and influences from the bottom up. (One way to do this effectively and organically is with a community business model, which we go over in this article.)

What is Business Model Innovation, for Real Though? 

There's no universal or agreed-on definition for business model innovation. (Which reflects the diversity of disciplines interested in this multifaceted concept.)

Khanagha et al. (2014) [55] define business model innovation as:

"Activities [that] can range from incremental changes in individual components of business models, the extension of the existing business model, introduction of parallel business models, right through to disruption of the business model, which may potentially entail replacing the existing model with a fundamentally different one."

Casadesus-Masanell and Zhu [53] refers to the same as: 

"The search for new logic of the firm and new ways to create and capture value for its stakeholders. It focuses primarily on finding new ways to generate revenues and define value propositions for customers, suppliers, and partners."

And different definitions emphasize different aspects of business model innovation. 

The common patterns we see include aspects like value, change, process, activities, discovery and core elements. Other aspect patterns include things like customer segments, value proposition, communication channels, customer relationships, revenue streams, essential resources, key activities, key partnerships, customer structure and more. 

At its heart, business model innovation centers around how your practice creates, delivers and captures value. 

Successful business model innovation is holistic, challenging you to take your business’s core strengths and build well-designed systems around those to produce more value for you and your clients.

What it means to innovate your service business model | Profi platform for Teams and consultancies

Why is Business Model Innovation so Important? 

Committing to your initial strengths is critical to innovate your business model effectively. 

Often, many practices gradually drift from their clients’ core needs unless they explicitly maintain focus on avoiding that by defining their company value set, mission, mindset or mantra. For example, professional service orgs might prioritize service delivery, meanwhile forgetting what value creation looks like for their audience.

This gradual drift can sneak up on your practice and is often a result of copying competitors or optimizing for short-term profit instead of a longer-term vision and strategy. 

Building business model innovation into your culture can help you build a professional practice that creates optimal value for everyone: customers, employees, shareholders and society. And this holistic, every-angled approach can result in: 

  • Increased growth 
  • An extended period of competitive advantage 
  • Positive brand recognition and reduced sales objections 
  • More robust practices that create business resilience in the face of fluctuating market cycles and unforeseen events, like the COVID-19 pandemic. 

Overall, business model innovation is a critical tool for building a great service business in any industry. (And its the reason why the fastest growing consultancies include it as an essential part of their "innovation strategy.")

Should You Change Your Business Model?

In a reality of infinite possibilities, there are always opportunities to transform your service business through new revenue streams, by reducing costs, optimizing offers or moving to an open business model . 

To determine whether you should innovate your business model, ask yourself:

  • Are there signals that your service model needs changing? Are you feeling up against a wall with the competition? Is your industry or niche ripe for digital disruption? What’s your blue ocean strategy canvas telling you?
  • What makes your current model successful, if it is? (And how do you define success relative to your competitors?)
  • Would the effort of reinventing your existing model be worth the return? (In terms of increasing growth, profit, brand awareness or creating a competitive advantage, etc.)

While you’re at it, we invite you to be reflective as a leader in your unique business offering and industry market by taking serious stock of your business and asking yourself the following questions. 

1) Why should clients work with you versus another firm that meets their needs? 

And please strive to answer this question from the client's perspective. You’ve got to really put yourself in your clients’ shoes. Brief interviews and surveys with your ICP are a great way to find out your blind spots. Are you increasing the client's revenue, strengthening their market position, or reducing the cost of risk for them? 

If your resulting benefits are not unique for your clientele, it can be hard to prove the return from your services. 

Pro fi Tip : If you have a unique value proposition, don't rest just yet. We invite you to go through the exercise of answering all of these questions to hone in on your differentiators from the typical service commodities.

Profi tip1 service business model innovation

2) What skills can you develop to make your value promise even more relevant, compelling, unique and hard to copy?

We're in a copycat economy. So, you must keep bettering your differentiation to offset the commoditization process. 

Instead of just focusing on the core values of your practice, add soft skills such as project management and efficiency to better your offer. 

Pro fi Tip: If you’re lacking in the unique offer department, exploring your client's problems, pain points and frustrations with existing products or service offerings in your industry or niche is a great place to start putting together a more compelling brand promise.

Profi tip2 service business model innovation

3) What unique product or service could your organization offer that would address these challenges and greatly benefit current or potential clients? 

You can leverage your experience in different industry verticals to provide unique service offerings. Let your goal be to add 5-10x more value above and beyond what your current products or services deliver.

Pro fi Tip: When you think about client value, think first about 5 to 10xing your existing offerings! What gems (resources like content, insight or expertise) do you have hidden away that you can leverage right now and repurpose into more value?

Profi tip3 service business model innovation

4) How do you capture value in your industry in new ways that drive greater service differentiation and growth?

As we just shared, you can always leverage your existing industry knowledge to deliver more value. Take the example of accounting firms who are entering the consulting and legal markets as the audit market reacts to increased price pressures and tougher competition. 

5) Do you solve and market a problem your customer is searching for?

Be honest with yourself. And, ask your clients! And when you have their answer, think bigger. More than just solving client problems, explore how you can leverage technology and data to adopt a more preventive approach to your client's potential challenges.

6) What solutions can you create that provide the 'greatest' customer value while locking out your competition? 

Formulate a solution that addresses your clients' new needs, such as those resulting from the recent economic crisis. And while you’re at it, determine how to structure and deliver the solution(s) in a way that provides the best client value.

To lock out your competition, safeguard your service offerings by limiting knowledge leaks . You can achieve that by minimizing professional turnover, setting up technological barriers and impeding competitors' access to information. 

Your professional service design will also need to innovate past offerings that are already commoditized. 

7) How might you disrupt your services to significantly decrease charges to clients?

Can you hire professionals who are willing to work at a lower rate in exchange for a flexible work arrangement? Or adopt a strategy where you can exchange your advice for leads? 

(Your quest — if you choose to accept it — is to disrupt your own service model and service design.)

8) Can any of your solutions be routinized or automated, and what is your plan for incorporating or defending against displacement?

There's a trend in professional practices: the evolution of services from pure craftsmanship to standardized and systemized operating procedures.

And it's likely that digital technology will speed up service automation and commoditization moving forward. 

(After all, knowledge work automation systems and tools could take on tasks equivalent to the output of 110-140 million full-time human equivalents (FTEs) .)

So, you’re going to need to leverage technology where you can automate repetitive tasks all along your value chain. 

Take the standard professional services workflow and see where you can automate routine tasks across it. Using all-in-one platforms like Profi can make this even easier. 

Here’s a few examples of how you can automate across the service workflow using Profi:

Client Acquisition -> Services Organization -> Service Delivery -> Billing

  • Set up automatic email and SMS text message reminders about sessions, messages, invitations and progress for both your teammates and clients
  • Automatically sync your external calendars with you and your service team’s calendars
  • Auto-set your forms to be sent to clients for intake, progress tracking, etc.
  • Link your payment accounts to enable automatic payment processing
  • Set up a whole slew of Zapier workflow automations between Profi’s integrated operating system for service providers and 1000+ other apps 

And, get real. If you can’t automate at least some of your non-mission-critical tasks , outsource them. (Use platforms like Verblio , Upwork and Fiverr to outsource time-consuming tasks.) 

Pro fi Tip: If your clients' frustrations and problems are not fuel for inspiration, then it’s time to focus on your revenue model.

Profi tip4 service business model innovation

9) Would a different revenue model build a higher value with your key clients?

For example:

  • Moving to value pricing and fixed fees
  • Eliminating hourly billing 
  • Trading advice for shares at startup companies
  • Embracing merit-based pricing 

10) What is the likelihood that your customers will refer new customers to you?

Building a community of loyal followers around your practice is essential to gaining customer referrals. However, your services must meet the clients' needs, and the entire client experience must be just as satisfactory. 

Models like talent marketplaces or community business models really come in for the win here. We cover these in more detail below, but models like these create an infrastructure that’s scalable and provides an ongoing feedback loop between you and your customers. So, if you’re listening, then you’re always improving your customer’s experience with your business by meeting their needs.

11) What is the ecosystem of stakeholders and partners that will create the most powerful business model? 

Your business model innovating should factor in the wider ecosystem of potential partners and stakeholders unique to your industry or niche too. Think about your teams, stakeholders and partners as one in the same.

Here, the productized service business model is your powerhouse. We talk about the productized service business model more below, but in this model, you essentially productize and package your servicing frameworks into scalable virtual programs with blended learning modules , train your team, and then exponentially expand your referral network with certified consultants representing your business. Viola! Instant scalability. If you’re considering how to rejig your internal team structure to better meet stakeholder, partner and client needs you can:

  • Focus on client teams instead of practice groups
  • Upgrade associate training . Utilize learner experience design techniques in a blended learning program format and offer brand or technology certifications tied to promotion paths 
  • Allow associates to self-organize and refer internally using a community business model (see more below)

How Do You Create Business Model Innovation? Is There a Right Method? 

A research study published in Strategy & Leadership suggests that enterprise model innovation should be: aligned, analytical and adaptable. Still, there are hardly any fully integrated or holistic tools or methods for creating and implementing system-wide business model innovation. 

So here's a quick overview of some proven methods you can combine to visualize your current model, generate ideas for new models and get busy implementing them. 

Proven methods for evaluating and visualizing existing business models 

To innovate your business model, you must first 'visualize' and 'evaluate' your existing models. 

Create a graphical representation of your existing business model

Depending on the details required, you can use the globally accepted business model canvas or business model navigator to visualize and evaluate your current model. 

The Business Model Canvas provides deeper insights into your business model, making it the ideal choice when testing or designing a new model.  It covers the model in nine blocks, including:

  • Customer segments 
  • Value promises 
  • Customer relationships 
  • Revenue structure
  • Key resources
  • Key partners
  • Key activities
  • Cost structure 

Stress test to surface strengths and blind spots 

To determine where the priorities are, you need to evaluate the strengths and weaknesses of individual areas of your business model. Stress tests help you surface your assets and your blind spots and the critical factors you need to jump on first. 

Note that you cannot view the model separately from its environment. You must factor in relevant trends in the market, technology, industry, culture and legislation. (You can achieve that through research or employee and expert discussions.) 

Proven methods for generating business model innovation ideas 

The following three methods will help examine your practice from different perspectives to highlight probable innovations. 

3 proven methods for service business model innovation ideas | Profi platform for Teams of consultants

#1: Business model innovation based on trends 

You can use market, tech, industry or niche, cultural and legislative trends to derive different scenarios for your service business. Then use these scenarios to inform your business model innovation process. 

With that, you can easily anticipate and address changes in your practice's environment. 

Here, you can actively implement the model that you believe will be relevant soon. Or just observe the market and wait to implement the model when the market shows signs of heading in the projected direction. 

#2: Business model innovation based on client needs throughout the customer journey

Customer experience design is grounded in the voice of your customer (or client, in this case) and you’re probably already hearing about your client needs across your business. 

The voice of your client customer might be flooding in on the daily through channels like your website chat, by phone or via your support staff, in social media messengers, email or website surveys, discovery interviews or intake, experience and product feedback forms. 

By investing in processes and tools that listen to or gather, look for patterns and prioritize client needs, you’ll discover both practical and sometimes surprising approaches to improve your client's experience. So, listen in carefully and then use those insights as the foundation of your new business model. 

Here's a quick stepped process to get you started. 

  • Choose a specific client target persona, group, vertical or segment
  • Detail out your customer’s journey 
  • Define every touchpoint and system your client may interact with during their experience with your service business, or their journey — whether on the front-end or back-end
  • Identify client objections and preferences throughout the journey 
  • What are the existing problems and opportunities that begin to surface? 

Professional service designs with homogeneous customer requirements can largely benefit from this approach, as customer experience design can make each customer persona or vertical’s unique path and story transparent across the whole of your business. Taking it a step further, blended service design can help you meet your clients where their at in a more scalable and personalized way. This gives you immediate insight into ways to innovate based on client needs.

#3: Creative imitation of innovative business model patterns

A study by the University of St. Gallen notes that 90% of business model innovations are formulated by recombining 55 business model patterns. Through creative imitation, you can systematically apply these patterns to your practice. 

Proven methods for testing and implementing business models

Discovery-driven learning and prototyping

A market-ready business model is developed and sharpened in the market. That means embracing discovery-driven learning through trial and error or cost-effectively testing the selected business model as per your hypothesis and prototypes. 

The goal is to leverage the practical knowledge gained to make your model more marketable. 

Implementation strategy (Internal vs. external implementation)

Professor Markides proposes two dimensions of a business innovation model strategy. That is: 

  • Potential conflict with the existing business model 
  • Potential synergy with the current business model 

From these dimensions, you can derive four implementation strategies, as outlined below. 

Separation strategy: if the conflict and synergy potential are high, break down the new business model as a separate business unit. 

Integration strategy: if the conflict potential is low and the synergy potential is high, implement the new model through yourself or your internal R&D department. 

Phased separation strategy: if the synergy potential is high, you can implement the new model gradually in your practice before outsourcing it. 

Phased integration strategy: if the anticipated conflict potential is high, establish the new model, then re-integrate the same into your practice in several phases.

In a nutshell, you can formulate a new business model by: 

  • Defining your client's value
  • Defining your strengths 
  • Defining your business objectives 
  • Benchmarking with leading innovators 
  • Putting all the points above together to identify the 'right' model 
  • Validating and iterating as needed 

Regardless of the method, you must improve your business model continuously. That calls for mindset and culture changes, as well as flexible organizational structures. 

How Can You Use Your Business Model as the Engine for Sustainable Innovation? 

To weave sustainability into your business model , think about it from every angle. Sustainable service models should:

  • Scale effectively 
  • Increase competitiveness and differentiation 
  • Reduce the probability of commoditization 
  • Creates a societal and environmental surplus 
  • Remain durable against socio-environmental trends 
  • Exhibit network effects that reshape value chains 
  • Harness or reshape your practice ecosystems 
  • Increase returns to shareholders 
  • Animate the purpose of your practice 

To make your business model innovation sustainable, combine societal, environmental and financial priorities. That is:

  • Expand the service business's canvas by mapping your ecosystem of stakeholders and societal issues in which you operate 
  • Stress-test your model within the broader map 
  • Extrapolate trends and create/build materiality scenarios 
  • Explore while scaling up your practice 
  • Identify strategic intervention points or innovation opportunities 
  • Innovate for a robust and resilient business model 
  • Change your inputs to generate environmental and societal benefits 
  • Expand the societal and 'environmental' value of your services 
  • Expand your value chains (by layering onto your ecosystem of partners and customers in other industries)
  • Re-localize and regionalize to bring the realized societal and environmental benefits closer to home 
  • Energize your brand (by encoding, promoting and monetizing the societal and 'environmental' value of your services)
  • Build across sectors (by collaborating with non-profits and government agencies in rapidly developing economies)
  • Link your model to drivers of client value and competitive advantage 
  • Finally, scale your initiative (to realize its potential value)

How Can You Use Services to Optimize Revenue and Profit?

I repeat: the professional service industry is not immune to disruption.

And the situation is compounded by the pandemic and the need to operate in completely virtual environments and deliver services digitally. 

Fortunately, this kind of disruption is an opportunity long before it's a threat. (A chance for professional services to reinvent and emerge with new business models relevant to the new service economy.) 

As a result, professional services are rethinking their business models, giving birth to: 

Knowledge-as-a-service models 

Productizing expertise as a digital solution or service can provide you with a resilient and continuous revenue stream. (An essential requirement amid the pandemic.) 

In a reverse trend, consultancies are building SaaS businesses and software to entrench their insights and practices. 

However, this model is not without limitations. For one, the price of software subscriptions may pale compared to the high ticket project fees charged by consultants. So, quantity becomes the name of the acquisition game here.

Productized service business models

Fast gaining in popularity due to its effectiveness at scaling both a business and a more personalized client experience with your business is the productized service business model.

To scale this effectively you’re going to need to lean on an integrated tech stack. And, hopefully it’s less a stack and more an holistic service operating system. Software like Profi with its Teams plan quickly enables firms with the integrated infrastructure to run this type of model at a low investment.

Imagine you want to build a team of healthcare program instructors or consultants, like our client LigoLab’s Ligoverse of instructors . With the productized business model you would standardize and productize your servicing frameworks, methodologies and practices into blended learning programs, train-up and certify a team of consultants to then up-sell your offering for you, helping you quickly scale. 

Let’s say you’ve now qualified and certified 10 consultants for your service delivery model. Now, you want to track performance and completely enable them to represent you well. So, now your tech stack needs to monitor their performance, activity, financials and provide them reviews. Productizing here means you’re pre-loading templated messaging, notes, forms, templated services and automation workflows the team can pick up quickly and run with.

Talent marketplaces

Technology-based talent marketplaces (like Mindset Coach and Innovation Experts Online ) help match independent consultants and on-demand talents. That allows professional practices to access skills and expertise beyond the traditional boundaries of a business. 

Instead of employing more consultants with the hope of keeping them utilized, firms can deploy a core team and have an extended network of high-quality, on-demand professionals. 

Outcome-based models

Clients are increasingly expecting more result-oriented, outcome-based engagements. So get comfortable charging that way, always highlighting what improvements your services have made to the client. 

Linking your invoice to measured results makes you accountable. 

Some other ways we see service providers using the Profi platform weaving the outcome-based model into their practices includes:

  • Promise-based or time-boxed service packages or programs: like 'Become a great storyteller,’ ‘Transform your leadership skills in 8 days,’ ‘Time manage like a CEO,’ ‘Reduce client churn in 8 hours a week'
  • Offering a discounted ‘discovery’ package or program where clients can upgrade/advance for more focused attention, insight or specific support if they’re seeing results.
  • Offering access to a private community upon initial or discovery program completion

Ultimately, when management sees an improvement in their quarterly results, they become happy. When the board 'sees' an increase in profitability, they become pleased. Shareholders become content. And you gain the satisfaction of keeping your promise to your client. 

Community-based model 

Community-based business models are surging in popularity as professional services aim to intensify client engagement and double down on relationship-building. These models rely extensively on community members and community management to acquire customers and provide them support. 

Just a few of realized benefits include:

  • New opportunities for deeper client involvement 
  • Better offerings
  • Lower costs

Be sure to check out our article on how community can be a major competitive advantage for your business model. In it we outline the almost infinite ways a community-based business model can drive client acquisition, growth and retention more organically than really any of these other models can.

And even better is to hear it from another consulting firm led by coaches and consultants who specialize in business model design who pivoted at the height of the pandemic hysteria and have integrated a community business model into their consultancy.

High-value engagements

When consultancies engage clients in the long term, the effective daily work rate decreases significantly. 

In its stead, professional services can focus on value, even when that manifests in shorter-term gigs. (The goal here is to deliver optimal value in the least time possible.) High-value service isn’t just an offering, it can be how you set up your client experience and the technology you choose to deliver your services with. 

For example, today’s clients and companies have higher expectations than ever about their privacy and the security and reliability of systems they do business in. Make sure the technology you choose to operate your service business meets and exceeds these critical needs of high-value clients. 

Key areas to consider:

  • Security & Privacy: 
  • HIPAA-compliant individual and group sessions
  • Secure client messaging: give clients and teams their own portal where they can securely contact their professional service provider, book their services, etc. 
  • Reliability & Security: choose servicing tech with excellent uptime like Profi who boasts a system uptime SLA of 99.9% where data is stored in the US and encrypted when possible.

Embrace Innovation to Thrive 

The future of professional services is blue ocean as far as the eye can see. Embracing business model innovation is critical to creating more resilience in your business and thriving (instead of just striving) your way through current and anticipated market disruptions. 

To make the innovation process easy, try Profi yourself (free for 30 days). For teams and corporations of professionals, book a demo with us , and let's talk about all the unique ways you can innovate your business model strategy with the right technology and partnership. We can help solve the world's problems better together through creative and technological innovation in your service business.

Carolyn Elder is a strategic, yet empathetic coach, content strategist and Head of Content at Profi . A SaaS writer, she enjoys focusing on content topics at the intersection of technology and the human condition. She oversees all content across Profi's customer-facing channels. Follow Carolyn on LinkedIn .

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The term business model refers to a company's plan for making a profit . It identifies the products or services the business plans to sell, its identified target market , and any anticipated expenses . Business models are important for both new and established businesses. They help companies attract investment, recruit talent, and motivate management and staff.

Businesses should regularly update their business model or they'll fail to anticipate trends and challenges ahead. Business models also help investors to evaluate companies that interest them and employees to understand the future of a company they may aspire to join.

Key Takeaways

  • A business model is a company's core strategy for profitably doing business.
  • Models generally include information like products or services the business plans to sell, target markets, and any anticipated expenses.
  • The two levers of a business model are pricing and costs.
  • A business model should be periodically revised to make sure it still reflects the business environment and customer demands.
  • Analysts and investors often look at a company's gross profit to evaluate the success of a business model.

Investopedia / Laura Porter

A business model is a high-level plan for profitably operating a business in a specific marketplace. This plan helps the company to identify the best way to go about doing its business while also serving to attract investors and talent.

A primary component of the business model is the value proposition . This is a description of the goods or services that a company offers and why they are desirable to customers or clients; it should ideally be stated in a way that differentiates the product or service from its competitors.

A new enterprise's business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy , a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company.

Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. And they are subject to change. Many businesses revise their business models periodically to reflect changing business environments and market demand .

Investors and Business Models

When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company's business model. Fortunately, it's not hard to find. Most companies outline their business model on their website and in their annual reports .

Admittedly, the business model may not tell you everything about a company's prospects. Investors need to fill in the blanks, look beyond the sales pitch, and recognize that sensitive information or any flouting of rules of ethics to gain an advantage won't be mentioned. The investor who understands the business model, even on a basic level, can make better sense of the financial data.

A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable. Counting costs up to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses.

One way analysts and investors evaluate the success of a business model is by looking at the company's gross profit . Gross profit is a company's total revenue minus the cost of goods sold (COGS) . Comparing a company's gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model. Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income —that is, gross profit minus operating expenses, which is an indication of just how much real profit the business is generating.

The two primary levers of a company's business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit.

Many analysts consider gross profit to be more important in evaluating a business plan. A good gross profit suggests a sound business plan. In that case, if expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves.

When evaluating a company as a possible investment, find out exactly how it makes its money—not just what it sells but how it sells it. That's the company's business model.

Types of Business Models

There isn't one type of business model. Not all companies are the same and each has different ways of making money. Business models can vary considerably. An aerospace company such as Boeing, for example, may operate similarly to a peer such as Airbus but won't share much in common in terms of how it makes money with, say, a shoe store or bar.

Direct sales, franchising , advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrid models as well, such as businesses that combine internet retail with brick-and-mortar stores or with sporting organizations like the NBA .

Below are some common types of business models; note that the examples given may fall into multiple categories.

One of the more common business models most people interact with regularly is the retailer model. A retailer is the last entity along a supply chain. They often buy finished goods from manufacturers or distributors and interface directly with customers.

Example: Costco Wholesale

Manufacturer

A manufacturer is responsible for sourcing raw materials and producing finished products by leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods or highly replicated, mass-produced products and can sell what it makes to distributors, retailers, or directly to customers.

Example: Ford Motor Company

Fee-for-Service

Instead of selling products, fee-for-service business models are centered around labor and providing services. A fee-for-service business model may charge an hourly rate or a fixed cost for a specific agreement. Fee-for-service companies are often specialized, offering insight that may not be common knowledge or may require specific training.

Example: DLA Piper LLP

Subscription

Subscription-based business models strive to attract clients in the hopes of luring them into long-time, loyal patrons. This is done by offering a product that requires ongoing payment, usually in return for a fixed duration of benefit. Though largely offered by digital companies for access to software, subscription business models are also popular for physical goods such as monthly reoccurring agriculture/produce subscription box deliveries.

Example: Spotify

Freemium business models attract customers by introducing them to basic, limited-scope products. Then, with the client using their service, the company attempts to convert them to a more premium, advance product that requires payment. Although a customer may theoretically stay on freemium forever, a company tries to show the benefit of becoming an upgraded member.

Example: LinkedIn/LinkedIn Premium

Some companies can reside within multiple business model types at the same time for the same product. For example, Spotify (a subscription-based model) also offers a free version and a premium version.

If a company is concerned about the cost of attracting a single customer, it may attempt to bundle products to sell multiple goods to a single client. Bundling capitalizes on existing customers by attempting to sell them different products. This can be incentivized by offering pricing discounts for buying multiple products.

Example: AT&T

Marketplace

Marketplaces receive compensation for hosting a platform for business to be conducted. Although transactions could occur without a marketplace, this business model attempts to make transacting easier, safer, and faster.

Example: eBay

Affiliate business models are based on marketing and the broad reach of a specific entity or person's platform. Companies pay an entity to promote a good, and that entity often receives compensation in exchange for their promotion. That compensation may be a fixed payment, a percentage of sales derived from their promotion, or both.

Example: social media influencers such as Lele Pons, Zach King, or Chiara Ferragni

Razor Blade

Aptly named after the product that invented the model, this business model aims to sell a durable product below cost to then generate high-margin sales of a disposable component needed to use that product. Also referred to as the " razor and blade model ", razor blade companies may give away expensive blade handles with the premise that consumers need to continually buy razor blades in the long run.

Example: HP (printers and ink)

"Tying" is an illegal razor blade model strategy that requires the purchase of an unrelated good prior to being able to buy a different (and often required) good. For example, imagine Gillette released a line of lotion and required all customers to buy three bottles before they were allowed to purchase disposable razor blades.

Reverse Razor Blade

Instead of relying on high-margin companion products, a reverse razor blade business model tries to sell a high-margin product upfront. Then, to use the product, low or free companion products are provided. This model aims to promote that upfront sale, as further use of the product is not highly profitable.

Example: Apple (iPhones + applications)

The franchise business model leverages existing business plans to expand and reproduce a company at a different location. Often food, hardware, or fitness companies, franchisers work with incoming franchisees to finance the business, promote the new location, and oversee operations. In return, the franchisor receives a percentage of earnings from the franchisee.

Example: Domino's Pizza

Pay-As-You-Go

Instead of charging a fixed fee, some companies may implement a pay-as-you-go business model where the amount charged depends on how much of the product or service was used. The company may charge a fixed fee for offering the service in addition to an amount that changes each month based on what was consumed.

Example: Utility companies

A brokerage business model connects buyers and sellers without directly selling a good themselves. Brokerage companies often receive a percentage of the amount paid when a deal is finalized. Most common in real estate, brokers are also prominent in construction/development and freight.

Example: Re/Max

There is no "one size fits all" when making a business model. Different professionals may suggest taking different steps when creating a business and planning your business model. Here are some broad steps someone can take to create a plan:

  • Identify your audience : Most business model plans will start with either defining the problem or identifying your audience and target market . A strong business model will reflect who you are trying to target so you can craft your product, messaging, and approach to connecting with that audience.
  • Define the problem : In addition to understanding your audience, you must know what problem you are trying to solve. A hardware company sells products for home repairs. A restaurant feeds the community. Without a problem or a need that creates demand for your services or products, your business may struggle to find its footing.
  • Understand your offerings : With your audience and problem in mind, consider what you are able to offer. What products are you interested in selling, and how does your expertise match that product? In this stage of the business model, the product is tweaked to adapt to what the market needs and what you're able to provide.
  • Document your needs : With your product selected, consider the hurdles your company will face. This includes product-specific challenges as well as operational difficulties. Make sure to document each of these needs to assess whether you are ready to launch in the future.
  • Find key partners : Most businesses will leverage other partners in driving company success. For example, a wedding planner may forge relationships with venues, caterers, florists, and tailors to enhance their offering. For manufacturers, consider who will provide your materials and how critical your relationship with that provider will be.
  • Set monetization solutions : A business model isn't complete until it identifies how the company will make money and turn a profit. This includes selecting the strategy or strategies laid out in the business model types section above.
  • Test your model : When your full plan is in place, perform test surveys or soft launches. Ask how people would feel paying your prices for your services. Offer discounts to new customers in exchange for reviews and feedback. You can always adjust your business model, but you should always consider leveraging direct feedback from the market when doing so.

Instead of reinventing the wheel, consider what competing companies are doing and how you can position yourself in the market. You may be able to easily spot gaps in the business model of others.

Criticism of Business Models

Joan Magretta, the former editor of the Harvard Business Review , suggests there are two critical factors in sizing up business models. When business models don't work, she states, it's because the story doesn't make sense and/or the numbers just don't add up to profits.

Complicated business models can put off investors and hinder a company's growth. People are less eager to invest in a company they don't understand. Moreover, some business models can be less profitable and at risk of being compromised. What works one year, isn't guaranteed to continue doing so in the future.

Take the airline industry. For years, major carriers such as American Airlines, Delta, and Continental built their businesses around a hub-and-spoke structure , in which all flights were routed through a handful of major airports. By ensuring that most seats were filled most of the time, the business model produced big profits.

However, a competing business model arose that made the strength of the major carriers a burden. Carriers like Southwest and JetBlue shuttled planes between smaller airports at a lower cost. They avoided some of the operational inefficiencies of the hub-and-spoke model while forcing labor costs down. That allowed them to cut prices, increasing demand for short flights between cities.

As these newer competitors drew more customers away, the old carriers were left to support their large, extended networks with fewer passengers. The problem became even worse when traffic fell sharply following the September 11 terrorist attacks in 2001 . To fill seats, these airlines had to offer more discounts at even deeper levels. The hub-and-spoke business model no longer made sense.

Example of Business Models

Consider the vast portfolio of Microsoft. Over the past several decades, the company has expanded its product line across digital services, software, gaming, and more. Various business models, all within Microsoft, include but are not limited to:

  • Productivity and business processes : Microsoft offers subscriptions to Office products and LinkedIn. These subscriptions may be based on product usage (i.e. the amount of data being uploaded to SharePoint).
  • Intelligent cloud : Microsoft offers server products and cloud services for a subscription.
  • Personal computing : Microsoft sells the Windows operating system as well as physically manufactured products such as Surface, PC components, and Xbox hardware. Residual Xbox sales include content, services, subscriptions, royalties, and advertising revenue.

A business model is a strategic plan of how a company will make money. The model describes the way a business will take its product, offer it to the market, and drive sales. A business model determines what products make sense for a company to sell, how it wants to promote its products, what type of people it should try to cater to, and what revenue streams it may expect.

What Is an Example of a Business Model?

Best Buy, Target, and Walmart are some of the largest examples of retail companies. These companies acquire goods from manufacturers or distributors to sell directly to the public. Retailers interface with their clients and sell goods, though retailers may or may not make the actual goods they sell.

What Are the Main Types of Business Models?

There are various types of business models. Examples include subscription models, bundling, and franchising. Business models can sometimes also be loosely defined by industry. For example, manufacturers produce their own goods and may or may not sell them directly to the public, whereas retailers buy goods to later resell to the public.

How Do I Build a Business Model?

There are many steps to building a business model, and there is no single consistent process among business experts. In general, a business model should identify your customers, understand the problem you are trying to solve, select a business model type to determine how your clients will buy your product, and determine the ways your company will make money. It is also important to periodically review your business model; once you've launched, evaluate your plan and adjust your target audience, product line, or pricing as needed.

A company isn't just an entity that sells goods. It's an ecosystem that must have a plan on who to sell to, what to sell, what to charge, and what value it is creating. A business model describes what an organization does to make a profit. After building a business model, a company should have a stronger direction on how it wants to operate and what its financial future appears to be.

U.S. Federal Trade Commission. " Tying the Sale of Two Products ."

Harvard Business Review. " Why Business Models Matter ."

Bureau of Transportation Statistics. " Airline Travel Since 9/11 ."

Microsoft. " Segment Information ."

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SaaS business model: Stages, pros & cons + essential tools to get ahead

The SaaS business model is unlike the traditional business model in many different ways. Perfecting it can be difficult without the right tools. Explore the fundamentals of how SaaS works, including models, metrics, and tools for SaaS growth.

What is SaaS?

  • The SaaS business model

SaaS business stages

9 saas business examples.

  • Key SaaS business metrics
  • 4 SaaS growth tools

What’s next for SaaS businesses?

Saas business model faqs, join our newsletter for the latest in saas.

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Ever since John Koenig first coined the term “SaaS” back in 2005, the software-as-a-service industry has been one of the fastest-moving and creative in the world. And with the field having undergone a couple of “ knockout expansion years ,” with more revenue pouring into SaaS than ever, it has never been a better time for a young SaaS company. The SaaS business model powering all of this activity is startlingly unique, still young, and inextricably tied to the power of cloud computing. Understanding the fundamentals of how SaaS works is vital when building out a plan for your company’s forward growth.

business model service development

SaaS, or software as a service, is a delivery model in which a centrally hosted software is licensed to customers via a subscription plan. Any company that leases its software through a central, cloud-based system can be said to be a SaaS company. A SaaS company maintains responsibility for the servers, database (and the data they contain), and other software that allow their product to be accessed and used. The subscription plans offered to customers can vary considerably within separate companies; some SaaS company business models involve offering multiple applications within their product, with different subscription plans giving access to different services.

How does the SaaS business model work

The reason we’re distinguishing between the SaaS business model and the rest is that the SaaS model includes a number of factors peculiar to it, such as:

Recurring payments

In SaaS, clients do not buy hardware. The software-as-a-service business and pricing model involves providing a  subscription  service to use the app, so you will have to worry about paying the yearly or monthly subscription as opposed to only once. Recurring payments take the form of monthly recurring revenue, otherwise known as MRR. Because a  SaaS company  provides a service, not a product, accounting for revenue properly can be difficult. When your customer signs the contract and subscribes, you may get some cash upfront, but that cash cannot be counted as revenue until you've earned it. Until then, it is a liability—money that your customer can ask to be returned at any point if you don’t deliver your service. As a result,  revenue recognition  is a fundamental part of the SaaS business model.

Heightened customer retention

All businesses care about customer retention, but in the SaaS revenue models, it is 10 times more important because retention of paying customers is the only thing that keeps you afloat. As we said above, you can’t lay claim to all of your clients’ subscription money until you’ve provided a complete term of service, so if you’re signing customers up for 12 months who are then leaving after 2, then you’ll be without the other 10 months of recurring revenue. As a result, the SaaS business model puts tremendous value on cultivating customer relationships and upselling. An existing SaaS customer spends more, on average, than a new customer, and are more than seven times more likely to churn (leave your business) to go to a competitor because of poor customer service than they are for a better product.

Consistent updates

While other products may come out with “next-gen” product versions, SaaS consistently provides smaller and more frequent upgrades to their services to keep the end-users happy and have better customer lifetime value. Part of this comes from the nature of being in the software business: software vulnerabilities can put customer information at risk from hackers, so continually assessing the state of security fixes is a top priority in the SaaS model. Hosting their own products also means SaaS companies can push updates whenever they need to, releasing new features, enhanced versions of old ones, and new product enhancements. By combining this with good customer communication, SaaS companies can be highly responsive to the  needs and feedback  of their customer base.

As we’ll see shortly, highly successful SaaS businesses can boast valuations in the $100 millions, serve a huge number of customers, and completely change the way in which entire industries think about aspects of their business. That, however, is the final and most successful stage of the SaaS business model. Broadly speaking, a SaaS business’s life can be broken down into three stages:

1. Early-stage

In the early stage of your SaaS business, you as the business owner or entrepreneur are still operating at the bare-bones level. You’re unlikely to have many customers, and your product will still be in its early  developmental stages . You may be seeking your first round of pre-seed  funding , or you may have decided to go for the  bootstrapping  approach to maintain better control of your operations. In the early stage, your staff roster will still be small, you will more than likely still have only one product you’re focusing your attention on, and you may not have started to turn real profit yet. At this stage, you should be asking yourself these main questions: Am I tracking metrics, bringing in new users, and looking to optimize pricing? Have I begun developing my own personal business model that will enable me to seek the right kind of funding and use it well?

2. Growth stage

The growth stage is where things start to get exciting. You’ve built something that’s growing fast, your product is gaining subscribers, and you’re beginning to bring in MRR and possibly positive cash flow. To kick off your growth stage and to continue powering through it, you will need to begin raising serious funds that will allow your company to grow its team, invest in product development and iteration, and scale. There are a number of funding types that serve the SaaS business model, including:

  • Venture Capital:  The glamour means of procuring funds for your startup, venture capital is provided by firms or funds that see high growth potential or a strong track record of recent growth in a SaaS company, enough to merit substantial financial assistance.
  • Angel Investors:  An angel investor is a single operator with substantial financial means who is prepared to make an investment in your company. They can be ideal for startups looking for their first big investment, although, more recently, so-called “super” angels have begun to play a decisive part in later funding rounds too.

Venture capitalists and angel investors are not the only routes to growing your business. Some companies go through  incubators  in their very early days; other, slightly more established SaaS companies find startup  accelerators  that meet their needs and use them for a different kind of funding experience. Some companies continue to bootstrap for a much longer time, and others are so adept at raising revenue from the start that they find they don’t need external funding until much later.

Now, you should be asking yourself these questions: Have I established key performance indicators (KPIs) to ensure I’m primed for further scaling? Do I have a strong monetization strategy in hand for when I do decide to seek some form of investment?

3. Mature stage

A SaaS company that has reached the mature stage has proved itself and can consider itself established. A company at the mature stage has a well-defined target audience that it’s catering to and has a reliable product that it’s making updates to. The company is bringing in good MRR, and all the other key KPIs (more on those to come) are stable. Mature-stage companies might still seek and receive investment, but it’ll be of a much larger order, aimed at breaking new markets or buying out competitors. The main question a SaaS company should be asking itself at this stage is: When is the last time we checked our pricing strategies? SaaS companies often reach the mature stage and settle into a sense of complacency, thinking that, because their business is solidly profitable, it must be running at its maximum potential. In fact, mature-stage SaaS companies are often positioned on a pile of potential revenue that they’re wasting with  poorly chosen price points .

business model service development

The variety of successful SaaS-type businesses is astonishing; there are examples of tremendous success in the B2B and B2C spheres, in AI and video hosting, in e-commerce, in data analytics, and more. To show you just how broad success in SaaS can be, we’ve compiled a list of a few SaaS businesses that have made a serious impact in their fields — or, in some cases, created new ones!

Wistia is a company providing video-hosting services for businesses, from uploads to tracking performance to building audiences and brand attention. Brendan Schwartz and Chris Savage founded the company in 2006 and got their first client, a medical devices company, that year. In 2019, the picture is pretty rosy for Wistia. Despite taking relatively little investment in its early days, it's now the video-hosting service of choice for more than 300,000 businesses across 50 countries that depend on Wistia, bringing them more creative and authentic communications .

Shopify is an e-commerce platform for online stores, allowing businesses to create online stores without needing to know how to code. Shopify has completely revolutionized the way businesses think about e-commerce in the process; now, any retailers, big or small, looking to sell online, on social media, or in person have a single integrated solution that can meet their needs. Shopify has been amply rewarded for its innovations in e-commerce. It made over $1 billion in 2018 and have well-exceeded that total in 2019. Since then, Shopify has grown to 4.4 million active merchants in 2023 .

Artificial intelligence has been one of the primary growth areas in SaaS during the late 2010s, and no company exemplifies the potential of that field more strongly than Chorus.ai . Chorus is a leading conversation intelligence platform for sales teams. The company’s solution functions as a plug-in to video-calling services, allowing sales teams to record their business calls and extract meaningful data.By recording and analyzing the contents of sales calls, commercial teams are able to refine their approach to selling, curate new training surveys , and regimes for their reps, and come up with new in-depth strategies for better communicating with clients. Chorus’ solutions are used by world-class revenue teams at other great (SaaS!) companies like Zoom, Adobe, Asana, and Segment.

Just when you thought recruitment was one of those fields that could never change, a SaaS company came along and changed everything. Lever revolutionized the recruitment sphere with its streamlined processes for sourcing, attracting, and hiring new talent. Its talent software makes it easier for employers to vet candidates, take care of talent marketing, and foster connections between employers and employees through the company’s cloud service. Much like Chorus, proof of Lever’s success comes with it being used by such seminal companies such as Shopify, Eventbrite, and Netflix to fill their offices with the best employees.

Clearbit creates products and curates data APIs aimed at providing insights throughout the customer life cycle to help businesses grow. There are few industries where clear communication between client and customer is more vital than in SaaS, and Clearbit’s resolution to help those who work with it “ understand [their] customers " has made it a vital asset to those they work with. Clearbit’s ability to do this, as well as their cutting-edge means of identifying future leads and personalizing marketing approaches, has led it to be designated one of the fastest-rising companies in SaaS.

UiPath is a platform for  robotic process automation . Its use of robotics and sophisticated scripts allows you to automate repetitive or redundant tasks from your schedule, and its innovations in drag-and-drop architecture will bring entirely new possibilities to front-office intelligent automation. Much like the rest of the companies on our list, they’re not doing badly, either. UiPath has a yearly revenue of over  $300 million  and was ranked first in the  Deloitte Technology Fast 500  on November 6, 2019.

Segment is a single API tool that allows you to collect, standardize, and activate customer data, providing a data foundation for growth. As the volume of data possessed by companies becomes increasingly sprawling and unmanageable, and as the public desire grows for clarity and integrity in data handling, Segment has slotted seamlessly into an area of need in the SaaS market. Segment, like Clearbit, is a real up-and-comer and is valued at $1.5 billion —its done it by attending to real practical and ethical needs in the industry.

Truework’s product automates employment- and income-verification requests for HR teams. In a not totally dissimilar way as Segment, Truework identified a series of pain points at which sensitive personal information tends to be exchanged—for example, when you change banks, buy a house, start a new job, or found a company—and saw a need for greater security in these transactions. Through this, the company has built “a network for verified identity that puts consumers in control of their sensitive personal information,” emphasizing “privacy and ownership.” Truework is at a considerably earlier stage in their success, but having received their first Series A funding round less than two years after being founded, it's surely destined for great things.

Thrive  is a software company that develops cutting-edge applications to help recruiters and talent executives make better hiring decisions. Its platform features collaborative, easy-to-use database capabilities that combine the best elements of a CRM and an  applicant tracking system  in one, seamless, cloud-based solution. The firm’s clients include several of the most valuable U.S. tech companies, and it has helped place more than 6,000 managers, professionals, and board members since its launch in 2015.

The SaaS business metrics to keep an eye on

SaaS companies are powered by data, and success in the field is predicated on how you maintain awareness of key metrics, how they interact, and how to improve then. The following are five key business metrics that determine the health and potential of a SaaS business.

Lifetime value, (LTV)

LTV is the total amount you’re due to receive from a customer over the life of their account with your product. The  LTV  of a user is one of the  most important metrics  for a SaaS business, and it’s vital that you  calculate it the right way . Retention-rate numbers (which we’ll come to shortly) are important but leave gaps in your understanding of how much retained customers are bringing in each month and won’t tell you much about the success you are (or aren’t) having with upselling. LTV brings you this precise understanding.

Customer acquisition cost (CAC)

CAC is the total cost of sales and marketing efforts that are needed to acquire a customer.

The fact of the matter is that bringing on new customers costs—and it’ll be a considerable time after bringing a new customer on board that the additional MRR offsets the cost of winning that new customer. You need to keep tabs on your CAC to ensure that your LTV is able to comfortably outpace it. Being too conservative with how much you’re willing to spend on CAC can lead to missed opportunities for revenue and growth from new customers; but being too reckless with it can lead to often critically low profitability.

Monthly & annual recurring revenue (MRR & ARR)

MRR and ARR are the lifeblood of a SaaS business. They measure the total amount of predictable revenue that a company expects on a  monthly or yearly basis. Many companies manage to make a mess of their MRR, nevertheless. A survey hosted by ProfitWell showed that one in five SaaS companies were not  reporting expenses  correctly when accounting for MRR; two in five were incorrectly including trialing or free users in some manner in their MRR; and a majority were making mistakes when differentiating between monthly, quarterly and annual payment timelines. There is no excuse for slackness with MRR, regardless of the fact that it’s not a figure you need to report to a government entity. It is a key statistic that allows investors to monitor the status of your company and is as important for you when plotting your trajectory.

Churn rate is the percentage of your customers leaving your service over a given period. It’s the nightmare statistic in the SaaS business model; even a little bit can be extremely damaging to a company’s hopes for sustaining the momentum of its growth. In fact, churn can be ruinous for companies  even when all of their other metrics are reasonably healthy. Knowing the foundation of your customer churn rate and the means by which you can reduce it could not be more important in SaaS. It can be a complex metric to get a full picture of. Breaking down your churn into segments and cohorts will reveal the different drivers behind your churn, while failing to correctly account for trialers or episodic/seasonal customers when plotting churn can muddle the picture. At our last count, there were 43 different ways public SaaS companies were accounting for the metric.

Retention rate

Your ability to retain customers is your  foundation for growth  in subscription-based services; churn is the flip side of retention, and keeping retention high is as important as keeping churn low. You may have noticed a pattern emerging in our speculations on key  SaaS metrics —and, yes, like all the rest, there’s a serious tendency among SaaS companies to calculate their retention rates incorrectly, too. Both user and MRR retention need to be calculated in tandem, so you can account for both the effects of your product, marketing, customer service, and pricing and the likelihood of sustaining profitability. You might not be taking care to differentiate between customer life-cycle stages when calculating retention rate, either, or between the plans your customers are on. In short, there’s a lot that can go wrong with your retention-rate calculations.

3 tools that help SaaS businesses grow

Now that we have a pretty solid understanding of the SaaS business model, you might already have started wondering what’s available to allow your business to get the best of the competition and really start to grow. We’ve got a few tools here at Paddle that can really help young SaaS companies grow.

Billing software

The SaaS business model is based on recurring billing, so you won't get very far without a decent recurring billing tool. There are a variety of solutions for managing subscriptions and recurring billing out there, but in many cases, you'll need to integrate these tools with a broader payments stack to manage payments and revenue. This can get messy fast. Or you can take an all-in-one approach and use a merchant of record .

As we saw above, your grasp on your data informs your success as a SaaS company: a well-organized, powerful  analytics solution  can make all the difference. Continued insight into the drivers behind your growth is fundamental for success in the SaaS business model: which customer segments are driving and detracting from subscription growth, which features in your product command the highest willingness to pay among your customer base, which features are leaving customers at more persistent risk of churn.

business model service development

Retention software

For all their importance when gauging the health of your SaaS business, churn and retention rates are seldom completely understood by young companies. Identifying customer cohorts and tracking revenue retention, MRR churn, and delinquent churn can be difficult to do without resorting to a plethora of spreadsheets.  Tools  that aid your retention rates and help drive down churn, while minimizing the chances of human error or misreporting, are vital.

The range of applications in SaaS is virtually limitless, and with the means of fundraising continuing to diversify, it has never been a better time to join the field. Still, all of the most successful software-as-a-service companies underpin their success by adhering to a few fundamentals in the SaaS business model: a reliance on good statistics and the use of the right tools and solutions. Apply the same principles to your business and you might find yourself heading in the same direction.

What is SaaS business model?

SaaS business model is based on selling cloud-based software for a subscription fee. The cloud-based software is usually accessible via mobile, desktop, and web apps, and the subscription fee is usually monthly or annually.

What is SaaS revenue model?

The SaaS revenue model is based on regular and ongoing payments to use software or a different digital product or tool. The payments have a defined period, and the most common two are monthly and annually.

Is Netflix a SaaS?

It may sound unusual initially, but yes, Netflix is indeed a SaaS. Netflix sells the software to stream movies and TV shows, both licensed through distribution deals and produced by Netflix.

What are the benefits of using Saas?

There are many benefits to SaaS software. The biggest include cost-effectivity, scalability, better security, no licensing management, and more scalability.

Related reading

business model service development

New Business Models For The New Economy: How Professional Services Firms Can Innovate

SAP

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By Asha Ambike, Director – Industries and Customer Advisory, SAP

Back in 2010, I worked for a global management consulting firm, and one of our projects was for a large telco around ARPU (Average Revenue Per User) Enhancement and Churn Management.

A bunch of consultants spending months analyzing and modeling churn behavior and making recommendations on how the telco could enhance ARPU and control churn. Cut to today, the same job can be automated by a SaaS solution that uses artificial intelligence and machine learning (AI/ML) to predict customers at risk and suggest retention offers to keep them in the fold - at a fraction of the cost of what we billed to the telco customer.

This anecdotal incident is symptomatic of the disruption and change that digital technologies are bringing about in the professional services industry. One such study from McKinsey estimates that knowledge work automaton tools and systems could take on tasks that would equal the output of 110 million to 140 million full-time human equivalents (FTEs).

Consequently, the professional services industry, that is typically on the forefront advising clients on digital transformation, now finds that it itself is not immune to digital disruption.

This situation is further compounded by Covid-19 and the need to operate in completely virtual environments and deliver projects digitally. Not far behind are new startup entrants like Catalant (formerly HourlyNerd) or Wonder with their innovative on-demand expert marketplaces, that offer services digitally, efficiently and at significantly lower costs.

New business models for the new economy

But then disruption is an opportunity long before it becomes a threat – an opportunity to re-invent and emerge stronger with new business models relevant for this new economy. From a recent survey by SAP-Oxford Economics with 300 senior executives from professional services firms, we see three key business models emerging.

1.     Knowledge-as-a-service: Going beyond the in-person, fixed duration engagements, productizing expertise in the form of digital services and solutions can provide a highly resilient and ongoing revenue stream, especially in these pandemic times. Classic example of this is McKinsey Solutions, software and technology-based analytics and tools that can be embedded at a client, providing ongoing engagement outside the traditional project-based model.

2.     Talent Marketplaces: Technology driven talent marketplaces comprising independent consultants and on-demand top talent allow firms to access expertise beyond the traditional boundaries of the firm. Examples include BTG, OpenIdeo, Eden McCallum and Gerson Lehrman Group, to name a few. Talent networks present an opportunity to access scarce skills and flexibly scale resources as per project pipeline and demand.

3.     Outcome based models: Increasingly customers are expecting firms to replace the traditional ‘time and material’ based engagements with more result oriented, outcome-based engagements. Leading firms like Accenture have been pioneering this with ‘skin-in-the-game’, value-based engagements that are linked to performance and business outcomes over effort involved. Another variant of this model is BCG Digital Ventures where the consulting firm partners with customers to jointly launch new digital business ventures.

Embracing next-gen practices is key to delivering new business models

Embracing the very digital technologies that present this threat of disruption is the first step towards business model innovations and the underlying operating models needed to deliver them. Professional services firms need to adopt next-gen practices in terms of people, processes and technologies to deliver these new business models. Firms need to recognize the importance of becoming far more data-driven across their various business processes and functions to take advantage of these opportunities.

For example, in order to deliver outcome-based engagements, firms require superior bidding processes that help leverage historical data from past proposals and project deliveries to create accurate pricing proposals. Imagine a sophisticated pricing and estimation platform  that generates accurate proposals in hours not days, resulting in higher win rates, superior project profitability, improved resource utilization and above all, an opportunity to participate in the upside from these outcome-based models.

Similarly, leveraging external talent networks would need automated resourcing practices that help resourcing managers staff and match demand pipeline with the right talent from internal and external pools. Further, delivering productized digital services and solutions would need sophisticated practices that support self-service/low-touch sales, configure-price-quote (CPQ) , subscription billing , revenue recognition and invoicing.

We’ve only begun to scratch the surface here. The future for professional services firms is exciting, and the firms that embrace innovation will triumph.

Find out more about how professional services firms can benefit from innovation by reading our latest study with Oxford Economics   The Interconnected Professional Services Firm .

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business model service development

  • John R. Bryson 4 ,
  • Jon Sundbo 5 ,
  • Lars Fuglsang 5 &
  • Peter Daniels 6  

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The chapter explores strategy and development as part of the ongoing debate on business models. The business model approach provides a useful structure for comparing the three different, but linked, elements of a business model—value propositions, value networks and value-capturing mechanisms. Disruptive innovation can occur anywhere within or between these three elements. Disruptive innovation continues to transform service businesses by destroying existing business models and via the development of new business models. The pace of disruption continues to increase, reflecting an escalation in the velocity of change. Central to the development of new service-based business models are innovations in monetarization or in revenue or value capture mechanisms. Multi-sided business models, or triadic business models, represent one form of innovative value capture based on the monetarization of derivative currencies. This, however, is only one form. Globalization has led to intensified competition that has driven innovation in business models but also service operations.

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Bryson, J.R., Sundbo, J., Fuglsang, L., Daniels, P. (2020). Business Models and Service Strategy. In: Service Management. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-52060-1_3

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BUSINESS MODELS

Learn everything you need to know about business models. This guide on business models was created by an ex-McKinsey consultant and includes frameworks, case studies, examples, a step-by-step design guide, and an 18-page business model PowerPoint template.

THE BIG PICTURE ON BUSINESS MODELS

1. To Grow, Get All of the Elements Right

If you think through, analyze , and correctly solve each element of the business model, your company will grow.

2. Sequentially Solve the Business Model

Strategic planning should always start with the mission , then flow through the targets, value proposition , go to market, and finally the organization .

3. Understand the Role of Each Business Model Element

Once you understand each business model element, then it is much easier to solve for the right strategies to grow.

4. Strategic Alignment is the Key to Execution

Strategic alignment is when an organization is laser-focused on developing and delivering a killer value proposition and go-to-market that beats the competition .

A BUSINESS MODEL HAS 5 CORE ELEMENTS

There are five major components to any business model:

1. The Mission   2. Targets  3. Customer Value Proposition  4. Go-to-Market  5. The Organization

The way a business model works is: " The organization efficiently & effectively develops and delivers the customer value proposition and go-to-market to fulfill the needs of the target customers better than competitors , all for the purpose of achieving the mission ."

The horizontal graphic below translates the flow of elements in a business model.

How a business model works

THE WHO, WHAT, WHY, WHERE & HOW OF BUSINESS MODELS

We can take the horizontal business model graphic and make it vertical, which is the graphic we use throughout the site.

Business Model Questions

Let's go over the big picture of the business model.

We start at the top with the "true north" representing a business' mission , vision, and values , which ultimately gives purpose and provides the "why" the company exists. An inspiring and enduring mission, vision, and values serve as a guide to align strategies, and help all employees make the   right decisions , however big or small the decisions .

We next move down to the   targets.   These include the   markets   and   geographies   ("where") the company competes in, for the business of the target   customers  ("who"). Companies that clearly define and deeply understand their targets, develop focused and aligned business models.

Next is the  value proposition , which is the "what" and the core of any business model, composed of the  business's products ,  services ,  and  pricing . Then, there is the  go-to-market , comprised of the  business's distribution ,  sales ,  and  marketing . The purpose of go-to-market is to amplify the value proposition to drive customer acquisition and loyalty.

Finally, the  organization  is organized into  functions  (e.g., sales, ops, finance). Everything the organization does is a  process  (whether defined as one or not) executed by  team members ,  partners , and  infrastructure . The organization is the execution machine and the "how" things get done in a business model. And as stated before, the organization's purpose is to efficiently and effectively develop and deliver the value proposition and go-to-market to fulfill customers' needs better than competitors, all for the purpose of achieving the mission, vision, and values.

SOLVE A BUSINESS MODEL FROM THE TOP DOWN

Let's go over a few things about business models. First, look below to see all the  different types of strategy , which are just the tip of the iceberg. Second, most companies make the mistake of solving their strategy from the bottom up, starting with functional strategies. The conversation goes something like this, "We've got our board meeting coming up. Bob, I need your ops strategy. Jane, I need your marketing strategy . Helen, I need your sales plan and strategy. Nate, give me a readout on the HR strategy ."

I equate it to trying to design a car, with the chassis, brakes, engine, and electronics team independently designing their part. In the end, it won't work. Now, let's get into a simple case study to understand better how a business model works.

Types of Strategy

SOUTHWEST AIRLINES - ONE OF THE CLEANEST BUSINESS MODELS

Finding a better example of a well-tuned business model than Southwest Airlines is hard. Starting in 1967, Southwest Airlines has grown to be the largest domestic airline in the U.S., with $20 billion in annual sales and 50,000 employees. With a deep history of award-winning service, Southwest has amassed 43 straight years of  profitability . If you were lucky enough to buy $10,000 worth of Southwest stock in 1971, it would be worth over $20,000,000 today.

Southwest Business Model

TRUE NORTH - "THE "WHY"

The true north of a company includes the organization's mission, vision, and values, which provide the foundation for aligning strategies, decisions, actions, and culture . A compelling mission gives the team and organization the inspiration and the focus they need to make mission-based decisions and align their strategies. A strong vision of strategic pillars and ambitious goals provides the next level of focus for aligning the organization's strategies. And values are the foundation of expected norms and behaviors that foster a company's culture. Without a compelling mission, vision, and values, management teams often struggle with strategic focus since they try to navigate without understanding the direction of true north.

Back in 1971, Southwest's mission was so simple and effective, “Charge the lowest possible fare. And provide the highest quality service.”

Over the past 45+ years, Southwest's strategic and day-to-day decisions reinforced how they could charge the lowest possible fare and provide the highest quality service. You'll see Southwest's mission throughout Southwest's business model.

Today, Southwest's true north is encapsulated below in its purpose, vision, mission, and values.

Southwest Mission

TARGETS - THE "WHO" & "WHERE"

A business model has three primary targets:  1. Markets , 2. Customers, 3. Geographies.  The targets define the "who" and "where" of a business model. A  market  establishes the solution space a business competes in for customers. If a  leadership team  truly understands its market dynamics, it can navigate its way to a leadership position. A defined  target customer  enables an organization to tailor their value proposition better to exceed the target customers' needs. While  target geographies  focus on the execution of a business and add to economies of scale.

Well-defined targets provide an organization clarity to make better decisions and execute at a higher level. Expanding into new markets, customer segments, and geographies can lead to explosive growth when a business already has a winning value proposition in existing markets, customer segments, and geographies. However, suppose a company expands into new target markets, customers, and geographies before the value proposition and organization are ready. In that case, it can fragment focus, create shoddy execution, and overextend the business into financial distress.

Let's better understand Southwest's target market, customer segments, and geographies.

Southwest Competitive Differentiation

Southwest's Target Market

The output of a market strategy is a differentiated positioning within the market. Southwest competes in the highly competitive commuter airline market, which, as an industry, lost $50 billion from 2001-2012.

The idea of Southwest was born on a napkin with lines connecting the three dots titled Dallas, San Antonio, and Houston. Back in 1967, the founders of Southwest saw a hole in the commuter airline market. While the big airlines were built around national and regional hub and spoke route models, Southwest focused on intrastate point-to-point routes (initially Dallas, Houston & San Antonio). Since then, Southwest has stuck to this point-to-point route market positioning, while most other airlines relied on their hub and spoke models.

southwest

Southwest's Target Customers

You start a business to fulfill a customer's need. Southwest started a regional point-to-point airline for customers who wanted an hour-long flight rather than waste 3.5 to 4.5 hours in a car to drive from Dallas to Houston or San Antonio. Instead of spending 7 to 9 hours behind the car windshield for a day round trip, customers could be pampered by  "the best service and the most beautiful girls in the sky."  Southwest had a unique perspective on how they defined the needs of their  target customers , as stated in their 1975 Annual Report,

"We believe that in short-haul markets of up to 500 miles, the private automobile is a worthy competitor for those consumers representing the great majority of us who cannot logically place a value on time commensurate with the airfares now charged in those markets. Except for the businessman and woman market, a fare that does not compete with the cost of personal automobile travel will not permit any air market to reach its potential.

By focusing on this unmet customer need to substitute a flight for a car drive, Southwest was one of the key influencers in driving astronomical growth in U.S. domestic air travel. They attracted business customers with low fares, convenience, and service, and leisure travelers with ultra-discounted weekend tickets to drive up their plane utilization. At the time, the ultra-discounted weekend fares opened up a whole new segment of travel customers who wanted to fly for pleasure, to visit family, recreation, and to explore new destinations.

Over the past 45+ years, Southwest has continued its focus on the business and leisure customer segments, tailoring its value proposition and go-to-market to these two segments.

Southwest History

Southwest's Target Geographies

While Southwest Airlines now serves over 100 destinations, its deliberate geographic expansion strategy was one of the keys to Southwest's growth. In keeping with its low-cost provider mission, Southwest has always pursued a geographic density strategy to drive cost and capital synergies and utilization.

Over the six years after their 1971 launch, Southwest expanded just in Texas with routes to the Rio Grande Valley, Austin, Corpus Christi, El Paso, Lubbock, and Midland/Odessa. In 1977, Southwest's fleet of 12 737s carried 2.4 million customers, which equals 200,000 passengers per plane, or 548 passengers per plane per day. Considering the population of Texas was only 13 million people in 1977, the word-of-mouth of the new, cool, and cheap Southwest Airlines was unavoidable. This geographic focus also enabled Southwest to leverage its fixed costs related to airports, personnel, maintenance facilities, and advertising .

Southwest has always taken a highly deliberate geographic expansion strategy, choosing routes that are natural extensions of the existing route network, leading to 40 years of steady, profitable growth. Southwest has continuously focused on driving the economies of scale that a dense geographic strategy provides. Furthermore, Southwest has been extremely opportunistic with their airport selection, often focusing on lower-cost second-tier airports in a region such as Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore-Washington International, Oakland, San Jose, Burbank, Manchester, Providence, Ft-Lauderdale-Hollywood.

And, when Southwest expanded internationally, they made the strategic acquisition of AirTran, which had few overlapping routes but did have a robust business to the Caribbean, Mexico, and select Central American cities.

southwest route map

The Strategic Takeaway on Targets

Understanding, defining, and executing against target markets, customers, and geographies is core to building a killer business model. If you create a  differentiated market position,  you have a long-term vision of what you need to execute against. If you define the right target customers, you can tailor a differentiated value proposition to drive more customer value than competitors while also narrowing the scope of your go-to-market strategies. If you develop geographic density, then you reap economies of scale.

Keep your targets focused until your business and economic model are ready to scale into new markets, customer segments, and geographies. New markets, customer segments, and geographies can provide explosive growth, but only if your value proposition and economics are ready to beat the competitors in the new targets. The downfall of too many businesses is they overextend themselves by trying to expand into too many new targets, fragmenting the focus and execution of the organization.

THE VALUE PROPOSITION - THE CORE & "WHAT"

Business Model Value Proposition

Southwest's Value Proposition

Let's return to the original Southwest mission:  "Charge the lowest possible fare. And provide the highest quality service."  Frankly, it sounds like their value proposition, which is what you want in a mission statement .

Herb Kelleher, the co-founder and former CEO of Southwest, understood the customer value equation from the beginning, as he highlighted in an interview with  Strategy + Business, after being honored as a "Lifetime Strategist,"

One of the things that people, I think, didn't understand is that we started out saying we're going to give you more for less, not less for less. We're going to give you new airplanes, not old airplanes. We're going to give you the best on-time performance. We're going to give you the people who are most hospitable."

1970s Southwest Ad

southwest ad

Southwest's Service - Rational Benefits

In evaluating a value proposition, start with the rational benefits of the  products  and  services . Southwest's rational benefits are getting customers and their bags from point A to B through the air, which they do efficiently and competently.

They have the highest frequency of point-to-point routes, providing customers convenience and reduced travel time versus hub and spoke airlines. Southwest has the best historical on-time and baggage performance. They have a fast and convenient check-in process. In the event of a change, they have no change penalties and make it easy to book another flight. They also have the richest and easiest-to-redeem rewards program, averaging 9.5% of passenger miles flown on Rapid Rewards flights versus ~7% on other airlines.

By consistently and efficiently getting passengers and their bags from point A to B, Southwest consistently ranks as one of the top airlines in customer satisfaction.

Southwest Value Proposition

Southwest's Service - Emotional Benefits

If you fly Southwest, you understand the difference in the emotional experience versus other airlines. It always starts with the people, and Southwest's employees have a fun, caring, and go-the-extra-mile attitude.

Then there is Southwest's physical experience of newer planes, with leather seats and extra legroom compared to other airlines in the same fare class.

Then there are the perks of free live TV, free snacks, drinks, and affordable $5 wifi and alcoholic beverages. If you're a frequent flier, they periodically send you free alcoholic beverage coupons.

There is also the emotional lift of not being taken advantage of with bag and change fees.

Southwest's service is so good, and their emotional connection with customers is so strong that they can pull off marketing campaigns centered around "Love." Imagine what a bad joke it would be if other airlines tried incorporating "love" into their  marketing .

southwest emotional benefits

Southwest Pricing

In 1993, the U.S. Department of Transportation coined the term the "Southwest Effect" for the rapid growth in total air travel in a city-to-city route once Southwest started to fly the route. The "Southwest Effect" is driven by their value equation, which equals benefits - price. While we've gone through the customer benefits of Southwest, let's flip to the other side of the coin:  pricing .

Historically, Southwest has been the price leader in the airline industry. With the growth of ultra-discount airlines (e.g., Frontier, Spirit), they may no longer be the ticket price leader. However, they are probably still the leader in the total cost of flying when you factor in the extra cost of bags, seat selection, change fees and the other charges of ultra-discount airlines.

Southwest utilizes its simple pricing in its #FeesDontFly  marketing campaign . While the competitive herd goes one way, Southwest goes the other way, which is the essence of  competitive differentiation .

Southwest Pricing

The Strategic Takeaways on Value Propositions

A business's value proposition comprises its products, services, and pricing. The goal of a value proposition is to drive better customer value (benefits - price) than competitors. Over the past 45+ years, Southwest has consistently delivered superior customer value, leading them to grow into the largest U.S. domestic airline.

For struggling companies, the first thing to look at is the customer value proposition, which is most likely deficient versus the competition . Even for successful companies, the bottom line is to continuously focus on differentiating the value proposition to improve benefits while driving down costs, which can translate into enhanced profit or price improvement. The Customer Value Wedge is a nice visual to understand this concept better.

The Customer Value Wedge

GO-TO-MARKET - AMPLIFYING THE VALUE PROPOSITION

The go-to-market strategy of a business model is how a company drives and fulfills the demand for products and services to customers. The three components of go-to-market include  distribution ,  sales , and  marketing . Powerful go-to-market strategies effectively and efficiently amplify the value proposition to the defined target customers.

The big strategic choice with distribution is whether to go direct, indirect, or a hybrid model of both direct and indirect channels. The big strategic goal with sales and marketing is to drive campaigns and activities to increase the size of the customer funnel and accelerate customers through the funnel.

Southwest Marketing

Southwest Direct Distribution

With the rise of digital channels, distribution is currently a hotbed of disruption and innovation . Thousands of companies have cut out significant distribution costs from their value chain, by going directly to customers through digital channels .

Given Southwest's mission of low fares, in the late 90s, as Expedia, Priceline, Orbitz, and other travel websites grew, Southwest decided not to partner with third-party websites and only utilize Southwest.com as their online distribution.  At the time it was a risky move as many airline analysts said Southwest was going to suffer. However, given the strength of Southwest's value proposition and loyalty, the direct distribution strategy paid off.

For Southwest, the estimated savings are ~$700 million a year by not using the travel sites. Southwest can split the $700 million between higher profits and lower fares for customers. It is an example of driving the customer value wedge.

Distribution strategy is a critical element of any go-to-market strategy, and getting it right can be the difference between winning and losing.

southwest airlines distribution

Southwest Sales & Marketing

Southwest's marketing, encapsulated in their "Tranfarency" and "Love" campaigns, reflects their low fares and high-quality service mission. "Transfarency" amplifies the rational benefits of Southwest's value proposition, while "Love" amplifies the emotional benefits.

One of the main outputs of any marketing strategy is a campaign, simply a combination of messages and media. There are three media meta-channels:  advocacy, owned, and paid . The beauty of Southwest is how consistent they are in driving its brand messages across all three of these media meta-channels.

With Southwest and most B2C companies, there isn't a "Sales" element to their business model, as in most B2B business models.

Too often, companies blame marketing for their growth woes instead of addressing the lack of value in their value proposition. Two of the most successful retailers, Costco and Trader Joe's, spend almost nothing on marketing but continue to grow through the strength of their value proposition and word-of-mouth advocacy. From 2010 to 2013, Southwest kept its advertising spending almost flat but increased revenues by 46%.

Southwest Marketing Channels

The Strategic Takeaways on Go-to-Market

Too often, executives blame distribution, marketing, and sales strategies for growth woes. They usually replace their sales and marketing leaders or spend more on advertising and salespeople when they need to improve their value proposition.

Go-to-market strategies amplify a value proposition. If the value proposition is inferior to the competition, improve the value proposition and then amplify the value proposition through bigger and better go-to-market strategies.

If your business has a strong value proposition, add growth fuel by heavily investing in distribution, sales, and marketing. And align the go-to-market strategies to the target customer and their typical purchasing journey. Lastly, get the brand messaging right to tap into the rational and emotional benefits of the value proposition.

THE ORGANIZATION - THE HEART & "HOW"

The purpose of an organization is to efficiently and effectively develop and deliver the customer value proposition and go-to-market. Reflect on this for a minute. Is your role and everyone in the company focused on developing and delivering the customer value proposition and go-to-market?

Organizations are simply a collection of processes executed by a combination of people, infrastructure, and partners . The  processes are organized into functions .

There are two types of functions: 1. value chain functions and 2. support functions. Value chain functions create the value proposition and deliver and service the value proposition (i.e., logistics, product development , manufacturing, sales, marketing, and service operations). Support functions support the efficiency and effectiveness of other functions (i.e., procurement , IT, finance, HR, legal).

Value Chain

Solve the Top Before Getting to the Bottom

From a strategic perspective, the better the management team defines the top part of the business model, the easier it is for them to define strong organizational and functional strategies. Strategically aligning the value proposition, go-to-market, and organizational strategies to the targets and "true north" is one of the easiest ways to drive the efficiency and effectiveness of the organization.

Another critical component of organizational strategy is  core competencies , which are those capabilities that a business needs to be world-class at to develop and deliver the competitive differentiation and advantage of the business model.

Now, let's dive into how Southwest reinforces its business model through its organizational strategies. Southwest's mission and value proposition of low cost, high service is accomplished through Southwest's strategies related to  Team Members, Infrastructure, Partners, & Processes .

Southwest's Enduring Focus on People

People are the heart and soul of any organization. Southwest's mantra is "employees first, customers second, shareholders third. As co-founder of Southwest, Herb Kelleher said,  "If the employees serve the customer well, the customer comes back, and that makes the shareholders happy. It's simple, it's not a conflict, it's a chain."

Southwest has one of the most passionate and loyal workforces. They were named  the best company for work-life balance . They've ranked as high as  #13 in the Forbes Best Employer list . They've never had a layoff or cut pay.  Voluntary turnover is less than 2%.  With over 50,000 employees, Southwest does an incredible job keeping its  team members  happy, productive, and passionate. So, the question is how?

There are three main elements to a holistic people strategy :  1. org design ,  2. employee journey, and 3. culture . Let's dig into Southwest's employee journey and culture to understand how they elevate and  realize the potential of their team .

Southwest Employee Journey

Southwest's Culture

A company's culture starts with its  values , which are reinforced by norms and the environment. Benefits and compensation are also critical to a company's culture.

It is hard to beat Southwest's culture. What other companies  celebrate their culture in their recruiting materials ? And, what other companies have a Culture Services Department and Local and Companywide Culture Committees?

It all starts with Southwest's values, which are broken up into "Live the Southwest Way" (Warrior Spirit, Servant's Heart, Fun-LUVing Attitude) and "Work the Southwest Way" (Safety and Reliability, Friendly Customer Service, and Low Costs).

Southwest norms, which define how Southwest team members interact with each other, reinforce the values. Southwest's environment (offices, planes, gates, etc.) celebrates employees, travel, and Southwest. Southwest also reinforces its values and norms with spirit parties, chili cook-offs, and Luvlines (their employee magazine).

Though Southwest is a low-price airline, its compensation is some of the highest in the industry. And they align all team members to their mission and financial performance through a generous profit-sharing plan. In 2015, Southwest paid out $620 million in profit-sharing, which amounted to over $12,000 per employee. This plan reinforces the Work the Southwest Way values. Southwest's benefits are numerous and generous. There are too many to list, but you should glance at them on  Southwest's website .

While culture may seem squishy and nebulous, a solid and enduring culture can take root in any company if you get the values right and reinforce them with norms, the environment, benefits, and compensation.

Southwest Culture

Southwest's Employee Journey

Strong companies infuse their mission and values into their  employee journey , including recruiting, hiring, onboarding , development, evaluation, and advancement. Some companies do it better than others, but great companies like Southwest are deliberate and thoughtful in their employee journey strategy.

Southwest leadership knows that starting with the right people, who inherently embody Southwest's values, is paramount to realizing its mission and preserving its culture. Southwest hires less than 2% of applicants and 6% of interviewees. Their interview process is rigorous, with group interviews, fit interviews, and a profile guide.

New hires go through a 4-week training program that trains them on the ins and outs of the job and enculturates them in the Southwest values with fun activities such as egg balancing relays and scavenger hunts. Once a team member begins to work, they are assigned a team member sponsor and participate in new hire parties and luncheons to reinforce the Southwest norms and culture.

Evaluation and advancement are based not only on a team member's skills but also on their demonstration of living the Southwest values. Team member development is reinforced through SWA University's extensive leadership and management development programs, along with continuous feedback and coaching.

There is also a continuous celebration of Southwest team members. Customers see it in the Southwest magazine with monthly articles on team members who have gone above and beyond. Southwest advertisements use team members instead of actors. Team members can give each other SWAG (Southwest Airlines Gratitude) points, utilizing an online platform that allows team members to recognize other team members for their Warrior Spirit, Servant's Heart, or Fun-LUVing Attitude.  Team members can turn their points in for gift cards and merchandise . There are also numerous employee awards, such as the Spirit Award.

Southwest has thoughtfully optimized its employee journey to elevate and realize the potential of its 50,000+ person team.

Southwest Employee Journey

Southwest's Infrastructure

Infrastructure includes the equipment, information technology, facilities, machinery, and other physical assets a business uses. Infrastructure strategy and decisions are challenging, given the typical significant investment, sometimes long and complex implementations, against the backdrop of a continuously changing future.

In Southwest's case, its infrastructure strategy reinforces its low-cost mission. In 1971, Southwest began service with four Boeing 737s, which were introduced into the market a mere four years earlier. While competitors used 15-25 seat commuter jets for the same type of routes, Southwest's 737s seated 112 passengers, ensuring Southwest a superior cost structure once the planes were fully utilized (which took a few years). Still to this day, Southwest's fleet of 700+ planes is all Boeing 737s, compared to United Airlines, which utilizes  over 20 types of aircraft .

As stated in  Southwest's 10-K ,  "The Company's low-cost structure has historically been facilitated by Southwest's use of a single aircraft type, the Boeing 737, an operationally efficient point-to-point route structure, and highly productive employees. Southwest's use of a single aircraft type has allowed for simplified scheduling, maintenance, flight operations, and training activities."

Southwest's no-seat assignments policy massively simplifies its systems and processes, with no need to track seats and seat assignments for every plane for every flight for an entire year out.

Then there is the decision, back in the early 2000s, not to install in-flight entertainment, which would have cost multiple millions of dollars per plane and led to installation downtime. The weight of each in-seat display unit can be upwards of 13 pounds. Every pound of extra weight adds ~$1,400 per year per plane in extra fuel. 13 pounds per seat adds ~$3 million in additional operating costs per year per aircraft. In-flight entertainment didn't align with their low-cost mission. Fast forward a decade, and now Southwest has arguably the best in-flight entertainment with free live TV with BYOD (bring your own device).

Southwest has always aligned its infrastructure strategy with its mission and value proposition, leading to its unit cost leadership of 4.4 cents per available seat mile versus 5.4 to 5.8 cents for other airlines.

Southwest Infrastructure

Southwest's Partners

Partners are all those companies that support a business. To understand the breadth of partners in a company, simply look at the accounts payable list to see all the partners. Now, while many partners are transactional, in most businesses, a few strategic partners can support the success of a business model.

In the case of Southwest, Boeing is a strong and important strategic partner. Here is an excellent quote from a  nice history of the Boeing / Southwest partnership,

"Our relationship with Southwest is about more than just delivering great airplanes," said Carolyn Corvi, vice president and general manager of the Boeing 737/757 Programs. "It's about understanding their business, trusting each other, and working together to achieve solutions. We know that while they have a lot of fun and play hard, they also run a business model that the entire industry emulates and admires. We are delighted and honored to have such a wonderful partner."

And you can see the benefits of this partnership, with Southwest often being the launch partner on Boeing's new 737 and customizing them to meet the needs of Southwest's customers. Take a look at the  737-800 MAX as an example .

Southwest's Processes

Every action in a business is a process, whether acknowledged as one or not. The key to processes is that they are lean and efficient by reducing non-value-added actions and inventory, otherwise known as waste. For Southwest, the foundation of processes is great people, infrastructure, and partners, which enables them to have super lean & low-cost processes and high plane utilization.

Just think about Southwest's quick gate turnaround, which originated as a 10-minute turnaround challenge,  which you can read about here . They only use 737s, so their turnaround teams and training are optimized on one type of plane. They don't have food carts, and they have customers and stewards clean up during deplaning. Through the profit-sharing plan, their team members are incentivized to get planes out on time and turn them around quickly.

Or, think about their no-seat assignments, which help them lean out many processes. Customer service interactions about seat assignments are non-existent, which also lowers IT costs by eliminating the complexity of seat assignments. Furthermore, the first customers to check in are the first to get their boarding number, which drives earlier check-in and better over / under-booking  metrics , eliminating the need to kick paying customers off an overbooked flight.

Southwest's lean processes also make it the historical leader in on-time and baggage performance. The collective focus on lean processes helps Southwest's team members realize their mission of being a low-cost airline.

Southwest Processes

Strategic Takeaways on Organizations

Southwest's organization efficiently and effectively develops and delivers its value proposition and go-to-market. Southwest's alignment of its entire business model from the mission to the targets to the value proposition, go-to-market, and the organization is extremely rare. So is their phenomenal revenue growth and 45 years of profitability.

Southwest Revenue Growth Historical

BUSINESS MODEL STRATEGY

If a company doesn't have a mission or has a weak mission, fix that first. If the target markets, customers, and geographies are too broad, then focus them on the most lucrative. If the value proposition doesn't drive better customer value than the competition, then solve that. If the value proposition is strong, then focus on scaling through an improved go-to-market strategy. The more focused the top part of the business model, the easier it is to develop great organizational and functional strategies. If the business model is robust and working, then, and only then, think about expanding into new markets, customer segments, or geographies.

Every company has the potential to grow for decades, but it all comes down to strategy and execution.

If you need to develop a business model strategy, I encourage you to read  developing a strategy  or  set up some time with me  to start figuring it out.

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Business Model Canvas

Plan and understand in advance the business model and constraints of the service you are designing., applied for.

Implementation

Stakeholders

also called

Product/Market Fit

related content

Value Proposition Canvas

Offering Map

The business model canvas is a synthetic chart providing an overview of the service in terms of value proposition, infrastructure, types of customers and financial model. It helps understand what activities are needed in order to build and deliver a service, and identify potential trade-offs.

Describe, design, challenge and pivot your business model.

remember to

Focus on the big picture, also the smallest details come with a cost.

Preview image of the template for Business Model Canvas

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Business Model Canvas: Explained with Examples

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Got a new business idea, but don’t know how to put it to work? Want to improve your existing business model? Overwhelmed by writing your business plan? There is a one-page technique that can provide you the solution you are looking for, and that’s the business model canvas.

In this guide, you’ll have the Business Model Canvas explained, along with steps on how to create one. All business model canvas examples in the post can be edited online.

What is a Business Model Canvas

A business model is simply a plan describing how a business intends to make money. It explains who your customer base is and how you deliver value to them and the related details of financing. And the business model canvas lets you define these different components on a single page.   

The Business Model Canvas is a strategic management tool that lets you visualize and assess your business idea or concept. It’s a one-page document containing nine boxes that represent different fundamental elements of a business.  

The business model canvas beats the traditional business plan that spans across several pages, by offering a much easier way to understand the different core elements of a business.

The right side of the canvas focuses on the customer or the market (external factors that are not under your control) while the left side of the canvas focuses on the business (internal factors that are mostly under your control). In the middle, you get the value propositions that represent the exchange of value between your business and your customers.

The business model canvas was originally developed by Alex Osterwalder and Yves Pigneur and introduced in their book ‘ Business Model Generation ’ as a visual framework for planning, developing and testing the business model(s) of an organization.

Business Model Canvas Explained

What Are the Benefits of Using a Business Model Canvas

Why do you need a business model canvas? The answer is simple. The business model canvas offers several benefits for businesses and entrepreneurs. It is a valuable tool and provides a visual and structured approach to designing, analyzing, optimizing, and communicating your business model.

  • The business model canvas provides a comprehensive overview of a business model’s essential aspects. The BMC provides a quick outline of the business model and is devoid of unnecessary details compared to the traditional business plan.
  • The comprehensive overview also ensures that the team considers all required components of their business model and can identify gaps or areas for improvement.
  • The BMC allows the team to have a holistic and shared understanding of the business model while enabling them to align and collaborate effectively.
  • The visual nature of the business model canvas makes it easier to refer to and understand by anyone. The business model canvas combines all vital business model elements in a single, easy-to-understand canvas.
  • The BMC can be considered a strategic analysis tool as it enables you to examine a business model’s strengths, weaknesses, opportunities, and challenges.
  • It’s easier to edit and can be easily shared with employees and stakeholders.
  • The BMC is a flexible and adaptable tool that can be updated and revised as the business evolves. Keep your business agile and responsive to market changes and customer needs.
  • The business model canvas can be used by large corporations and startups with just a few employees.
  • The business model canvas effectively facilitates discussions among team members, investors, partners, customers, and other stakeholders. It clarifies how different aspects of the business are related and ensures a shared understanding of the business model.
  • You can use a BMC template to facilitate discussions and guide brainstorming brainstorming sessions to generate insights and ideas to refine the business model and make strategic decisions.
  • The BMC is action-oriented, encouraging businesses to identify activities and initiatives to improve their business model to drive business growth.
  • A business model canvas provides a structured approach for businesses to explore possibilities and experiment with new ideas. This encourages creativity and innovation, which in turn encourages team members to think outside the box.

How to Make a Business Model Canvas

Here’s a step-by-step guide on how to create a business canvas model.

Step 1: Gather your team and the required material Bring a team or a group of people from your company together to collaborate. It is better to bring in a diverse group to cover all aspects.

While you can create a business model canvas with whiteboards, sticky notes, and markers, using an online platform like Creately will ensure that your work can be accessed from anywhere, anytime. Create a workspace in Creately and provide editing/reviewing permission to start.

Step 2: Set the context Clearly define the purpose and the scope of what you want to map out and visualize in the business model canvas. Narrow down the business or idea you want to analyze with the team and its context.

Step 3: Draw the canvas Divide the workspace into nine equal sections to represent the nine building blocks of the business model canvas.

Step 4: Identify the key building blocks Label each section as customer segment, value proposition, channels, customer relationships, revenue streams, key resources, key activities, and cost structure.

Step 5: Fill in the canvas Work with your team to fill in each section of the canvas with relevant information. You can use data, keywords, diagrams, and more to represent ideas and concepts.

Step 6: Analyze and iterate Once your team has filled in the business model canvas, analyze the relationships to identify strengths, weaknesses, opportunities, and challenges. Discuss improvements and make adjustments as necessary.

Step 7: Finalize Finalize and use the model as a visual reference to communicate and align your business model with stakeholders. You can also use the model to make informed and strategic decisions and guide your business.

What are the Key Building Blocks of the Business Model Canvas?

There are nine building blocks in the business model canvas and they are:

Customer Segments

Customer relationships, revenue streams, key activities, key resources, key partners, cost structure.

  • Value Proposition

When filling out a Business Model Canvas, you will brainstorm and conduct research on each of these elements. The data you collect can be placed in each relevant section of the canvas. So have a business model canvas ready when you start the exercise.  

Business Model Canvas Template

Let’s look into what the 9 components of the BMC are in more detail.

These are the groups of people or companies that you are trying to target and sell your product or service to.

Segmenting your customers based on similarities such as geographical area, gender, age, behaviors, interests, etc. gives you the opportunity to better serve their needs, specifically by customizing the solution you are providing them.

After a thorough analysis of your customer segments, you can determine who you should serve and ignore. Then create customer personas for each of the selected customer segments.

Customer Persona Template for Business Model Canvas Explained

There are different customer segments a business model can target and they are;

  • Mass market: A business model that focuses on mass markets doesn’t group its customers into segments. Instead, it focuses on the general population or a large group of people with similar needs. For example, a product like a phone.  
  • Niche market: Here the focus is centered on a specific group of people with unique needs and traits. Here the value propositions, distribution channels, and customer relationships should be customized to meet their specific requirements. An example would be buyers of sports shoes.
  • Segmented: Based on slightly different needs, there could be different groups within the main customer segment. Accordingly, you can create different value propositions, distribution channels, etc. to meet the different needs of these segments.
  • Diversified: A diversified market segment includes customers with very different needs.
  • Multi-sided markets: this includes interdependent customer segments. For example, a credit card company caters to both their credit card holders as well as merchants who accept those cards.

Use STP Model templates for segmenting your market and developing ideal marketing campaigns

Visualize, assess, and update your business model. Collaborate on brainstorming with your team on your next business model innovation.

In this section, you need to establish the type of relationship you will have with each of your customer segments or how you will interact with them throughout their journey with your company.

There are several types of customer relationships

  • Personal assistance: you interact with the customer in person or by email, through phone call or other means.
  • Dedicated personal assistance: you assign a dedicated customer representative to an individual customer.  
  • Self-service: here you maintain no relationship with the customer, but provides what the customer needs to help themselves.
  • Automated services: this includes automated processes or machinery that helps customers perform services themselves.
  • Communities: these include online communities where customers can help each other solve their own problems with regard to the product or service.
  • Co-creation: here the company allows the customer to get involved in the designing or development of the product. For example, YouTube has given its users the opportunity to create content for its audience.

You can understand the kind of relationship your customer has with your company through a customer journey map . It will help you identify the different stages your customers go through when interacting with your company. And it will help you make sense of how to acquire, retain and grow your customers.

Customer Journey Map

This block is to describe how your company will communicate with and reach out to your customers. Channels are the touchpoints that let your customers connect with your company.

Channels play a role in raising awareness of your product or service among customers and delivering your value propositions to them. Channels can also be used to allow customers the avenue to buy products or services and offer post-purchase support.

There are two types of channels

  • Owned channels: company website, social media sites, in-house sales, etc.
  • Partner channels: partner-owned websites, wholesale distribution, retail, etc.

Revenues streams are the sources from which a company generates money by selling their product or service to the customers. And in this block, you should describe how you will earn revenue from your value propositions.  

A revenue stream can belong to one of the following revenue models,

  • Transaction-based revenue: made from customers who make a one-time payment
  • Recurring revenue: made from ongoing payments for continuing services or post-sale services

There are several ways you can generate revenue from

  • Asset sales: by selling the rights of ownership for a product to a buyer
  • Usage fee: by charging the customer for the use of its product or service
  • Subscription fee: by charging the customer for using its product regularly and consistently
  • Lending/ leasing/ renting: the customer pays to get exclusive rights to use an asset for a fixed period of time
  • Licensing: customer pays to get permission to use the company’s intellectual property
  • Brokerage fees: revenue generated by acting as an intermediary between two or more parties
  • Advertising: by charging the customer to advertise a product, service or brand using company platforms

What are the activities/ tasks that need to be completed to fulfill your business purpose? In this section, you should list down all the key activities you need to do to make your business model work.

These key activities should focus on fulfilling its value proposition, reaching customer segments and maintaining customer relationships, and generating revenue.

There are 3 categories of key activities;

  • Production: designing, manufacturing and delivering a product in significant quantities and/ or of superior quality.
  • Problem-solving: finding new solutions to individual problems faced by customers.
  • Platform/ network: Creating and maintaining platforms. For example, Microsoft provides a reliable operating system to support third-party software products.

This is where you list down which key resources or the main inputs you need to carry out your key activities in order to create your value proposition.

There are several types of key resources and they are

  • Human (employees)
  • Financial (cash, lines of credit, etc.)
  • Intellectual (brand, patents, IP, copyright)
  • Physical (equipment, inventory, buildings)

Key partners are the external companies or suppliers that will help you carry out your key activities. These partnerships are forged in oder to reduce risks and acquire resources.

Types of partnerships are

  • Strategic alliance: partnership between non-competitors
  • Coopetition: strategic partnership between partners
  • Joint ventures: partners developing a new business
  • Buyer-supplier relationships: ensure reliable supplies

In this block, you identify all the costs associated with operating your business model.

You’ll need to focus on evaluating the cost of creating and delivering your value propositions, creating revenue streams, and maintaining customer relationships. And this will be easier to do so once you have defined your key resources, activities, and partners.  

Businesses can either be cost-driven (focuses on minimizing costs whenever possible) and value-driven (focuses on providing maximum value to the customer).

Value Propositions

This is the building block that is at the heart of the business model canvas. And it represents your unique solution (product or service) for a problem faced by a customer segment, or that creates value for the customer segment.

A value proposition should be unique or should be different from that of your competitors. If you are offering a new product, it should be innovative and disruptive. And if you are offering a product that already exists in the market, it should stand out with new features and attributes.

Value propositions can be either quantitative (price and speed of service) or qualitative (customer experience or design).

Value Proposition Canvas

What to Avoid When Creating a Business Model Canvas

One thing to remember when creating a business model canvas is that it is a concise and focused document. It is designed to capture key elements of a business model and, as such, should not include detailed information. Some of the items to avoid include,

  • Detailed financial projections such as revenue forecasts, cost breakdowns, and financial ratios. Revenue streams and cost structure should be represented at a high level, providing an overview rather than detailed projections.
  • Detailed operational processes such as standard operating procedures of a business. The BMC focuses on the strategic and conceptual aspects.
  • Comprehensive marketing or sales strategies. The business model canvas does not provide space for comprehensive marketing or sales strategies. These should be included in marketing or sales plans, which allow you to expand into more details.
  • Legal or regulatory details such as intellectual property, licensing agreements, or compliance requirements. As these require more detailed and specialized attention, they are better suited to be addressed in separate legal or regulatory documents.
  • Long-term strategic goals or vision statements. While the canvas helps to align the business model with the overall strategy, it should focus on the immediate and tangible aspects.
  • Irrelevant or unnecessary information that does not directly relate to the business model. Including extra or unnecessary information can clutter the BMC and make it less effective in communicating the core elements.

What Are Your Thoughts on the Business Model Canvas?

Once you have completed your business model canvas, you can share it with your organization and stakeholders and get their feedback as well. The business model canvas is a living document, therefore after completing it you need to revisit and ensure that it is relevant, updated and accurate.

What best practices do you follow when creating a business model canvas? Do share your tips with us in the comments section below.

Join over thousands of organizations that use Creately to brainstorm, plan, analyze, and execute their projects successfully.

FAQs About the Business Model Canvas

  • Use clear and concise language
  • Use visual-aids
  • Customize for your audience
  • Highlight key insights
  • Be open to feedback and discussion

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Amanda Athuraliya is the communication specialist/content writer at Creately, online diagramming and collaboration tool. She is an avid reader, a budding writer and a passionate researcher who loves to write about all kinds of topics.

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8 Types of Business Models & the Value They Deliver

Stacks of coins in a garden

  • 26 May 2016

You want to start a company but aren’t sure about a viable business model. How might you create something that people are willing to pay for and could earn you a profit?

Before diving into potential strategies, it’s important to understand what a business is and does. At its heart, a business generates value for its customers. A business model is a specific method used to create and deliver this value.

What Is Value in Business?

A successful business creates something of value . The world is filled with opportunities to fulfill people’s wants and needs, and your job as an entrepreneur is to find a way to capitalize on these opportunities.

A viable business model is one that allows a business to charge a price for the value it’s creating, such that the business brings in enough money to make it worthwhile and continue operating over time. Whatever the business is offering must also satisfy the customer’s needs and quality expectations.

It’s important to note that value is subjective. What’s valuable to one person may not be to another. Moreover, the concept of value excludes any moral judgments about the intrinsic worth of an offering. For example, while most would agree that human life is more valuable than sports, some professional athletes make far more money than the average brain surgeon.

Nonetheless, the concept of value provides a useful bedrock on which to begin building your business model. In particular, consider what forms of value people are willing to pay for. Here are eight potential business models and the forms of value they deliver—as well as the pros and cons of each—to help you get started.

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8 Types of Business Models to Explore

A product is a tangible item of value. To run a successful product-focused business, try to produce the item for as low a cost as possible while maintaining a reasonable level of quality. Once the item is produced, your objective should be to sell as many units as you can for as high a price as people are willing to pay to maximize profit.

Products are all around us. From laptops to books to HBS Online courses (products don’t have to be physical), products are a classic form of value with high upside if you can get them right.

  • Pros: Many products can be easily duplicated. Thus, firms can achieve economies of scale after bearing some upfront costs of production.
  • Cons: Physical products need to be stored as inventory, which can increase costs. They can also be damaged or lost more easily than, say, a service.

Related: How to Create an Effective Value Proposition

A service involves offering assistance to someone else for a fee. To make money from your service, provide a skill to others that they either can’t or don’t want to do themselves. If possible, repeatedly provide this benefit to them at a high quality.

Like products, services are in abundance, especially in the knowledge economy. From hairdressers to construction workers to consultants to teachers, people with lucrative skills can earn good money for their time.

  • Pros: If you have a skill in high demand or a skill that very few others have, you can charge a fair price for your time and stand out in your field.
  • Cons: If you don’t charge enough for your services, or many people have your skill, your business may not be as lucrative.

3. Shared Assets

A shared asset is a resource that many people can use. Such resources allow the owner to create or purchase the item once and then charge customers for its use. To run a profitable business around shared assets, you need to balance the tradeoff of serving as many customers as you can without affecting the overall quality of the experience.

For instance, think of a fitness center. A gym typically buys treadmills, ellipticals, free weights, bikes, and other equipment and charges customers monthly membership fees for access to these shared assets. The key is to charge customers enough to maintain and, if needed, replace their assets over time. Finding the right range of customers is the key to making a shared asset model work.

  • Pros: This model provides people access to a lot of assets they wouldn’t otherwise have access to. In addition, many people are willing to pay a lot for access to trendy social spaces.
  • Cons: Because they don’t own the assets, customers have little incentive to treat your resources well. Make sure you have enough in your budget for quick fixes, if necessary.

4. Subscription

A subscription is a type of program in which a user pays a recurring fee for access to certain specified benefits. These benefits often include the recurring provision of products or services. Unlike a shared asset, however, your experience with the product or service isn’t affected by others.

To have a successful subscription-based offering, build a subscriber base by providing reliable value over time while attracting new customers.

The number of subscription services has exploded in recent years. From magazines to streaming services to grocery and wine delivery subscriptions, businesses are turning to the subscription-based model, often with great success.

  • Pros: This model provides certainty in the form of predictable revenue streams, making financial forecasting a bit easier. It also benefits from a loyal customer base and customer inertia (for instance, customers may forget to cancel their subscription).
  • Cons: To run this model, your business operations must be strong. If you can’t deliver value consistently over time, you may want to consider a different business model.

5. Lease/Rental

A lease involves obtaining an asset and renting it out for an agreed-upon amount of time in exchange for a fee. You can lease virtually anything, but it’s in your best interest to rent assets that are durable enough to be returned in good condition. This ensures you can lease the good multiple times and, perhaps, eventually sell it.

To profit from leases, the key is to ensure that the revenue you get from leasing the asset before it loses value is greater than the purchase price. This requires you to price the rental of the item strategically and potentially not lease to those who may not return it in good condition. This is why many rentals of high-value items require references, credit checks, or other background information that can predict how someone may return the leased item.

  • Pros: You don’t have to have a novel idea to make money using a lease business model . You can purchase assets and rent them to others who wouldn’t buy them for full value and earn a premium.
  • Cons: You need to protect yourself from unexpected damage to your assets. One way to do so is through insurance.

6. Insurance

Insurance entails the transfer of risk from a customer to a seller of an insurance policy. In exchange for the insurance company (the seller of the policy) taking on the risk of a specified event occurring, they receive periodic payments ("premiums" in insurance lingo) from the policyholder. If the specified event doesn’t happen, the insurance company keeps the money, but if it does, the company has to pay the policyholder.

In a sense, insurance is the sale of safety—it provides value by protecting people from unlikely, but catastrophic, risks. Policyholders can take insurance out on almost anything: life, health, house, car, boat, and more. To run a successful insurance company, you have to accurately estimate the likelihood of bad events occurring and charge higher premiums than the claims you pay out to your customers.

  • Pros: If you calculate risk accurately, you’re guaranteed to make money using the insurance business model.
  • Cons: It can be difficult to accurately calculate the likelihood of specific events occurring. Insurance only works because it spreads risk over large numbers of policyholders. Insurance companies can fail if a large portion of policyholders is impacted by a widespread, negative event they didn’t see coming (for example, the Global financial crisis in 2007 and 2008).

Related: 5 Steps to Validate Your Business Idea

7. Reselling

Reselling is the purchasing of an asset from one seller and the subsequent sale of that asset to an end buyer at a premium price. Reselling is the process through which most major retailers purchase the products they then sell to buyers. For example, think of farmers supplying fruits and vegetables to a grocery store or manufacturers selling goods to a hardware store.

Companies make money through resale by purchasing large quantities of items (usually at a bulk discount) from wholesalers and selling single items for a higher price to individuals. This price raise is called a markup.

  • Pros: Markups can often be high for retail sales, enabling you to earn a profit on the items you resell. For example, a bottle of water might cost 10 cents to produce, whereas a customer may be willing to pay $1.50 or more for the same bottle.
  • Cons: You need to be able to gain access to quality products at low costs for the reselling business model to work. You’ll also need the physical space to store inventory to manage sales cycles.

8. Agency/Promotion

Agents create value by marketing an asset, which they don’t own, to an interested buyer. They then earn a fee or a commission for bringing the buyer and seller together. Thus, instead of using their own assets to create value, they team up with others to help promote them to the world.

Running a successful agency requires good connections, excellent negotiation skills , and a willingness to work with a diverse set of individuals. One example is a sports agent who promotes players to teams and negotiates on their behalf to get the best deal. In return, they typically receive compensation equal to a certain percentage of the contract.

  • Pros: You can highly profit from expertise and connections in your industry, be it publishing, acting, advertising, or something else.
  • Cons: You only get paid if you seal the deal, so you have to be able to live with some uncertainty.

So You Want to Be an Entrepreneur: How to Get Started | Access Your Free E-Book | Download Now

Setting Your Business Up for Success

These eight types of business models each have pros and cons and deliver value in their own ways. If you’re looking to start a business and need a place to start, one of these could be the best fit for your venture and entrepreneurial skill set .

Interested in honing your entrepreneurial skills? Explore our four-week online course Entrepreneurship Essentials and our other entrepreneurship and innovation courses to learn the language of the business world.

This post was updated on February 19, 2021, and is a compilation of two posts, previously published on May 26, 2016, and June 2, 2016.

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The Ultimate Guide to Business Development and How It Can Help Your Company Grow

Discover the importance of business development and how the process can help your business grow better.

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business development

Updated: 08/19/22

Published: 08/17/21

Imagine working for a company without any employees dedicated to growing and developing the business.

Nobody to challenge you to improve or tell you about new business opportunities, changes in the market, what your competition is up to, or how you can attract your target audience more effectively.

This would make it pretty hard to succeed, don’t you think?

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Business Development

Business Development Reps

BDR Responsibilities

Business Development Ideas

Business development process, business development plan.

Business development is the process of implementing strategies and opportunities across your organization to promote growth and boost revenue.

It involves pursuing opportunities to help your business grow, identifying new prospects, and converting more leads into customers. Business development is closely tied to sales — business development teams and representatives are almost always a part of the greater sales org.

Although business development is closely related to sales, it’s important to note what makes them different.

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Business Development vs. Sales

As mentioned, business development lives on the greater sales team yet it serves a different function than typical sales work and responsibilities.

Business development is a process that helps your company establish and maintain relationships with prospects, learn about your buyer’s personas, increase brand awareness, and seek new opportunities to promote growth.

In contrast, sales teams sell your product or service to customers and work to convert leads into customers. Business development-related work simplifies the work of a salesperson or sales manager.

Let’s take a closer look at what business development representatives — the people responsible for carrying out the various business development tasks — do next.

Business Development Representative

Business development representatives (BDRs) seek out and establish new strategies, tactics, targets, employees, and prospects for your business. The goal of all BDRs is to find ways to grow and provide long-term value for the business.

Possessing the necessary business development skills and experience will help your BDRs achieve all of their day-to-day tasks and responsibilities.

Business Development Representative Responsibilities

Although some BDR responsibilities may change over time and as your business grows, the following list will provide you with a solid understanding of typical BDR tasks.

1. Qualify leads.

BDRs must qualify leads and pinpoint ideal prospects to determine who they'll sell to. Typically, leads are qualified through calls, emails, web forms, and social media.

The key to qualifying leads (leads who are assigned to the BDRs as well as leads BDRs identify themselves) is to consider their needs and then determine whether or not your product or software could be a solution for them.

2. Identify and communicate with prospects.

By qualifying leads and searching for people who fit your buyer personas, BDRs will identify ideal prospects. They can communicate with those prospects directly to learn more about their needs and pain points.

This way, BDRs can determine whether or not the prospect will really benefit from your product or service by becoming a customer. This is important because it increases the potential of improved customer loyalty and retention.

Once the BDRs have identified ideal prospects, those prospects can be passed along to a sales rep on the team (or sales manager, if necessary) who can nurture them into making a deal.

3. Proactively seek new business opportunities.

Proactively seeking new opportunities — whether that’s in terms of the product line, markets, prospects, or brand awareness — is an important part of your business’s success. BDRs work to find new business opportunities through networking, researching your competition, and talking to prospects and current customers.

If a new business opportunity is identified, BDRs should schedule marketing assessments and discovery meetings with the sales reps on the team so they can all assess whether or not there’s potential for a deal.

4. Stay up-to-date on competition and new market trends.

It’s important to stay up-to-date on your competition’s strategies, products, and target audience as well as any new market and industry trends.

This will allow you to more effectively identify ideal prospects. It also helps your business prepare for any shifts in the market that could lead to the need for a new approach to qualifying leads and attracting your target audience.

5. Report to salespeople and development managers.

As we reviewed, at most companies, BDRs report to sales reps and sales managers. BDRS must communicate with these higher-ups for multiple reasons such as discussing lead qualification strategies and how to get prospects in touch with sales reps to nurture them into customers.

BDRs also have to report their findings (such as business opportunities and market trends) to sales reps and managers. Relaying this information and collaborating with sales reps and managers to develop and/or update appropriate strategies for your business and audience is critical to your success as an organization.

6. Promote satisfaction and loyalty.

A BDR's interaction with a prospect might be the very first interaction that prospect ever has with your business. So, creating a great first impression right off the bat is crucial to promote interest early on.

Whether a BDR is working to qualify the lead, learn more about the prospect and their needs, or find the right sales rep to work on a deal with them, their interactions with all of your prospects matter.

Once a BDR researches the prospect or begins interacting with them, ensure they tailor all communication towards the prospect. Customizing all content sent their way shows them they’re being listened to and cared for. These actions are professional and leave a strong impression.

In addition to understanding how BDRs help you grow, business development ideas are another powerful way to engage prospects and identify new business opportunities. Let’s take a look.

  • Innovate the way you network.
  • Offer consultations.
  • Provide sales demos for prospects and leads.
  • Nurture prospects.
  • Provide prospects with several types of content.
  • Communicate with marketing.
  • Invest in your website.
  • Push your employees to expand and refine their skills.

Business development ideas are tactics you can implement to positively impact your company in a multitude of different ways. They can help you identify ideal prospects, network more effectively, improve brand awareness, and uncover new opportunities.

The following tactics are here to get you started — every business and team is different, meaning these ideas may or may not be suited for your specific situation. (So, feel free to modify the list!)

1. Innovate the way you network.

It’s no secret cold calls are less effective than they once were. Instead, innovate the way you network by establishing strong relationships with your prospects. You can do this by meeting with them in person at conferences, trade shows, or events related to your industry.

Browse your online networks including LinkedIn and other social sites for potential customers, too. Reach out to the people who sign up for your email subscription or complete other forms on your site.

2. Offer consultations.

Offer consultations and assessments for prospects. Talking about the ways your product or service applies to their needs will help prospects decide whether or not they’ll convert.

In contrast, consultations and assessments may also bring to light the ways a prospect is not an ideal fit for your product (which is equally as valuable since it prevents you from wasting any time nurturing them or having to deal with an unsatisfied customer down the road).

3. Provide sales demos for prospects and leads.

Provide your prospects and leads with sales demos so they can see how your product or service works in action. Ensure these demos are customized to show a prospect or lead how your product solves their challenge. You can share these demos in person, over email, on your website, or via video chat.

4. Nurture prospects.

Remember to nurture your prospects, whether it’s by phone call, email, meeting, or another mode of communication. The point of lead nurturing is to provide any information needed about your product or service so your prospects can decide whether or not they want to make a purchase.

By nurturing your leads , you’ll be able to tailor the content regarding your brand and product so your leads can better understand how your product will solve their specific pain points. You’ll also be able to show your support for the prospect and ensure they feel heard and understood by your company.

5. Provide prospects with several types of content.

Provide your prospects with different content types such as blogs, videos, and social media posts so they can learn more about your brand and product or service.

It’s best to meet your prospects where they are and provide the content they prefer to read or watch. Ensure all of this content is downloadable and/or shareable so prospects can send it to their team members to show them why your solution is their best option.

6. Communicate with marketing.

Although business development lives in the sales department, that doesn’t mean internal business development work only involves other members of the sales team. Host regular meetings and maintain open lines of communication with the departments at your company that impact your ability to succeed such as marketing and product development.

Think about it this way: Marketing creates content and campaigns for your target audience about how your product or service resolves their challenges. So, why wouldn’t you want to talk to them about the blogs, campaigns, social media posts, and website content they’re creating for the people you’re selling to?

Your reps and BDRs can share any content the marketing team creates directly with prospects to help them convert, as well as inform the marketing team of any content they feel is missing for prospects. If there are projects or campaigns out of your scope, you can opt to hire a marketing agency to help fill the void. But, like your marketing team, they'll need to understand your product and how to connect with your target audience.

7. Invest in your website.

You never get a second chance at a first impression, and in many cases, your website is exactly that — your prospects' first impression of your brand. So, it serves you to make it as accessible, navigable, visible, and helpful as possible.

Taking strides like making your site visually engaging, connecting your social media profiles, optimizing your site for search engines, linking to collateral like sales content , and maintaining an active blog can go a long way when conducting business development.

8. Push your employees to expand and refine their skills and knowledge.

Business development is never stagnant. Strategy, technology, and market conditions are all constantly evolving — so you're best off having your employees stay abreast of these trends.

Anyone involved in your business development should be liable to develop new skills as needed. If your organization adopts any sort of new technology, thoroughly train anyone the change touches on how to use it.

Encourage your employees to learn more about both the nuances of their field and the industries they serve. Is artificial intelligence starting to shift the dynamics of a specific industry? If so, make the BDRs who serve that market learn all they can about how it might change the nature of the companies they interact with.

A business development process is the combination of steps your business takes to grow effectively, boost revenue, improve relationships with leads, and more. These steps are what your business development team will work on every day. It includes everything related to delighting customers along each part of the buyer's journey.

By working through your business development process, your team will have a strong understanding of your organization-wide goals, sales targets, current business situation, who your target audience members are, and more.

How to Do Business Development

  • Conduct extensive market research.
  • Raise visibility and awareness.
  • Promote thought leadership.
  • Conduct outreach.
  • Qualify leads to pass off to sales.
  • Provide exemplary customer service.
  • Develop sales content from success stories.

1. Conduct extensive market research.

Successful business development rests, in large part, on you understanding your market and target personas. If you have no idea who you're trying to sell to and the state of the market they comprise, you can't successfully implement any other point on this list.

Study and survey your current customers to see who tends to buy from you. Look into your competition to get a feel for where you fit into your broader market. And take any other strides to get a better feel for the "who" behind your successful sales — without that intel, you'll never be able to shape the "how" side of your business development.

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2. Raise visibility and awareness.

Business development, as a broader practice, extends beyond your sales org — your marketing department can also play a central role in the process. You can't source a base of potential customers if no one knows who you are.

Actions like constructing an effective website, investing in paid advertising, leveraging social profiles, participating in co-marketing partnerships with industry peers, and maintaining an active blog can all go a long way in supporting successful business development.

3. Promote thought leadership.

This point is sort of an extension of the one above. Establishing credibility is one of the more important steps you can take when doing business development. You can't just stop with prospects knowing who you are — they need to trust you if you're ever going to earn their business.

Publishing in-depth, industry-specific blog content is one way to get there — if you can show that you have a firm grasp on every aspect of your field, you can frame yourself as a reliable, knowledgeable resource for your customers. That kind of trust often translates to sales, down the line. Other media like webinars, white papers, and video content can also help your case.

4. Conduct outreach.

Actively reaching out to prospects is one of the most crucial, traditional elements of business development. You need to touch base with prospects if you're going to vet them and ultimately convert them to qualified leads.

This step is typically supported by extensive research on individual prospects, paired with contacting warm and cold leads proactively but not aggressively. BDRs typically shoulder this responsibility — and for many people, it's the aspect of the process most closely associated with the term "business development."

5. Qualify leads.

Once your BDRs have connected with leads, they need to qualify them to determine their viability and understand whether they're worth the sales org's time and effort. That generally entails having conversations with leads and asking the right qualifying questions to reveal their fit for your product or service.

This is one of the most pivotal moments in the business development process — in some respects, it could be considered its last step. Successfully executing this point typically means the process, as a whole, has worked.

6. Provide exemplary customer service.

Business development is an ongoing process that involves virtually every side of your business in some capacity — and customer service is no exception. Your service org needs to keep current customers happy to generate positive word of mouth and bolster your company's reputation. That kind of effort offers you credibility and can generate referrals, making business development more straightforward and effective.

7. Develop sales content from success stories.

Another part of business development is translating customer satisfaction into actionable, promotable sales content — pointed, product-specific content that's used to generate sales. While marketing content is used for thought leadership and garnering general interest, sales content is used to appeal to potential buyers, looking into your company specifically.

Sales content can come in a variety of forms, including case studies and testimonials — two mediums that lean heavily on your current customer base. When you use customers' experiences to generate interest in your business, your business development efforts essentially come full circle.

Visual of the 7 business development process/strategy stages

By compiling these elements of business development and sharing them among your team, you create an actionable business development strategy or plan that encourages and promotes success and growth. Let's review the different steps involved in creating your business development plan next.

A business development plan is a strategy your team can refer to while working to achieve growth-related goals. Sales managers typically create the business development plan for BDRs to work on.

The purpose of a business development plan (or strategy) is to set realistic goals and targets that allow your reps to grow the business, close more deals, identify prospects, align members of the sales team (and other teams, company-wide), and convert more leads.

1. Craft an elevator pitch.

You can simplify any initial communication with prospects by having an elevator pitch ready to go. This elevator pitch should explain your company’s mission and how your product or service can solve the needs of your target audience. Your elevator pitch should grab the attention of prospects and leads — and get them excited to learn more about what you offer.

Additionally, you can help your team determine which elevator pitches used by both BDRs and reps are most successful in converting leads and then document it in your greater strategy so everyone has access to it.

2. Set SMART goals.

Set SMART goals for your strategy — meaning, make sure your targets are specific, measurable, attainable, relevant, and timely. By creating SMART goals for your business development plan, you’ll be able to ensure these goals are aligned with those of your entire company.

For example, if one of your goals is to increase your number of identified qualified leads this quarter by 5% , make the goal specific by determining the type of prospects you’ll focus on and how you’ll identify them.

Then, decide how you’ll measure your success — perhaps by measuring the number of these prospects who then go on to talk with a sales rep to learn more about the product or service.

You determine this goal is attainable due to the fact you increased your number of qualified leads last quarter by 3%. 5% isn’t too much of a leap.

Your goal is relevant because you know it’ll help your business grow — it pushes you to make a greater impact on your team by contributing to the sales team’s ability to close more deals and boost revenue. Lastly, it’s timely because you’ve set this goal for the quarter.

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3. Conduct a SWOT analysis.

As mentioned above, part of any role in business development is to stay up-to-date on market and industry trends and understand your competition. This is where SWOT analysis comes in handy — SWOT stands for strengths, weaknesses, opportunities, and threats . The key to using SWOT analysis correctly is to have a clear goal in mind first.

For example, if your goal is to determine the best way to handle outreach with prospects , you can begin talking to your BDRs, sales reps, sales managers, and current customers about what works best for them.

Next, think about your strengths — what does your business do well? Maybe you have a large support team that provides helpful onboarding for new customers. Or you have several remote reps who can meet face-to-face with prospects in their desired location.

(You might have multiple strengths that make you stand out, so don’t be afraid to list them all and which ones have the greatest impact on your customers.)

Now, think about your weaknesses . Are your product’s limited offerings requiring some leads to consider your competition’s product in addition to yours? Is the need for your product growing faster than your production, or faster than you’re able to establish a large customer support team to assist your customers?

Onto your business opportunities . Think about where you’re going as a business and what you know you can accomplish. For example, maybe your business has recently partnered with another company that can help you boost brand awareness and attract a much broader base of leads and customers.

Lastly, who are your threats ? Think about your current competition — who’s producing a product or service like yours and is attracting a similar target audience? Who could become your competition in the future — is there a market gap that another company (new or established) could identify the need for and begin selling?

SWOT analysis allows you to identify the ways your company can create opportunities to grow and expand. It also helps how you establish new processes to address any weaknesses or threats such as identifying more qualified leads, efficiently converting prospects into customers, and shortening the sales cycle.

4. Determine how you’ll measure success.

Depending on the SMART goals you created and the SWOT analysis you performed, you’ll also need to decide how you’re going to measure your business development success.

Here are some examples of common business development KPIs that can help you analyze your efforts:

  • Company growth
  • Changes in revenue
  • Lead conversion rate
  • Leads generated per month/ quarter/ predetermined time
  • Prospect and customer satisfaction
  • Pipeline value

5. Set a budget.

Depending on the type of business development goals you set for the team, you may determine you need to set a budget. Consider your resources, the cost of any previous business development strategies you’ve developed, and other important operational line items (what you need, who’s involved, etc.).

Collaborate with the greater team to determine the amount you’re willing to, and need to, spend on business development to get the process started at your company.

6. Always keep your target audience in mind.

Whatever it is you’re working towards, keep your target audience and ideal prospects in mind. Assess their needs and understand exactly how your business and product or service will meet their pain points.

After all, this audience is the group who is most likely to buy your product. Make sure your plan addresses them and their needs so your team can convert more of them and grow your business.

7. Choose an outreach strategy.

As we’ve reviewed above, a major component of business development is finding new prospects and potential customers. To find new prospects, you’ll need to decide how you’ll perform outreach, or connect with these potential customers. Here are some ideas:

  • Use referrals
  • Upsell and cross-sell
  • Sponsorship and advertisement

Also, review any expectations or guardrails related to outreach reps are held to so your business has only professional and on-brand interactions with prospects.

Congrats! You’ve just completed your business development plan — with your strategy and ideas, your business will be growing in no time.

Business Development Resources

1. hubspot sales hub.

Business Development Resources Hubspot

Best for Businesses Interested in a Wide-Reaching, One-Stop Solution

HubSpot Sales Hub includes a suite of resources that enable more focused, effective business development. Features like email templates and email tracking lend themselves to well-targeted, productive prospecting.

Its conversational intelligence capabilities can provide invaluable insight into the "why" behind your BDRs' overall performance — letting you pinpoint the strengths and flaws in key business development elements like your messaging and pain point assessments.

Sales Hub is a dynamic solution that covers a lot of bases for your sales org — including several beyond business development. But that wide range of applications doesn't undermine its utility for BDRs and their managers. If you're looking for a solution that addresses almost every component of successful business development, consider investing in HubSpot Sales Hub.

2. Bloobirds

image_Playbook_Builder

Best for Businesses Interested in Keeping BDRs and Top-of-Funnel Activities on Track

Bloobirds is a sales engagement and playbook platform that guides SDRs and closing reps to convert more prospects into customers. It partners with your existing CRM — sitting on top of it to make it more functional for the sales team.

It eliminates admin tasks, makes selling more intuitive, and makes sure reps follow best plays with the in-app playbook's help. Bloobirds helps sales teams flow through their pipeline — it also collects crucial data and creates competitive insights.

3. Leadfeeder

Business Development Resources leadfeeder

Best for Businesses Struggling to Generate High-Potential Leads

Leadfeeder is a powerful resource for enhancing a central element of any business development efforts — lead generation The platform helps you identify high-potential leads by automatically analyzing your website traffic.

The software removes ISP traffic to pin down visitors' companies and gauge interest. It also lets you create behavioral and demographic filters for better-informed, more productive lead segmentation.

Successful business development often leans, in large part, on your ability to generate high-quality leads — so if you're interested in effectively sourcing those contacts, you'll need to invest in some sort of lead generation software. Leadfeeder is as good a place as any to start.

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How To Use LinkedIn For Business And Marketing

Take control of your LinkedIn strategy with this free guide. You'll learn about...

  • LinkedIn Company Pages
  • Optimizing for Search.
  • LinkedIn Analytics.

4. LinkedIn

Business Development Resources LinkedIn

Best for Businesses Looking for a Free Way to Source Leads

LinkedIn is one of the most prominent, practical, effective resources for certain key elements of the business development process — namely, prospecting. The value behind leveraging social media for top-of-funnel sales activities isn't exactly some well-kept secret.

Plenty of business development professionals already use channels like LinkedIn to source, screen, and connect with potential leads. Strides like scrolling through skill endorsements, using alumni searches, and engaging with users who have looked at your posts are all excellent ways to find interested prospects and enhance your business development efforts.

Business Development Helps You Grow Better

Business development is a crucial part of any successful company. It’s how you determine the best ways to boost revenue, identify your ideal prospects, generate more leads, and close more deals.

Think about how you can make a strong business development plan and ensure you have the right group of business development reps so you can begin growing your business today.

Editor's note: This post was originally published in July, 2019 and has been updated for comprehensiveness.

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  • Business Management

Service Innovation: Embracing design thinking in business model innovation

Service innovation

February 15, 2022 •

7 min reading

T his is the challenging backdrop against which companies are turning to service innovation to set themselves apart from the crowd. Even if companies are able to tame the complexities of service provision, simply developing a new product-service bundle is no longer enough. Today’s market requires services to be thoughtful and human-centered. Rethinking their business models gives companies the chance to take a step back from how things have been done so far and embrace the principles of design thinking to shape their future.

The challenges of service provision and service innovation

Compared with product-based businesses, those that rely more heavily upon service provision face a unique array of challenges. Without claim to exhaustiveness, these challenges can be boiled down to:

Intangibility

In the absence of any palpable or tactile property of service deliveries, the assessment of a service’s value is more challenging compared to product offerings. In that sense, services are evaluated on the basis of their performance rather than product characteristics. Consequently, customers must be given confidence in a service to be feel encouraged to engage in a service purchase.

Simultaneity

Service provision and consumption occupy the same timeframe. This means that it is impossible to split up supply and consumption, with the service provider inseparably bound to the customer at that very moment. This not only increases the onus on staff (or, as the case may be, the technological interface) to represent the company well, as well makes the customer an integral part to the service concept and delivery.

Perishability

Services are available during a pre-defined window of time, after which the prerequisite resources, processes and systems may no longer be available. Think rail travel: once the train has left the station, that connection is no longer an option for would-be travelers to consume. When it comes to service provision, you only get one opportunity to make a good impression.

Variability

Even if a customer was to request the exact same service he or she enjoyed the previous week, this week’s service would be slightly different due to unavoidable variations in peripheral factors. Against this backdrop, businesses must strive to provide excellent service at all times. They may even embrace this lack of absolute replicability by offering customized services.

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Avoiding common pitfalls

These challenges are exacerbated by the difficulty in accurately and appealingly describing services to potential customers. Special care must be taken to avoid common pitfalls , such as not properly conveying the level of complexity of a service, failing to give a comprehensive overview of what a service entails and struggling to overcome bias, both in the choice of descriptive words and understanding how these will be interpreted by the target audience.

Add to this the extra layer of attempting to usher in innovation, and new questions arise: Will service innovation harmonize with the existing operational environment or require a more fundamental rethink? Is this innovative service compatible with the marketplaces on which we currently do business? Are we willing and able to take the risks involved in pursuing service innovation?

Embracing innovation in service therefore requires a methodical, structured approach: service business model innovation.

Taming the beast through service business model innovation

Prof. Nicole Hinrichs , who teaches Service Innovation by Design in the EHL Graduate School, reminds us that business model innovation can be instrumental to any business, whether services have long since been in their area of expertise or they are undergoing servitization.

What is business model innovation and how does it work?

If we consider a business model to be “ a company’s core strategy for profitably doing business ”, business model innovation must go hand in hand with far-reaching change. This is the case to differing degrees. Business model innovation essentially dissects the way an organization creates, delivers and captures value and puts the pieces back together in a novel way by either altering all or some of them . This reorientation seeks to produce greater value for customers and the business alike.

To make this change in a structured, well-considered manner, Harvard Business Review recommends carefully weighing up “ what your offerings will be, when decisions are made, who makes them, and why ”.

Meanwhile, Boston Consulting Group advises that business model innovation can be approached from different angles depending on the circumstances and the scale of the required change:

  • The reinventor approach , applicable in the event of uncertain growth prospects, which sees a company “reinvent its customer-value proposition and realign its operations to profitably deliver on the new superior offering”.
  • The adaptor approach , exploring adjacent businesses or markets through experimentation and innovation in the face of fundamental disruption.
  • The maverick approach , whereby a successful core business is scaled up, revolutionizing the industry and setting new standards. Growth here relies upon continuous evolution to maintain the competitive edge.
  • The adventurer approach , aggressively expanding a business’s footprint into new or related territories.

Service business model innovation enhanced by design thinking

Successfully addressing intangibility, simultaneity, perishability and variability requires a nuanced approach to business model innovation enriched with service design thinking . With this in mind, any changes should be firmly rooted in customer needs, always thinking of the user and focusing on the end experience. Service business model innovation should take a human-centric approach down to the very last detail.

As part of this holistic undertaking , during the front-end planning stage , carefully consider whether your ideas are compatible with your company’s strategic mission and vision. Take stock of any existing services and reflect on the market segment they occupy. Be very clear on what you want to achieve, how long this is likely to take and what implications it might have on both your bottom line and brand continuity. Take care to assess feasibility and costs.

Do not shy away from expanding your team with the right talent to ensure design thinking is embraced during your business model innovation efforts. You might be able to “expand [your] innovation ecosystem by looking for opportunities to co-create with customers and consumers [or] exploit Web 2.0 networks to enlarge the effective scale of your innovation team” (see Design Thinking by Tim Brown, featured in HBR’s 10 Must Reads on Design Thinking ). In the same vein, do not forget to take a closer look at what your competitors are up to and how their efforts are resonating with consumers.

Continue to apply the principles of service design thinking during the implementation stage , testing the waters as regards consumer acceptance. Cut through the complexity with “integrative thinking”, using a “ service blueprint ” to help ensure all your staff are on the same page and identify any weak links in the emerging ecosystem. A pilot study can help smooth out any initial bumps in delivery.

Beware of resting on your laurels. Once commercialization is complete, give the post-introduction evaluation stage your full attention and make any amendments required to service delivery, staffing or marketing based on the market response.

Business model innovation examples

What does business model innovation look like in practice? Take Rolls Royce , for example: The British aircraft turbine manufacturer transitioned from selling engines to selling thrust hours to the airlines, building on the faith its customers already had in its engines (to overcome any reluctance linked to intangibility). This enabled the company to retain ownership of the engines (perishability) and offer maintenance and repair, extending the timeframe during which it was being of service to its customers (simultaneity).

As for variability, this can be overcome to a significant degree by turning one-off purchases into subscriptions, changing the way customers are granted access to largely unchanged products: Software as a Service (SaaS) and Infrastructure as a Service (IaaS), for instance. Another way to tackle variability is to provide customers with reassurance in the form of ratings information, as is done by platforms of the likes of Airbnb and Uber. These few examples are but the tip of the iceberg. Combine business model innovation with design thinking and discover the hidden depths of potential.

Dr Nicole Hinrichs

Associate Professor of Entrepreneurship and Strategic Management at EHL

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“No matter what sector you are in, no matter what kind of company you have, services are more and more important, but they are messy”.

Prof. Christopher Tucci - Digital Strategy and Innovation, Imperial College London

business model service development

“A business model innovation approach can not only help veteran service providers to augment or improve their service, but it also allows somebody coming from the product side to learn how to develop a product-service bundle or even move into a fully-fledged service offering.”

Dr Nicole Hinrichs - Associate Professor of Entrepreneurship and Strategic Management at EHL

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The Four Things a Service Business Must Get Right

  • Frances X. Frei

business model service development

Many of the management tools and techniques used in service businesses were designed to tackle the challenges of product companies. Although they are valuable to service managers, they aren’t sufficient for success. In this article, Harvard Business School’s Frei explains why and urges companies to add some new ones to the mix. After years of extensive research and analysis, she offers an approach for crafting a profitable service business based on four critical elements: the design of the offering, the funding mechanism, employee management, and customer management.

Just like a product that’s going to market, a service needs to be compellingly designed, and management must field a workforce capable of producing it at an attractive price. In addition, however, service firms must manage their customers, who do not simply use the service but who can also be integral to its production: Because customers’ involvement as producers can wreak havoc on costs, companies must also develop creative ways to fund their distinctive offerings, by providing a self-service alternative, for example, or by offsetting expenses with operational savings.

A close look at successful service businesses—Walmart, Commerce Bank, the Cleveland Clinic, and others—reveals that effective integration of the four elements is key. There is no “right” way to combine them; the appropriate design of one depends upon the other three. If managers don’t get all four pulling together, they risk pulling the enterprise apart.

Incumbents can fend off attacks from highly focused upstarts by becoming multifocused—that is, by pursuing multiple niches through optimized service models rather than trying to cover the entire waterfront with one model. Shared services within a firm (functions such as HR and finance) can help, since they will enable it to generate economies of scale and experience across models.

Extensive study of the world’s best service companies reveals the principles on which they’re built.

The Idea in Brief

All successful firms must design a compelling offering and manage the workforce to deliver it at an attractive price. But service firms must do even more: deal with the frustrating fact that their customers can wreak havoc on service quality and costs.

For example, a customer dithering at a fast-food counter slows things down for everyone else waiting in line. An architect’s client struggling to clarify how a new facility will be used drags out the design process.

To tackle this challenge, Frei advises aligning four key elements of your business:

  • What your service offering consists of
  • How you fund the excellence you want to provide
  • How you manage employees to deliver quality service
  • What you do to help customers enhance—not erode—service

Get these elements pulling together, and none of them can pull your business apart—as service stars like Wal-Mart, Commerce Bank, and Cleveland Clinic have discovered firsthand.

The Idea in Practice

To consistently deliver service excellence, ensure that each of these four elements reinforces the others:

Service Offering

Determine how customers define “excellence” when it comes to your offering: Convenience? Friendliness? Flexible choices? Price? Identify what you’ll do to deliver that excellence—and what you won’t do. Example: 

Commerce Bank decided to serve customers who prized pleasant, face-to-face service and convenience. It offers evening and weekend hours, buildings with high ceilings and natural light, and a fun contraption for redeeming loose change. Despite its relatively unattractive interest rates and narrow product range, its retail customer base has expanded dramatically.

Funding Mechanism

Think about how you’ll pay for the increased cost of the excellence you’re seeking to provide through your service offering. Possibilities include:

  • Charging the customer. For example, Starbucks customers value lingering in the company’s coffee-house setting. To fund this inviting atmosphere, Starbucks charges a premium for its coffee.
  • Spending now to save later. For instance, Intuit offers customer support service free of charge. It uses callers’ input to improve future versions of its software, so customers will ultimately need less support.
  • Having customers do the work. For example, airlines’ self-check-in kiosks not only reduce costs; they also enhance the service offering by liberating travelers from long lines at staffed counters and by providing convenient tools such as seat maps.

Employee Management

Ensure that your workforce management activities (recruiting, selection, training, job design) empower employees to deliver the excellence embodied in your service offerings. Example: 

Commerce Bank competes on extended hours and friendly service, not on low price or product variety. It knows it doesn’t need straight-A students to master its limited product set, so it hires for attitude and trains for service. For instance, it uses simple recruiting criteria, such as “Does this person smile in a resting state?” And it encourages employees to recruit people they see providing great customer service in other industries.

Customer Management

Articulate which behaviors customers must demonstrate to get the most value from your service. Then design your service specifically to foster those behaviors. Example: 

To get customers using the new self-check-in kiosks, airlines ensured that travelers could complete the transactions with far fewer keystrokes than check-in personnel used to need. By contrast, retail stores that offer self-service checkout machines haven’t made using those machines easy for shoppers. Moreover, the stores expect shoppers to shoulder responsibility for fraud prevention by weighing bags during checkout. Result? Anxious customers avoid the machines.

As the world’s major economies have matured, they have become dominated by service-focused businesses. But many of the management tools and techniques that service managers use were designed to tackle the challenges of product companies. Are these sufficient, or do we need new ones?

  • Frances X. Frei is the UPS Foundation Professor of Service Management at Harvard Business School and is a coauthor of the books Move Fast and Fix Things and Unleashed .

business model service development

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  • A Game-Changing Business Development Strategy to Achieve Consistent Growth

Joe Pope

Your business development strategy can be key to the success or failure of your firm. In this post, we’ll explore how to create a strategy and associated plan that can propel an individual, a practice or an entire firm to new levels of growth and profitability.

Business Development Defined

Business development (BD) is the process used to identify, nurture and acquire new clients and business opportunities to drive growth and profitability. A business development strategy is a document that describes the strategy you will use to accomplish that goal.

The scope of business development can vary a lot from organization to organization. Consider the model professional services organizations use to get new business shown in Figure 1.

business model service development

Figure 1. The three stages of the business development funnel

The first two stages of the model, Attract Prospects and Build Engagement, are traditional marketing functions. The final stage, Turn Opportunities into Clients, is a traditional sales function. In its traditional role, business development would be looking for new channels of distribution or marketing partners.

But roles are changing and naming conventions evolve. In today’s world many firms refer to the entire marketing and sales process as business development. We know, it can be confusing. So let’s sort it out a bit.

Business Development vs. Marketing

Marketing is the process of determining which products and services you will offer to which target audiences, at what price. It also addresses how you will position and promote your firm and its offerings in the competitive marketplace. The result of all this activity should be an increasing awareness of your firm among your target audience — and a stronger flow of qualified leads and opportunities.

Download the Business Development Guide

Historically, business development has been a subset of the marketing function that was focused on acquiring new marketing or distribution relationships and channels. While this role still exists in many companies, the business development title has become interchangeable with many marketing and sales functions.  

Business Development vs. Sales

Sales is the task of converting leads or opportunities into new clients. Business development is a broader term that encompasses many activities beyond the sales function. And while there is some overlap, most traditional BD roles are only lightly involved in closing new clients.  

Business development is often confused with sales. This is not too surprising because many people who are clearly in sales have taken to using the title of Business Developer . Presumably this is done because the organization believes that the BD designation avoids the stigma sometimes associated with sales.

Nowhere is this practice more prevalent than in professional services. Accountants, lawyers and strategy consultants do not want to be seen as “pushy sales people.” This titular bias is firmly rooted despite the fact that developing new business is an important role of most senior members of professional services firms. Also, the many aspects of the traditional business development role (finding new distribution channels, for instance) don’t translate easily to the professional services environment.

Since so many clients want to meet and get to know the professionals they will be working with, the Seller-Doer role is well established in many firms. The preference for Seller-Doers also tends to discourage firms from fielding a full-time sales force.

As an alternative approach to leveraging fee-earners’ time, some firms have one or more Business Developers on staff. In the professional services context, these folks are often involved in lead generation and qualification, as well as supporting the Seller-doers in their efforts to close new clients. In other organizational contexts, this role might be thought of as a sales support role.

The result of this confusing picture is that many professional services firms call sales “business development” and make it part of every senior professional’s role. They may also include some marketing functions, such as lead generation and lead nurturing, into the professional’s BD responsibilities.

It is on this expanded role — in which business development encompasses the full range of lead-generation, nurturing and sales tasks — that we will concentrate on in this post.

See also: Heller Consulting Case Story

Business Development Examples

To clarify what the professional services business development role entails, let’s consider this business development example:

Bethany is the Director of Business Development at a fictional mid-sized architecture firm. She is not an architect herself. Nor is she involved in any aspect of delivering client projects. Instead, her role is exclusively focused on signing new business for her firm—whether new or existing clients. 

For new clients, Bethany spends much of her time responding to RFPs, communicating directly with inbound leads generated by the marketing/sales enablement team, and nurturing potential clients that she met at a recent industry conference. Bethany also collaborates with the marketing team in the development of any materials she needs to sell to new accounts.

When it comes to existing accounts, Bethany also plays a major role. She meets monthly with delivery teams to understand whether current client projects are on scope or if change orders are needed. She also maintains a relationship with clients’ key stakeholders. If an opportunity for more work opens, she knows that her relationship with the client is an important component of the potential deal.

In this example, Bethany is the primary driver of business development but that does not mean she is doing this alone. Her colleague, Greg, is a lead architect at the firm. While Greg’s primary focus is delivering for his clients, business development—and even marketing—is also an important part of his professional life. Greg often attends industry conferences with Bethany, where he is a speaker and subject matter expert and she is the primary networker. The business development dynamic should not end with Bethany, and it should permeate the whole organization.

In this business development example, you can see that the range of roles and responsibilities is wide. This is why it is essential that business development be delivered strategically. Let’s talk about what that means.

Strategic Business Development

Not every business development activity has the same impact. In fact, many are opportunistic and tactical in nature. This is especially true for many Seller-Doers. 

Caught between the pressures of client work and an urgent need to bring in new business, they cast about for something quick and easy—maybe a small piece of business at a low price point—that will produce short term results. Of course, this is no real strategy at all.

Strategic business development is the alignment of business development processes and procedures with your firm’s strategic business goals. The role of strategic business development is to acquire ideal clients—the kind that are highly profitable and aren’t overly demanding—for your highest priority services using brand promises that you can deliver upon.

Deciding which targets to pursue and strategies to employ can be a high stakes decision. A good strategy, well implemented, can drive high levels of growth and profitability. A poorly conceived strategy can stymie growth and frustrate valuable talent.

Yet many firms falter at this critical step. They rely on habit, anecdotes and fads — or worse still, that innovation killer, “this is how we have always done it.” In a later section, we’ll explain how to develop your strategic business development plan. But first let’s explore some of the strategies that might go into that plan.

Top Business Development Strategies

Let’s look at some of the most common business development strategies and how they stack up agains what today’s buyers are looking for .

Networking is probably the most universally used business development technique. It’s built on the ideas that professional services buying decisions are rooted in relationships, and the best way to develop new relationships is through face-to-face networking.

It certainly is true that many relationships are established in that way. And if you are networking with members of your target audience, you can develop new business. But there are limitations. Today’s buyers, however, are very time pressured, and networking is time consuming. It can be very expensive, if you consider travel and time away from the office.

Newer digital networking techniques can help on the cost and time front. But even social media requires an investment of time and attention.

A close relative of networking, referrals are often seen as the mechanism that turns networking and client satisfaction into new business. You establish a relationship, and that person refers new business to you. Satisfied clients do the same.

Without question, referrals are common, and many firms get most or all of their business from them. But referrals are passive. They rely on your clients and contacts to identify good prospects for your services and make a referral at the right time.

The problem is, referral sources often don’t know the full scope of your services or the range of ways you can help a client. So many referrals are poorly matched to your capabilities. Other well-matched referrals go unmade because your referral source fails to recognize a great prospect when they see one. Finally, many prospects that might be good clients rule out your firm before even talking with you. One  study puts that number at over 50%.

Importantly, there are new digital strategies that can accelerate referrals. Making your specific expertise more visible is the key. This allows people to make better referrals and increases your referral base beyond clients and a few business contacts.

Learn More: Referral Marketing Course

Sponsorships and Advertising

Can you develop new business directly by sponsoring events and advertising? It would solve a lot of problems if it works. No more trying to get time from fully utilized billable professionals.

Unfortunately, the results on this front are not very encouraging. Studies have shown that traditional advertising is actually associated with slower growth. Only when advertising is combined with other techniques, such as speaking at an event, do these techniques bear fruit.

The most promising advertising strategy seems to be well-targeted digital advertising. This allows firms to get their messages and offers in front of the right people at a lower cost.

Outbound Telephone and Mail

Professional services firms have been using phone calls and mail to directly target potential clients for decades. Target the right firms and roles with a relevant message and you would expect to find new opportunities that can be developed into clients.

There are a couple of key challenges with these strategies. First they are relatively expensive, so they need to be just right to be effective. Second, if you don’t catch the prospect at the right time, your offer may have no appeal relevance — and consequently, no impact on business development.

The key is to have a very appealing offer delivered to a very qualified and responsive list. It’s not easy to get this combination right.

Thought Leadership and Content Marketing

Here, the strategy is to make your expertise visible to potential buyers and referral sources. This is accomplished through writing, speaking or publishing content that demonstrates your expertise and how it can be applied to solve client problems.

Books, articles and speaking engagements have long been staples of professional services business development strategy. Many high visibility experts have built their practices and firms upon this strategy. It often takes a good part of a career to execute this approach.

But changing times and technology have reshaped this strategy. With the onset of digital communication it is now easier and much faster to establish your expertise with a target market. Search engines have leveled the playing field so that relatively unknown individuals and firms can become known even outside their physical region. Webinars have democratized public speaking, and blogs and websites give every firm a 24/7 presence. Add in video and social media and the budding expert can access a vastly expanded marketplace.

But these developments also open firms to much greater competition as well. You may find yourself competing with specialists whom you were never aware of. The impact is to raise the stakes on your business development strategy.

Combined Strategies

It is common to combine different business development strategies. For example, networking and referrals are frequently used together. And on one level, a combined strategy makes perfect sense. The strength of one strategy can shore up the weakness of another.

But there is a hidden danger. For a strategy to perform at its peak, it must be fully implemented. There is a danger that by attempting to execute too many different strategies you will never completely implement any of them.

Good intentions, no matter how ambitious, are of little real business development value. Under-investment, lack of follow through and inconsistent effort are the bane of effective business development.

It is far more effective to fully implement a simple strategy than to dabble in a complex one. Fewer elements, competently implemented, produce better results.

Next, we turn our attention to the tactics used to implement a high-level strategy. But first there is a bit of confusion to clear up.

Business Development Strategy Vs. Tactics

The line between strategy and tactics is not always clear. For example, you can think of networking as an overall business development strategy or as a tactic to enhance the impact of a thought leadership strategy. Confusing to be sure.

From our perspective, the distinction is around focus and intent. If networking is your business development strategy all your focus should be on making the networking more effective and efficient. You will select tactics that are aimed at making networking more powerful or easier. You may try out another marketing technique and drop it if it does not help you implement your networking strategy.

On the other hand, if networking is simply one of many tactics, your decision to use it will depend on whether it supports your larger strategy. Tactics and techniques can be tested and easily changed. Strategy, on the other hand, is a considered choice and does not change from day to day or week to week.

10 Most Effective Business Development Tactics

Which business development tactics are most effective? To find out, we recently conducted a study that looked at 824 professional services firms. The research identified those firms that were growing at greater than a 20% compound annual growth rate over a three-year period.

These High Growth firms were compared to firms in the same industry that did not grow over the same time period. We then examined which business development tactics were employed by each group and which provided the most impact.

The result is a list of the ten most impactful tactics employed by the High Growth firms:

  • Outbound sales calls from internal teams
  • Providing assessments and/or consultations
  • Business development materials
  • Speaking at targeted conferences or events
  • Networking at targeted conferences or events
  • Conducting and publishing original research
  • Live product/service demonstrations
  • Presenting in educational webinars
  • Marketing partnerships with other organizations
  • Case studies

There are a couple of key observations about these growth tactics. First, these techniques can be employed in service of different business development strategies. For example number four on the list, speaking at targeted conferences or events, can easily support a networking or a thought leadership strategy.

The other observation is that the top tactics include a mix of both digital and traditional techniques. As we will see when we develop your plan, having a healthy mix of digital and traditional techniques tends to increase the impact of your strategy.

Business Development Skills

Now that we have identified the key business development strategies and tactics, it is time to consider the business development skills your team will need. Business development skills require a broad range of technical skills but there are some that make a difference.

When the Hinge Research Institute studied marketing and business development skills in our annual High Growth Study , we found that the firms that grow faster have a skills advantage within their marketing and business development teams.

In Figure 2 below, we see which business development skills are the most important for the high growth firms:

business model service development

Figure 2. Skill ratings by marketing function (High Growth vs. No Growth firms)

Let’s dive into the top three skills from this list. 

The number one business development skill high growth firms enjoy are strong project management skills. And for experienced business development specialists, this makes good sense. Staying organized, accurately tracking business development activity, and managing accounts are essential for building and maintaining strong business relationships. Sound project management practices also allow the business development team to product stronger proposals more quickly without sacrificing quality.

The next most important skill is simplifying complex concepts. In business development conversations, it is vital that team members are able to communicate your firm’s service offerings and capabilities in a ways that prospects can understand. Speaking in industry jargon or presenting overly complicated charts creates unnecessary confusion and friction. Therefore, it is no surprise to see that the fastest growing professional services firms have an advantage in communicating complex information in a way that buyers understand.

The third most important business development skill is data analytics. Firms that make a habit of regularly monitoring key metrics have a real advantage. They can see what marketing techniques are working and which are having problems. The allows them to make course corrections in near real time. Firms that rarely or never look at data are running blind, relying instead on potentially misleading anecdotal evidence.

Review the other business development and marketing skills in the figure above and determine which skills your team should aim to develop.  Developing these skills should be a key priority of your business development team.

How to Create Your Strategic Business Development Plan

A Business Development Plan is a document that outlines how you implement your business development strategy. It can be a plan for an individual, a practice or the firm as a whole. Its scope covers both the marketing and sales functions, as they are so intertwined in most professional services firms.

Here are the key steps to develop and document your plan.

Define your target audience

Who are you trying to attract as new clients? Focus on your “best-fit” clients, not all possible prospects. It is most effective to focus on a narrow target audience. But don’t go so narrow that you can’t achieve your business goals.

Research their issues, buying behavior and your competitors

The more you know about your target audience the better equipped you will be to attract their attention and communicate how you can help them. What are their key business issues? Is your expertise relevant to those issues? Where do they look for advice and inspiration? What is the competitive environment like? How do you stack up?

Identify your competitive advantage

What makes you different? Why is that better for your target client? Are you the most cost-effective alternative? Or the industry’s leading expert? However you position your firm, your claims need to be true, provable and relevant to your target audience. It is very useful to document this positioning as you will use it over and over again as you develop your messages and marketing tools.

Choose your overall business development strategy

Pick the broad strategy or strategies you will use to reach, engage and convert your prospects. You can start with the list of top strategies provided above. Which strategy fits with the needs and preferences of your target audiences? Which ones best convey your competitive advantage? For example, if you are competing because you have superior industry expertise, a thought leadership/content marketing strategy will likely serve you well.

Click to play video

Choose your business development tactics

A great place to start is the list of the most effective tactics we provided above. Make sure that each technique you select fits your target audience and strategy. Remember, it’s not about your personal preferences or familiarity with a tactic. It’s about what creates a connection with your audience.

Also, you will need to balance your choices in two important ways: First, you will need tactics that address each stage of the business development pipeline shown in Figure 1. Some techniques work great for gaining visibility but do not address longer-term need to nurture prospects over time. You need to cover the full funnel.

Second, you need a good balance between digital and traditional techniques (Figure 2). Your research should inform this choice. Be careful about assumptions. Just because you don’t use social media doesn’t mean that a portion of your prospects don’t use it to check you out.

business model service development

When, how often, which conferences, what topics? Now is the time to settle on the details that turn a broad strategy into a specific plan. Many plans include a content or marketing calendar that lays out the specifics, week by week. If that is too much detail for you, at least document what you will be doing and how often. You will need these details to monitor the implementation of your plan.

Specify how you will monitor implementation and impact

Often overlooked, these important considerations often spell the difference between success and failure. Unimplemented strategies don’t work. Keep track of what you do, and when. This will both motivate action and provide a great starting place as you troubleshoot your strategy. Also monitor and record the impacts you see. The most obvious effect will be how much new business you closed. But you should also monitor new leads or new contacts, at the bare minimum. Finally, don’t neglect important process outcomes such as referrals, new names added to your list and downloads of content that expose prospects and referral sources to your expertise.

If you follow these steps you will end up with a documented business development strategy and a concrete plan to implement and optimize it.

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Service Design

What is service design.

Service design is a process where designers create sustainable solutions and optimal experiences for both customers in unique contexts and any service providers involved. Designers break services into sections and adapt fine-tuned solutions to suit all users’ needs in context—based on actors, location and other factors.

“When you have two coffee shops right next to each other, and each sells the exact same coffee at the exact same price, service design is what makes you walk into one and not the other.” — 31Volts Service Design Studio

See how effective service design can result in more delightful experiences.

  • Transcript loading…

Service Design is about Designing for the Biggest Picture

Users don’t access brands in a vacuum, but within complex chains of interactions. For example, a car is a product, but in service design terms it’s a tool when an elderly customer wants to book an Uber ride to visit a friend in hospital. There’s much to consider in such contexts. This user might be accessing Uber on a smartphone, which she’s still learning to use. Perhaps she’s infirm, too, lives in an assisted living facility and must inform the driver about her specific needs. Also, she’s not the only user involved here. Other users are any service providers attached to her user experience. For example, the driver that customer books also uses Uber—but experiences a different aspect of it. To cater to various users’ and customers’ contexts as a designer, you must understand these sorts of relations between service receivers and service providers and the far-reaching aspects of their contexts from start to finish. Only then can you ideate towards solutions for these users’/customers’ specific ecosystems while you ensure brands can deliver on expectations optimally and sustainably .

In service design, you work within a broad scope including user experience (UX) design and customer experience (CX) design . To design for everyone concerned, you must appreciate the macro- and micro-level factors that affect their realities.

business model service development

A service design experience often involves multiple channels, contexts and products.

Marc Stickdorn and Jakob Schneider, authors of This is Service Design Thinking , identify five key principles—for service design to be:

User-centered – Use qualitative research to design focusing on all users.

Co-creative – Include all relevant stakeholders in the design process.

Sequencing – Break a complex service into separate processes and user journey sections.

Evidencing – Envision service experiences to make them tangible for users to understand and trust brands.

Holistic – Design for all touchpoints throughout experiences, across networks of users and interactions.

Designers increasingly work more around services than around physical products—e.g., SaaS (software as a service). Meanwhile, with advances in digital technology continually redefining what users can expect whenever they proceed towards goals, brands focus on maximizing convenience and removing barriers for their users . A digital example is Square, which unbundles point-of-sale systems from cash registers and rebundles smartphones as potential point-of-sale systems.

How to Do Service Design Best

First, identify these vital parts of any service encounter:

Actors (e.g., employees delivering the service)

Location (e.g., a virtual environment where customers receive the service)

Props (e.g., objects used during service delivery)

Associates (other organizations involved in providing the service – e.g., logistics)

Processes (e.g., workflows used to deliver the service)

You’ll need to define problems, iterate and address all dimensions of the customers’, users’ and business needs best in a holistic design . To begin, you must empathize with all relevant users/customers. These are some of the most common tools:

Customer journey maps (to find the customers’ touchpoints, barriers and critical moments)

Personas (to help envision target users)

Service blueprints (elevated forms of customer journey maps that help reveal the full spectrum of situations where users/customers can interact with brands)

You should use these to help leverage insights to account for such vital areas as accessibility and customer reengagement.

business model service development

Service blueprints are an important tool in the service design process.

Do Service Design for the Complete Experience

Remember to design for the complete experience. That means you should accommodate your users’/customers’ environment/s and the various barriers, motivations and feelings they’ll have. Here are some core considerations:

Understand your brand’s purpose, the demand for it and the ability of all associated service providers to deliver on promises.

The customers’ needs come ahead of the brand’s internal ones .

Focus on delivering unified and efficient services holistically —as opposed to taking a component-by-component approach.

Include input from users .

Streamline work processes to maximize efficiency .

Co-creation sessions are vital to prototyping .

Eliminate anything (e.g., features, work processes) that fails to add value for customers.

Use agile development to adapt to ever-changing customer needs.

Service design applies both to not-so-tangible areas (e.g., riders buying a single Uber trip) and tangible ones (e.g., iPhone owners visiting Apple Store for assistance/repairs). Overall, service design is a conversation where you should leave your users and customers satisfied at all touchpoints, delighted to have encountered your brand.

Learn More about Service Design

Learn all about service design by taking our course: Service Design: How to Design Integrated Service Experiences .

Read this insightful piece, Service Design: What Is It, What Does It Involve, And Should You Care?

Discover more about service blueprinting in Service Design 101

Read this eye-opening piece exploring Service Design Thinking

Examine Uber’s service design in Uber Service Design Teardown

Questions related to Service Design

A service design diagram is a visual representation of the overall structure and components of a service, including the interactions between different elements. It provides an overview of the service and helps stakeholders understand how different parts of the service fit together. It may include information such as user interfaces, system components, data flows, and more.

Actors/Roles: Entities bringing the experience to the customer.

Information Flow: Details of data shared, required, or used.

Interactions: Between people, systems, and services.

Devices & Channels: Tools and mediums of communication.

The diagram is essential for understanding the current state of a service, emphasizing the intricacies and interdependencies, guiding service blueprint creation, and identifying potential breakpoints or areas for enhancement.

In the context of service design, frontstage refers to the actions performed by employees that are visible to the customer. It includes interactions such as customer service, product demonstrations, and any other activities that customers can directly observe.

On the other hand, backstage actions are performed by employees that are not visible to the customer. These actions support the service delivery and may include tasks such as inventory management, quality control, and other behind-the-scenes operations.

Good service design is a holistic approach that prioritizes every user interaction, both in digital and real-life contexts. Jonas Piet, Director and Service Design Lead at Inwithforward shares the example of Kudoz, a learning platform to demonstrate backstage service design.

While the digital platform is a crucial component, the user's journey begins long before they interact with the app. It might start with discovering the service at a community event or through a promotional video. Service designers ensure that every touchpoint, from community events to the digital interface, provides a coherent and positive experience. They focus on the intricate details, be it designing the role of an 'Experience Curator', crafting a compelling story, or ensuring safety checks. In essence, good service design intertwines various interactions, ensuring they align perfectly.

Discover the principles of human-centered design through Interaction Design Foundation's in-depth courses: Design for the 21st Century with Don Norman offers a contemporary perspective on design thinking, while Design for a Better World with Don Norman emphasizes designing for positive global impact. To deepen your understanding, Don Norman's seminal book, " Design for a Better World: Meaningful, Sustainable, Humanity Centered ," from MIT Press, is an invaluable resource.

Developing service design begins with 

In-depth user research, often ethnographic field studies, forming personas and journey maps. 

Engage stakeholders early and consistently. 

Utilize tools like the business model and value proposition canvases for a strategic foundation. 

Transition from journey maps to service blueprints, mapping out the entire service ecosystem. 

Embrace prototyping, iteratively refining with stakeholder input. 

Thoroughly test prototypes, launch the finalized service, and continuously measure its impact. 

Learn more from the video below:

Service design starts by understanding all pieces of an activity, centered on a user's need. 

It involves figuring out systems from the ground up to support the experience, considering digital, physical, and social contexts. In-depth user research, stakeholder engagement, and aligning organizational resources, user needs, and outcomes are vital. 

Service design, as discussed in our video, encompasses both the visible interactions a customer experiences and the underlying processes staff engage with. It deals with a complex web of interconnectivity, from front-end interactions to back-end systems and distribution. However, the challenge isn't just about designing services. The organizational culture must be receptive. Even if service designers identify areas of improvement, if the organization isn't prepared or faces legislative and technological barriers, change becomes arduous. Despite having dedicated individuals wanting change, they can often be constrained by larger, intricate issues. Service design requires a holistic approach, and while it can pinpoint problems, actual implementation might be held back by factors beyond the design realm.

UX (User Experience) design centers on the digital experience of users, focusing on specific touchpoints (which are often screen-based interactions). CX (Customer Experience) is broader, encompassing every touchpoint a customer has with a brand, from digital to in-store. 

Service design has the highest scope of the three concepts, factoring in business processes, systems, and other back-end elements that the customer does not interact with. While UX zooms in on digital interactions, service design steps back, integrating everything for a seamless journey. All three disciplines aim to enhance the user's or customer's experience but operate at different scales and depths.

Absolutely! As businesses increasingly recognize the value of delivering exceptional customer experiences, service design has become a pivotal discipline. It ensures seamless and holistic services that cater to both customer needs and business goals.

  • Copyright holder: Matthew Yohe. Appearance time: 0:06 - 0:08 Copyright license and terms: CC-BY-SA-3.0 . Modified: No. Link: https://commons.wikimedia.org/wiki/File:Steve Jobs Headshot 2010-CROP (cropped_2).jpg

The demand for professionals with expertise in service design is growing across various industries, from tech to hospitality. In order to stay competitive and satisfy the current demand, many individuals are looking to improve their skills. For those keen on mastering this domain, Interaction Design Foundation's course on Service Design provides an in-depth understanding and hands-on learning. It's a great way to get started or deepen your expertise!

Answer a Short Quiz to Earn a Gift

What is the primary goal of service design?

  • To create visually appealing service interfaces
  • To ensure financial growth for service providers
  • To optimize experiences for both customers and service providers

Which principle of service design involves breaking complex services into manageable parts?

  • Co-creative

Which tool is an elevated form of a customer journey map to reveal a full spectrum of user interactions with a brand?

  • Service blueprints
  • User scenarios

What should designers focus on for a complete service experience?

  • They should concentrate solely on the technological aspects.
  • They should prioritize brand needs over customer needs.
  • They should understand and accommodate user environments and barriers.

What is an intended outcome of employing service design in business practices?

  • To decrease the overall user base to manage expectations better
  • To increase service complexity to enhance user engagement
  • To leave users satisfied at all touchpoints with the brand

Better luck next time!

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Literature on Service Design

Here’s the entire UX literature on Service Design by the Interaction Design Foundation, collated in one place:

Learn more about Service Design

Take a deep dive into Service Design with our course Service Design: How to Design Integrated Service Experiences .

Services are everywhere! When you get a new passport, order a pizza or make a reservation on AirBnB, you're engaging with services. How those services are designed is crucial to whether they provide a pleasant experience or an exasperating one. The experience of a service is essential to its success or failure no matter if your goal is to gain and retain customers for your app or to design an efficient waiting system for a doctor’s office.

In a service design process, you use an in-depth understanding of the business and its customers to ensure that all the touchpoints of your service are perfect and, just as importantly, that your organization can deliver a great service experience every time . It’s not just about designing the customer interactions; you also need to design the entire ecosystem surrounding those interactions.

In this course, you’ll learn how to go through a robust service design process and which methods to use at each step along the way. You’ll also learn how to create a service design culture in your organization and set up a service design team . We’ll provide you with lots of case studies to learn from as well as interviews with top designers in the field. For each practical method, you’ll get downloadable templates that guide you on how to use the methods in your own work.

This course contains a series of practical exercises that build on one another to create a complete service design project . The exercises are optional, but you’ll get invaluable hands-on experience with the methods you encounter in this course if you complete them, because they will teach you to take your first steps as a service designer. What’s equally important is that you can use your work as a case study for your portfolio to showcase your abilities to future employers! A portfolio is essential if you want to step into or move ahead in a career in service design.

Your primary instructor in the course is Frank Spillers . Frank is CXO of award-winning design agency Experience Dynamics and a service design expert who has consulted with companies all over the world. Much of the written learning material also comes from John Zimmerman and Jodi Forlizzi , both Professors in Human-Computer Interaction at Carnegie Mellon University and highly influential in establishing design research as we know it today.

You’ll earn a verifiable and industry-trusted Course Certificate once you complete the course. You can highlight it on your resume, CV, LinkedIn profile or on your website.

All open-source articles on Service Design

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What is a business model? (Plus, how to define yours)

Last updated: March 2024

Business models distill the potential of a business down to its essence. Companies across every industry and at all stages of maturity need business models. Some rely on lengthy processes to build complicated models, while others move quickly to articulate the basics and take action. Either way, having the discipline to work through this planning tool forces internal alignment.

You must build something that real people with real needs will find value in and pay for — otherwise you do not have a lasting business. Brian de Haaff Aha! co-founder and CEO

For established enterprises, a business model is often a living document that is reviewed and adapted over the years. For companies launching products and services or entering new markets, a business model helps ensure that decisions are tied back to the overall business strategy . And for early-stage startups, a simple one-page business model enables founders to explore the mechanics of a business and how you anticipate it will be successful.

Defining and documenting a business model is an essential exercise. Whether you are starting a new venture, expanding into a new market, or shifting your go-to-market strategy , you can use a business model to capture fundamental assumptions about the opportunity ahead and tactics for addressing challenges.

Forward-thinking companies integrate their business model into all aspects of the organization — from recruiting talent to motivating employees. That is why many choose tools that make it possible to quickly build and share a business model. In Aha! software, for example, there are multiple ways to build a model and connect it to everyday work. One of the quickest ways is by using our whiteboard template — featured below.

Get this business model whiteboard template — with a free trial .

Business model large

Start using this template now

You can also try a similar template that is built into the product strategy section of Aha! Roadmaps . Or you can download free Excel and PowerPoint business model templates in this guide .

This article covers the basics of business models, from core concepts to best practices. Jump ahead to any section:

Definition of a business model

Business model components

Business model vs. business plan.

Different types of business models

Pros and cons of different models

Analyzing competitor business models

Business model templates

How to build a business model

What is the definition of a business model?

A business model defines how a company will create, deliver, and capture value.

A business model answers questions that are crucial for strategic decision-making and business operations. Creating a business model for your startup or product means identifying the problem you are going to solve, the market that you will serve, the level of investment required, what products you will offer, and how you will generate revenue. Pricing and costs are the two levers that affect profitability within a given business model.

A business model is part of your overall business strategy. Some business models extend beyond economic context and include value exchange in social or cultural terms — such as the intangible impact the company will have on a community or industry. The process of constructing and changing a business model is often referred to as “business model innovation.”

15 elements of a brilliant business strategy

This is why innovation programs fail

There are three main areas of focus in a business model: value proposition, value delivery, and value capture. The proposition outlines who your customers are and what you will offer. The delivery details how you will organize the business to deliver on the proposition. And the capture is a hypothesis for how the proposition and delivery will align to return value back to the business.

business model service development

The components of a business model include everything the organization needs to document and internalize so that the team can implement all three value focuses. This includes the market in which you operate, organizational strengths and challenges , essential elements of your product or products, and how you will generate revenue.

Below are some components to include when you create a business model:

Vision and mission : Overview of what you want to achieve and how you will do it.

Objectives: High-level goals that will support your vision and mission, along with how you will measure success.

Customer targets and challenges: Description of target customers (written as archetypes or personas ) and their pain points.

Solution: How your offering will solve customer pain points.

Differentiators: Characteristics that differentiate your product or service.

Pricing: What your solution will cost and how it will be sold.

Positioning and messaging: How you will communicate the value of your offering to customers.

Go-to-market: Proposed approach for launching new offerings and services.

Investment: Resources required to introduce your offering.

Growth opportunity: Ways that you will grow the business over time.

Positioning vs. messaging

  • What is value-based product development?
  • What is a go-to-market roadmap?

What is a business roadmap?

Business models and business plans are both elements of your overall business strategy. But there are key differences between a business model and a business plan.

A business model captures your hypothesis for how your business will generate revenue and — charging a price for an offering you create at a sustainable cost.

A business model will include a brief overview of what you offer and to whom.

A business plan drops down one level to show how you will implement the business model.

It includes specifics such as operational practices, experience and structure of the , milestones to be reached on a set timeline, and comprehensive financial projections.

A business model is seen as foundational and will not usually be reworked in reaction to shorter-term shifts — whereas a business plan is more likely to be updated based on changes in the economy or market.

Related: Business plan templates

What is the benefit of building a business model?

Innovation is about more than the products or technologies that you build. The way that you operate your business is a critical factor in how you stand apart in a crowded marketplace. The benefit of building a business model is that you can use the exercise to expose and exploit what makes your company unique — why choosing your offering is better for customers than any alternatives and how you will grow the business over time.

Many people associate business models with lengthy documents that describe a company’s problem, opportunity, and solution in the context of a two-to-five-year forecast. But business models do not need to be a long treatise.

A one-pager is just as effective for distilling and communicating the most important elements of your business strategy. The concise format is useful for sharing with broader teams so that everyone understands the high-level approach. Done right, a business model can become a touchstone for the team by outlining core differentiators to promote and defend in the market.

Related: A more comprehensive business model builder

What are the different types of business models?

There are many different types of business models. Below are some of the most common business models with example companies for reference (take note of the companies that appear in several categories):

Displays advertisements from other companies to a specific audience.

Pays a small commission to others to promote goods.

Sells multiple products to a single customer for a fixed price.

Sells labor (intellectual or physical) for a set price (hourly or by project).

Builds on existing successful business and receives a percentage of earnings from franchises who invest in, operate, and promote new locations.

Provides a limited free product with a more advanced option that users can pay to access.

Sources raw materials to produce finished goods that are sold to retailers or directly to customers.

Charges customers based on actual usage of a product.

Procures and sells products manufactured by others — the last step of a supply chain.

Offers a product that requires ongoing payment for a fixed time period.

Hosts a platform for other companies to do business in exchange for compensation

Did you keep track of the companies that appeared in several of the business model examples? Good. You now have a grasp of how complex enterprises with vast portfolios of products and services often employ many business models within the same organization.

Consider a company like Apple, which manufactures and sells hardware products as well as offering cloud-storage, streaming subscriptions, and a marketplace for other applications. Amazon, whose offerings range from retail (with the acquisition of Whole Foods) to marketplace (Amazon.com) to subscription services (Amazon Prime and Amazon Music) to affiliate, also features in different categories. Each division or vertical will have a distinct business model that reflects the nuances of how it operates while also supporting the corporate business model.

Related: The product manager vs. the portfolio product manager

Pros and cons of different business models

Some types of business models work better for certain industries than others. For example, software-as-a-service (SaaS) companies often rely on freemium business models. This makes it easy for potential users to experience the value of the product and incentivizes paid conversions via access to additional features.

Many social media platforms make money through advertising. By providing full access to the platform for free, these companies attract more users. In turn, this creates a more valuable audience for advertisers and increases revenue for the business.

Simple and transactional

Customers expect return on investment

Low barrier to entry for customers

Lack of control over branding

Sell more products at once

Reliance on discounting

Simple billing

Requires pipeline of new leads

Low initial cost

Difficult to maintain quality

Rapid user growth

Path to profit is uncertain

Control and innovation opportunities

High capital investment

Low barrier of entry for customers

Challenges with customer retention

More profit margin

High competition

Continual revenue stream

High customer churn

How do you analyze a competitor’s business model?

Business analysts and investors will often evaluate a company’s business model as part of due diligence for funding or market research . You can apply the same tactics to analyze a competitor’s business model — with a few caveats.

Public companies are subject to reporting requirements. This means that the business must regularly disclose financial and performance data to the public — these disclosures occur quarterly and annually. The data includes everything from gross revenue, operating costs and losses, cash flow and reserves, and leadership discussions of business results. Designed to protect and inform investors, these reports can provide you with the information you need to understand the basics of the company’s business model and how well it is performing against the model.

Private companies are not required to reveal business data publicly. Investors or partners may be privy to certain aspects of the company’s performance, but it can be difficult to understand exactly what is happening from the outside. Some analysts or business websites will attempt to “size” a business or market by looking at a variety of factors — including the number of employees, volume of search terms related to the core offering, estimated customer base, pricing structure, partnerships, advertising spend, and media coverage.

Once you have identified relevant alternatives to your offering and gathered all of the information that you can find, a good way to analyze a competitor’s business model is to conduct a competitive analysis.

You do not want to spend too much time thinking about other companies when you could be focused on your own. A simple SWOT analysis is a helpful way to map out strengths, weaknesses, opportunities, and threats that were revealed during your research.

Competitor analysis templates

  • How to price your product
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Below are three types of business model layouts available in Aha! software that you can use to succinctly assess what is possible and what challenges could arise for your business.

Whiteboard business model template

Articulate the foundation of your product or service in a whiteboard-style format. The focus is on capturing key elements like why the solution is worth buying (messaging), pain points of the buyers (customer challenges), and ways you will grow the business (growth opportunities).

Business model canvas

This business model canvas included in Aha! Roadmaps uses drag-and-drop components within a flexible layout. You can rename or hide components as needed. And you can create as many strategic models in your workspace as you would like.

How to craft a product strategy in Aha! Roadmaps

How to use the strategic model template in Aha! Roadmaps

Free Excel and PowerPoint business model templates

Aha! Roadmaps helps businesses map out their strategy directly within the software. This is an example of a business model created in Aha!

  • Lean canvas

Similar to the business model canvas, the lean canvas in Aha! Roadmaps takes a problem-focused approach to create an actionable business plan. It is most commonly used by startups and entrepreneurs to document business assumptions. The focus is on quickly creating a concise, single-page business model. It documents nine elements, including customer segments, channels used to reach customers, and the ways you plan to make money.

Aha! Roadmaps helps businesses map out their strategy directly within the software. This is an example of a lean canvas created in Aha!

How to build a business model in 10 steps

Crafting a business model is part of establishing a meaningful business strategy. But a business model is essentially a hypothesis — you need to test yours to prove that it will actually provide value. Many startup founders especially underestimate the costs and timeline for reaching profitability.

1. Identify your target market

Who will benefit from your offering? What characteristics do prospective customers share?

2. Define the problem you will solve

What is the problem that you are solving? What are the pain points of your potential customers?

3. Detail your unique selling proposition (USP)

What will you build and how will you support it?

4. Create a pricing strategy

How much will you charge for your offering? What factors will go into choosing your price point?

5. Develop a marketing approach

How will you market your product and reach target customers? What channels will you choose for go-to-market?

6. Establish operational practices

How will you streamline processes and procedures to reduce overhead and fixed costs?

7. Capture path to profitability

How will your business generate revenue? What level of investment will be required and what fixed costs exist?

8. Anticipate challenges

Who are your competitors? What opportunities and threats exist for your business?

9. Validate your business model

Was your hypothesis correct? Does your business model solve a problem the way you thought it would?

10. Update to reflect learnings

What can you do differently in the future to ensure greater success?

Your business model will ultimately guide your organization and influence your product roadmap. Give it the deep thought it deserves — questioning your core assumptions about how you will generate value and how your team will work towards achieving shared goals.

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SaaS Business Model: Stages, Advantages, Disadvantages, and Key Tools

Discover the ins and outs of the SaaS business model. Learn key strategies and insights for success in the software industry.

Noah Jay Hendricks

Noah Jay Hendricks

When not knee-deep in his vegetable garden, wrestling with weeds, Noah can be found daydreaming about engaged and happy customers who never have to worry about their CRM because it’s working for them, not against them.

Published: Jul 04, 2024

| 32 mins read

What is the Software as a Service (SaaS)?

saas1

SaaS, or software as a service, is a model where software is centrally hosted and provided to customers through a subscription. Companies that offer their products via cloud-based software are considered SaaS providers.

These companies handle the servers, databases (including the data), and other software needed for their product use. Subscription plans can vary widely between companies; some SaaS providers offer multiple applications within their product, with different plans giving access to various services.

[Related article: SaaS Sales Explained: Key Insights for 2024 ]

Here are the leading CRM options to succeed in the SaaS industry:

Teamgate

Teamgate enables SaaS businesses to efficiently track customer interactions, optimize their sales funnels, and drive sustainable growth. This CRM helps streamline operations, enhance customer engagement, and improve sales performance.

HubSpot

CRM was created ready for the modern world to help users run businesses and start selling. Moreover, it is the ultimate CRM for web designers, offering a versatile toolkit that improves client relationships.

Zoho

It is a web-based email marketing management service for small and medium businesses. It automates the entire marketing process - from managing your email marketing campaign to maintaining mailing lists.

Salesforce (2)

Salesforce is an industry leader known for its mammoth feature set and endless customization options. The platform can adapt to any industry, from manufacturing to insurance. 

How the SaaS business model works

To market a SaaS startup effectively, it's crucial to have software developers who can turn complex cloud computing tasks into easy-to-use platforms.

SaaS companies aim to increase their monthly revenue streams and build a strong, engaged user base to achieve profitable Annual Recurring Revenue (ARR) and Monthly Recurring Revenue (MRR). Consequently, most enterprise SaaS business models don't rely solely on one-time pricing. More often, SaaS models are designed to maximize recurring monthly revenue. This approach is common in both enterprise-level B2B solutions and consumer-level B2C products that simplify daily life.

The monthly subscription model keeps customer acquisition costs (CAC) low, although the pricing model affects users' willingness to commit. Monitoring customer churn, especially in the early months, is essential for any SaaS business . Many SaaS products often offer a free trial period before starting monthly fees. This puts pressure on startups to showcase their platform's value and flexibility during the trial to convert users into paying customers.

A major source of churn is trial users who leave before subscribing. Reducing friction between the trial period and paid subscriptions is crucial for growth.

To retain customers, your startup must deliver perfect service and convenience, making users feel they can't live without your SaaS solution. While challenging, achieving this can lead to significant rewards in the SaaS industry when done correctly.

Stages of the SaaS Business

saas-stages

The most successful SaaS companies can reach valuations in the hundreds of millions, serve vast customer bases, and revolutionize entire industries. However, this represents the pinnacle of the SaaS business journey. Generally, a SaaS business progresses through three stages:

1. Development stage

In the early stage, you're operating with minimal resources. Customer numbers are low, and your product is still in development. You might be seeking pre-seed funding or opting for bootstrapping to maintain control over your operations.

During this phase, your team is likely small, you’re focused on a single product, and profitability may not have been achieved yet.

Key questions to consider at this stage include: Are you tracking important metrics , attracting new users, and optimizing pricing? Have you started crafting a software as a service business model that will help you secure appropriate funding and use it effectively?

2. Growth stage

The growth stage is when things start to take off. Your product is rapidly gaining subscribers, generating Monthly Recurring Revenue (MRR), and possibly achieving positive cash flow.

To propel your growth, you'll need to secure substantial funding to expand your team, invest in product development, and scale operations. Various funding sources cater to SaaS businesses, including:

  • Venture Capital: This funding source comes from firms that see high growth potential or a solid track record in your SaaS company, providing significant financial support.
  • Angel Investors: These individual investors offer substantial financial backing and are ideal for the business model for SaaS startup seeking its first major investment. Recently, "super" angels have also become influential in later funding rounds.

Venture capitalists and angel investors are not the sole options for expanding your business. Some startups join incubators in their initial stages; more mature SaaS companies often turn to startup accelerators for a distinct funding experience. Furthermore, some companies choose to bootstrap for a long time, while others succeed in making money immediately and don't require outside capital for an extended period.

During this stage, ask yourself: Have I established key performance indicators (KPIs) to support further scaling? Do I currently have a strong monetization plan for when I look for funding?

[Related article:  15+ SaaS Product Ideas & Examples for Your Startup in 2024 ]

3. Maturity stage

When a SaaS company reaches the mature stage, it has established itself with a well-defined target audience and a dependable product that is regularly updated. At this point, the company generates strong Monthly Recurring Revenue (MRR) and maintains stable key performance indicators (KPIs). Mature-stage companies may still seek large-scale investments to enter new markets or acquire competitors.

The primary question for a SaaS company at this stage should be: When did we last review our pricing strategies? Mature companies often become complacent, believing that stable profitability means they are operating at full potential. However, these companies may be missing out on substantial revenue by not optimizing their pricing.

4. Renewal or decline stage

In the renewal or decline stage, a SaaS company must either rejuvenate growth or face decline. Slowing growth, increased competition, and market saturation are common challenges.

For renewal, the company should focus on innovation by introducing new features or products to meet evolving customer needs. Growth can also be accelerated by targeting new markets or locations. Forming strategic partnerships or acquiring other companies can enhance capabilities and market reach. Additionally, actively seeking and integrating customer feedback is crucial for improving satisfaction and retention.

If a company cannot adapt, it may enter the decline phase. To manage this, the company should reduce operational costs to stay profitable and streamline offerings to focus on the most critical areas. Rebranding or repositioning can help regain customer interest and market relevance.

The essential questions for a SaaS company at this stage are: Are we investing in innovation to stay ahead of the curve? Are we listening to our customers and adapting accordingly? Are we exploring new opportunities for growth while managing costs effectively?

Powerful CRM System

monday-sales-crm

SaaS business model example

SaaS businesses encompass a wide range of software applications that cater to various needs, primarily helping businesses operate more efficiently.

Let's explore some notable successes in the SaaS industry:

Sales-and-Marketing-Adoption-Dashboard-in-Salesforce-Mar-27-2024-01-29-56-8226-PM

Salesforce is one of the pioneering SaaS companies, established in 1999 as a software firm. It has played a pivotal role in enabling businesses to streamline sales team management, process prospects effectively, and enhance client follow-up strategies. Salesforce has set a benchmark for success in the SaaS sector, inspiring other business owners to achieve similar levels of impact with their products.

Monday crm dashboard-Mar-27-2024-01-19-39-2020-PM

monday.com achieved a remarkable valuation exceeding $1 billion in 2019, despite generating only $4 million in monthly recurring revenue (MRR) in 2016. There are various reasons for this success:

  • They innovated project management software by focusing on both individual task assignments and comprehensive project management over extended periods, optimizing team resource allocation.
  • Implementing multiple pricing tiers enhanced profitability per customer account, without offering a freemium SaaS operating model, ensuring immediate results with paid advertising.
  • Targeted advertising campaigns on platforms like YouTube and Instagram, rather than LinkedIn, minimized customer acquisition costs (CAC), enabling substantial investment in rapid growth initiatives. 

zendesk-ui

Zendesk is renowned for its customer service ticketing system, widely acclaimed for its user-friendly interface catering to businesses of all sizes. It empowers organizations to efficiently manage customer service operations, thereby enhancing overall customer experience.

MeetEdgar-ui

MeetEdgar offers a social media automation SaaS solution designed to save users substantial time. It automates social media scheduling and allows posts to be recycled, ensuring content reaches a broader audience over time. Although smaller in scale compared to Salesforce, Edgar has made significant strides in the social media SaaS niche, serving as a model for other SaaS businesses.

Shopify-ui

Shopify revolutionized e-commerce by providing an accessible platform for online stores, eliminating the need for coding knowledge. It has democratized online retailing, enabling businesses of all sizes to establish and manage online, social media, and in-person sales channels seamlessly.

These examples illustrate how diverse SaaS solutions have reshaped industries, demonstrating the potential for innovation and growth within the sector.

Advantages of the SaaS model

Cost efficiency 💸.

The SaaS business models offer significant cost savings for businesses. By opting for SaaS, companies can avoid the upfront costs associated with purchasing and installing software. Instead, they pay a predictable subscription fee, which often includes maintenance and updates. This approach eliminates the need for expensive hardware, reduces IT staffing requirements, and spreads costs over time, making budgeting more manageable.

Scalability 📈

Scalability is a major advantage of SaaS. Software requirements can vary as a business expands. The best SaaS solutions allow companies to easily scale their usage up or down without the hassle of traditional software upgrades or installations. This flexibility ensures that businesses can adapt quickly to changing demands, adding new users or features as needed without significant disruption or cost.

Accessibility ☁️

Existing SaaS applications are accessible from anywhere with an internet connection, which is particularly beneficial in today’s remote work environment . This accessibility ensures that employees can work from any location, using any device, enhancing collaboration and productivity. Moreover, because SaaS applications are hosted in the cloud, data is centralized and can be accessed in real time, facilitating better decision-making and coordination.

Regular updates and maintenance 🆕

With SaaS, regular updates and maintenance are handled by the service provider. This eliminates the need for manual upgrades and downtime by ensuring that companies always have access to the newest features and security updates. This continuous improvement helps companies stay competitive and secure, as they benefit from the provider’s ongoing investment in the software’s development and upkeep. Additionally, this reduces the burden on internal IT departments, allowing them to focus on more strategic tasks.

[Related article: Discover the Benefits & Challenges of CRMs in Business ]

Disadvantages of the SaaS model

Data security and privacy 🛡️.

One of the primary concerns with the SaaS platform business model involves data security and privacy. Since data is stored on the provider's servers and accessed over the internet, it is vulnerable to breaches and unauthorized access. Businesses must trust that the SaaS provider has robust security measures in place. Additionally, compliance with data protection regulations can be challenging, as companies must ensure that their data handling practices align with legal requirements, even when data is managed by third parties.

Dependence on Internet connectivity 🌐

The reliance on internet connectivity is one of the significant cons of the SaaS industry. Users need a stable internet connection to use SaaS applications. Access to software and data may be interrupted in places with unstable internet connections or during outages, leading to decreased efficiency and operational delays. This dependence can be particularly problematic for businesses with remote employees or those operating in regions with inconsistent internet service.

Limited customization 🔧

Typical SaaS solutions often come with limited customization options compared to on-premise software . While many SaaS providers offer configurable settings, the level of customization may not meet the needs of every business. This could be a serious drawback for businesses that require highly tailored solutions to fit unique workflows or industry-specific requirements. The one-size-fits-all nature of many SaaS applications can lead to compromises in functionality and efficiency, forcing businesses to adapt their processes to the software rather than the other way around.

5 Tips for SaaS business success

SaaS-Implementation

Whether you're aiming to grow or planning to sell, here are some tips and the general way to optimize your SaaS business.

1. Determine your break-even point

Determine when your SaaS revenue will match your investments. Knowing this helps you make strategic decisions at the right time, whether you plan to sell or continue growing your business.

2. Understand your cash flow and runway

Cashflow and runway dictate your growth potential and speed, especially during the hypergrowth phase. Monitoring these ensures you can sustain and scale your business effectively.

3. Align your business with your desired lifestyle

Align your SaaS company business model with your lifestyle goals. If wealth is your priority, pursue it. If a balanced work-life is your aim, make business decisions that support that, like avoiding investors who might add stress.

4. Monitor and enhance your revenue per employee

Employees are vital but costly. Tracking revenue per employee is crucial for success. The energy sector leads in this metric, but SaaS is among the top five sectors, highlighting its importance.

5. Address one problem at a time

Avoid feature overload in your SaaS products. When planning your business roadmap, keep it simple and focused. Solving multiple problems is good, but evaluate if new features fit within the existing product or should be separate offerings.

[Related article: How to Choose a CRM System: Checklist with 6 Tips ]

Essential SaaS metrics to monitor

SaaS-Metrics

SaaS software companies thrive on data, and their success depends on how well they track key metrics, understand their interactions, and make improvements. Here are five key business metrics to measure that reveal the health and potential of a SaaS company.

Customer Lifetime Value (LTV)

A customer's lifetime value (LTV) is the total revenue you can expect from them while using your product.

Calculating LTV accurately is crucial for SaaS businesses. While retention rates (which we'll discuss soon) are important, they don't fully show how much revenue retained customers generate monthly or the effectiveness of upselling. LTV provides this detailed insight.

Customer Acquisition Cost (CAC)

CAC represents the total expenses incurred in sales and marketing to acquire a new customer.

Acquiring new customers is costly, and it takes time before the additional Monthly Recurring Revenue (MRR) from a new customer covers the acquisition costs. Monitoring CAC is essential to ensure that it is comfortably outweighed by the Lifetime Value (LTV) of a customer.

Spending too little on CAC can result in missed revenue and growth opportunities, while overspending can impact profitability. Balancing CAC is crucial for sustainable growth.

Monthly Recurring Revenue (MRR) & Annual Recurring Revenue (ARR)

MRR and ARR are crucial for SaaS businesses, reflecting the predictable revenue expected each month or year.

Despite their importance, many companies mishandle their MRR. A ProfitWell survey found that one in five SaaS companies incorrectly reported expenses related to MRR, two in five improperly included trial or free users, and most made errors distinguishing between monthly, quarterly, and annual payments.

Accurate MRR tracking is essential, even though it isn't required for government reporting. This metric is vital for investors to gauge your company's health and for you to plan your growth strategy effectively.

The churn rate is the percentage of customers who stop using your service over a specific period. It's a critical metric for SaaS businesses because even a small increase can impact growth.

Churn can be devastating, even if other metrics are strong. Understanding your churn rate's causes and finding ways to reduce it is crucial in the SaaS industry.

It's a complex metric to analyze fully. Segmenting churn into different customer groups can help identify its drivers, while incorrectly accounting for trial users or seasonal customers can lead to inaccurate results. There are numerous methods SaaS solutions use to measure churn, each offering different insights.

Customer Retention Rate

Retaining customers is fundamental for growth in subscription-based models; high retention is as vital as low churn.

A pattern emerges in discussing key SaaS metrics: many companies miscalculate retention rates. Both user retention and MRR retention should be measured together to understand the combined impact of your product, marketing, customer service, and pricing on long-term profitability.

When calculating retention rates, it’s crucial to differentiate between customer life-cycle stages and the plans customers are on. Missteps in these calculations can lead to inaccurate retention metrics, affecting strategic decisions.

Why do most SaaS startups fail and how to avoid it?

saas-fails

Many SaaS startups face challenges that can lead to failure, but understanding these pitfalls can help mitigate risks and increase chances of success:

  • Lack of market fit: One of the primary reasons SaaS startups fail is a lack of product-market fit. This occurs when the product does not adequately solve a significant problem for a target market or fails to meet customer needs in a compelling way. Startups can prevent this by performing in-depth market research, gathering early feedback from customers, and repeating regularly based on insights.
  • Poor user acquisition and retention strategies: Acquiring customers can be costly, and retaining them is equally challenging. Startups often struggle with ineffective marketing strategies , high customer churn rates, etc. Successful startups focus on building scalable customer acquisition channels, implementing robust customer onboarding processes, and prioritizing customer success and retention efforts.
  • Insufficient funding or runway: Many SaaS startups underestimate the funding needed to reach profitability or scale effectively. Running out of cash before achieving critical milestones can lead to failure. To mitigate this risk, startups should accurately forecast financial needs, secure adequate funding through various sources (e.g., venture capital, angel investors), and manage cash flow prudently.
  • Competitive pressure and differentiation: The SaaS market is highly competitive, with numerous players offering similar solutions. Startups that fail to differentiate their product or provide unique value propositions struggle to attract customers and sustain growth. To stand out, startups should identify and communicate their unique selling points clearly, continuously innovate, and stay ahead of market trends.
  • Ineffective leadership and team dynamics: Poor leadership, lack of expertise, or team conflicts can derail a startup's progress. Strong leadership, a cohesive team, and a culture of innovation and accountability are crucial for navigating challenges and driving growth. Startups should invest in building a diverse and talented team, foster a supportive work environment, and lead by example.
  • Failure to adapt to market changes: Markets evolve rapidly, and startups must adapt accordingly. Those who fail to pivot or adjust their strategies in response to market dynamics, technological advancements, or changing customer preferences risk becoming obsolete. Successful startups prioritize agility, monitor industry trends closely, and are proactive in adapting their products and strategies.
  • Legal and compliance issues: Ignoring legal regulations or failing to comply with industry standards can lead to significant setbacks or legal consequences. Startups must prioritize legal compliance, data protection, and cybersecurity measures from the outset. Seeking legal counsel, implementing robust security protocols, and staying informed about regulatory changes are important steps to reduce risks.

By addressing these common reasons for failure and implementing proactive strategies to mitigate risks, SaaS startups can enhance their chances of long-term success in a competitive and rapidly evolving online business.

[Related article: Top 15 Reasons of CRM Failure and How to Avoid Them ]

Business model SaaS FAQs

How do i know if the company is saas.

A company is considered SaaS (Software as a Service) if it provides software applications through the internet on a subscription basis, typically hosted and managed centrally.

Is Uber a SaaS or PaaS?

Uber operates more like a platform-as-a-service (PaaS) rather than a software-as-a-service (SaaS). It acts as a middleman, linking passengers with drivers, providing a service rather than a self-contained software product.

Why do people like SaaS?

People like SaaS because it offers accessibility, scalability, regular updates, and typically lower upfront costs compared to traditional business models. It provides flexibility and often improves all aspects of your business.

How do I start a SaaS model?

To start a SaaS product business model, begin by identifying a problem or need that your software can address. Develop a minimum viable product (MVP), validate it with potential customers, secure funding if necessary, build and launch your product, and continuously iterate based on user feedback.

Is Google a SaaS company?

Yes, Google offers several SaaS products, such as Google Workspace (formerly G Suite), Google Drive, Google Docs, and Google Analytics. These are cloud-based services accessed via subscription, making Google a leading vendor in the SaaS market.

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Prepare now for the future of industrial services

Over the past two years, industrial-services organizations have significantly changed the way they sell, deliver, and make money from services—with equally significant implications for their operating and commercial models. To understand this changing environment, in late 2021 we surveyed more than 600 services executives across industries and regions to identify the trends they see, the impact on the way they work, and what they are doing to prepare their organizations for the future.

About the authors

This article is a collaborative effort by Harold Brink, Adriana Fonseca, Keith Gilson, Nicolas Guzman, Brandon Heriford, and Senthil Muthiah from McKinsey’s Service Operations practice.

The COVID-19 pandemic has accelerated shifts in how we live, work, and do business . Our survey showed us that services organizations are no exception. Among executives, a clear consensus about the services operating model of the future is emerging. These profound trends are fundamentally changing the way services organizations work:

  • the rise of the remote-first approach: a catalogue of contactless self-service options led by the Internet of Things (IoT) to explore before in-person or live support comes into play
  • the need to match expectations set in the consumer space
  • the need to empower the services workforce with more technology and information
  • the rise of advanced services offerings—for instance, “as a service” solutions

Given the scale of the changes, these trends are also changing how services generate revenues. However, we do not see a consensus on the best way to protect—and, ideally, increase—revenues in this transition period; there is no one-size-fits-all answer to the commercial challenges. The response depends on industry dynamics, competitive positions, and customer needs.

Operating-model trends—how the delivery of services is changing

The most important service model change emerging from the survey data is the rise of remote-first operations, in part because consumer businesses have raised the bar for service expectations. That calls for more investment to give employees the right tools.

The rise of remote first. Old habits are hard to break—for instance, customers calling for help without first having reviewed online solution guides or service providers visiting a customer in person without first reviewing data from the case. Services executives have long known that technology could significantly enhance productivity and the customer experience. However, getting people to make that shift has been hard.

The COVID-19 pandemic forced progress toward a new way of working as employees worked remotely and limited their contact with other people. Both customers and service providers now say that they like this new regime. More than three-quarters of the executives responding to our survey reported that remote-first, contactless service options have moved beyond the consideration or pilot phase and are either being scaled up or fully deployed in operations (Exhibit 1).

Before the pandemic, even a robotics company had run into widespread resistance from customers when it attempted to persuade them to try a remote-first service model that would free up services teams from the need to perform tests that could be conducted by remote diagnostics. The change was eventually forced by the pandemic’s physical-distancing and stay-at-home mandates. At that point, the company deployed connectivity kits to make remote resolution the first level of diagnosis. The change not only reduced cost to service by more than 20 percent but also raised customer satisfaction by five percentage points.

The need to match B2C expectations. For well more than a decade, the rise of digital natives has set the bar for remote-first offerings, such as seamless interaction between digital and physical experiences, ease of communication, self-service, and real-time tracking. The pandemic raised standards yet again. Executives told us that as their customers became comfortable with this type of technology-enabled service delivery, expectations have risen across the board, setting new benchmarks for every interaction.

The need to equip workforces with better tech. In line with customer trends, a younger, tech-savvy workforce is demanding access to technology with interfaces akin to those in personal digital interactions. They know that in an era of tight labor markets, having the most relevant information at their fingertips will help them raise their impact. Furthermore, technology can drive additional efficiencies through dynamic dispatching, real-time or AI-enabled remote support, and the faster resolution of issues thanks to quicker, easier access to expert support.

How commercial models are changing

Although the survey results show that the overall mix of commercial models is not expected to change much (Exhibit 2), the idea that commercial models will remain mostly unchanged is probably incorrect. Only in the aggregate does the future mix of models appear similar to today’s. Underneath these overall numbers, movement between categories will be substantial. For example, many companies anticipate a move from subscription- to performance-based agreements, but most say they expect a trend in the reverse direction.

One executive, for example, reported a big uptick in time-and-materials-based services as result of a new “click here to contact services” button in the company’s user interface. Another manufacturer reported using a similar technology for an always-on health-monitoring system that increased revenues from subscription-based services. Both stories illustrate a trend toward a remote-first approach enabled by a digital backbone. However, the outcome in commercial models is very different.

Executives told us that even within these commercial models, we should expect big changes. For example, outcomes-based contracts tied to response times, on the one hand, and guaranteed-uptime agreements, on the other, have very different risk dynamics. The former is predicated on excellence in operations and carries limited risk for a well-managed service organization. Guaranteed uptime, requiring deep insights into the reliability and performance of products, can pose significant risks if not structured correctly.

In fact, these different commercial models provide both opportunities and a wide range of risks. We heard about three risks in particular:

  • Revenue leakage, damaging financials . One executive who participated in the survey found that a significant investment in remote connectivity made the customer base less willing to pay for remote service than for in-person help. Yet the remote service was just as effective as the in-person one and had faster response times. Moreover, customers also moved from subscription-based services to on-demand time-and-materials arrangements because they found that the on-demand and subscription responses were equally fast. These moves further eroded revenues.
  • Recognition leakage, damaging morale . One company successfully launched a managed-service offering that bundled products with services in one convenient monthly payment. Although the workload of the services team increased significantly, the credit for the higher revenues went to the product development team—a recipe for morale issues.
  • Business model leakage, damaging long-term prospects . In one industry we studied, a third-party company developed an online services marketplace that greatly reduced the influence of the industry’s OEMs. Users of this new marketplace could upload data from their equipment, which independent services providers could then use to offer service proposals and quotes. Customers found that the proposals they received through this platform typically arrived faster than those from the OEMs, were of equal or better quality, and were significantly less expensive than the OEMs’ services.

How to prepare for the future

Despite the consensus on the basic pillars of the services delivery model of the future, the complexity of the landscape means that commercial models must be tailored to find the sources of value and the revenues from improved efficiency. The survey data suggest a twofold approach: building critical enablers (such as filling skills gaps and developing new digital muscles) for the new remote-first delivery model while creating a tailored commercial approach over two to five years.

Critical enablers for the operating model

We believe that the operating model has three critical enablers: talent, the digital transformation, and data and analytics.

Talent. Nearly all executives we surveyed noted that their companies faced a skill gap in digital and analytics capabilities. Indeed, by the end of the decade, the demand for new technological skills is expected to rise by 58 percent, exceeding supply by almost 60 percent . Our respondents recognize that attracting and retaining the right talent is critical, but recruiting alone won’t solve the problem in a supply-constrained labor market.

Would you like to learn more about our Service Operations Practice ?

Instead, companies are investing significantly to manage talent and build capabilities that would help them evolve their current workforce and attract younger people (Exhibit 3). Training to upskill team members should use best-practice adult-learning principles. For example, one organization successfully accelerated the pace of learning in services sales by using the PRISM method —practice, reinforcement, immersion, social, and mindset—which relies on dynamic in-field coaching, digital tools for reinforcement, and social groups to reinforce key concepts.

Digital transformation. Executives are investing to digitize and automate nearly all functions. More than 60 percent of our respondents reported that they have either implemented or are scaling up digital and automation solutions. Nearly 40 percent are doing so in-house (with or without third-party support), and 30 percent are partnering through joint ventures.

The key lesson is that this is not a one-and-done transformation but an ongoing effort. For example, a gas utility’s services team set up a digital factory—an approach that uses agile principles—to quickly develop the company’s digital programs . Even after the initial set of programs were finished, the company maintained the digital-factory infrastructure. Over the following two years, the factory deployed more than ten new tools and apps, including solutions for supervising remote sites and augmented-reality devices for remote support.

Data and analytics. Building out data collection, data management, and analytical capabilities is another leading priority for executives. The first step is to build a digital connection, which varies widely by product offering and industry context, to the installed base. This approach makes it possible to use AI and the IoT to generate more sophisticated offerings—the core focus of services executives in the next five years (Exhibit 4).

Approaches to enhancing the collection and management of data vary widely among companies, depending on specific use cases and the existing data infrastructure. However, these working methods should be viewed as required investments that enable future commercial models while de-risking the cannibalization of current value pools.

Working together. Talent, digital, and data and analytics, working together, are required to enable not only a next-generation operating model based on customer expectations but also near-term growth. Many companies can’t eliminate their services backlog solely through tech capacity and availability. Together, the enablers can improve capacity through upskilling, making servicing processes more efficient, or eliminating the need for them altogether. Therefore, the enablers should be viewed not just as operational considerations but also as a way to unlock revenues.

Build the next-generation commercial model

The next generation of commercial models faces complexities that traditional models didn’t: impact-based agreements, the capture of revenue from remote work, and the risk of third-party disrupters. Two ways of dealing with these challenges show promise.

Capture the latent commercial opportunity today. Too often, under an “ops first, commercial second” mindset, the commercial engine of services lags behind other parts of the business. However, significant near-term growth opportunities can finance investments and prepare the sales organization for more sophisticated future sales processes.

How to boost growth in industrial services: Better customer experience

How to boost growth in industrial services: Better customer experience

Near-term moves include increasing the visibility of the installed base (and better understanding the scope of commercial opportunities), increasing the generation and prioritization of leads, enhancing the offering’s design, sharpening service-agreement churn responses, and segmenting strategies for pricing parts and service. Getting these basics right can help increase the sales team’s focus on services and perhaps even perfect the organization’s services pitch to reintroduce itself to its customer base before it introduces future next-generation offerings.

Create an offering-centric organizational structure. Next-generation service offerings will feel very different from today’s: they will require a degree of customization for specific segments and customers instead of one-size-fits-all charges for time and materials. Although each commercial offer could vary dramatically by industry and end customer, there are organizational prerequisites for building these offers:

  • Adopt a product-centric lens to develop the offering: consider technology, service levels, and pricing holistically to develop innovative services.
  • Develop a portfolio management approach to services: prioritize and enhance new-product offers with the highest rates of adoption by customers and gross margin dollars generated.
  • Build the muscle to calculate the specific cost savings for each customer as a result of new services products and articulate that value clearly.
  • Make an explicit point of generating revenue from the cost savings. Too often, the easy way out is to allow assumptions about share gains or customer retention to trump the difficult work of developing new offer structures.

Clearly, services are changing rapidly. There is a strong consensus on future operating models but a wide range of commercial options that executives will need to assess carefully. Choosing well could provide entirely new business models, with revenue streams to match.

Harold Brink is a partner in McKinsey’s Boston office, where Senthil Muthiah is a senior partner; Adriana Fonseca is a knowledge specialist in the San José office; Keith Gilson is director of practice operations in the Toronto office; Nicolas Guzman is a consultant in the New York office; and Brandon Heriford is an associate partner in the Atlanta office.

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New CULVERT Tool

Introducing CULVERT, the Climate & Upland Loading Vulnerability Evaluation & Risk Analysis Tool 

  • Research Topics
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  • Economics of removing fuels
  • Modeling supply chains
  • Removing biomass
  • Safer prescribed fires
  • Eastern Innovation Landscape Network
  • Experimental Forests and Ranges
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Culverts for climate resilience: Developing the CULVERT tool

Road culverts are part of the transportation infrastructure on national forest lands. Current national forest road infrastructure was designed to accommodate historical climate conditions.

Climate change brings increasing threats, such as extreme precipitation, to roads and culverts. Floods, sediment-laden floodwaters, and debris flows after wildfires are among the threats. Damaged culverts can adversely impact traffic, safety, economies, and aquatic species passage.

We are developing a new tool that can help identify culverts that may be under-sized and in need of upgrades: CULVERT, the Climate and Upland Loading Vulnerability Evaluation and Risk Analysis Tool. This tool will be useful for anyone assessing culvert vulnerability to floods, soil erosion and post-wildfire debris flow. 

The U.S. Department of Transportation is a major funding source and the work is also supported by the USDA Forest Service. 

  • Project Milestones

a culvert with trees behind it

A box culvert on the Francis Marion National Forest in South Carolina. 

The CULVERT tool is being designed to predict which culverts may be vulnerable to failure and could need restoration or rebuilding. 

The tool is an automated quasi-dynamic hydro-geospatial model-based decision support system. The results will also be available through an online static and interactive dashboard built into the tool. 

The tool is being developed with data from two pilot sites, the Santee Experimental Forest in South Carolina, and the Hubbard Brook Experimental Forest in New Hampshire. 

If successful, there is potential to expand across all National Forest System lands and beyond, to all lands where high resolution climatic and geospatial data for road stream crossings are available. 

The project is expected to facilitate informed decision-making ahead of field visits and on future design, restoration, and adaptation strategies.  

Phase 1: Developing the Model

In this phase, the team collected, processed, and analyzed multiple datasets. The datasets describe current and projected precipitation, streamflow from specific watersheds, culverts, terrain, flood risk, and much more.

a flooded road

Flooded road and bridge after an extreme precipitation event in 2015 at the Santee Experimental Forest, SC. Agency roads are important to nearby community residents, visitors to national forests, partners, and employees. 

Forest Service engineers from the White Mountain National Forest in New Hampshire, where Hubbard Brook Experimental Forest is located, helped select USGS stream gauge locations within and near the White Mountain National Forest boundary, and provided culvert data for the Hubbard Brook Experimental Forest region. Similarly, Forest Service engineers for the Francis Marion National Forest helped provide details of culvert data for the Santee Experimental Forest.

Phase 1 is nearing completion. The team’s Phase 1 activities included:

  • Collect and process culvert data, geospatial and high-resolution hydro-meteorological data, and LiDAR for both sites. 
  • With geospatial technology and LiDAR, identify additional culverts and other road-stream crossings on sites where culvert datasets are not available.
  • Analyze current precipitation and downscaled future precipitation projections for both sites. Current/historic data come from Forest Service long-term on-site gauges as well as the National Oceanic and Atmospheric Administration and the future projections from Environmental Protection Agency.
  • Assess risks of culvert failure due to flooding and erosion using multiple hydrology and geospatial models. Using hydro-met data and site characteristics in the models, the team assessed the range of flood discharge and sediment export potentials causing overtopping and siltation of culverts, respectively. The models were also calibrated with on-site data, where available, and validated with expert judgement.
  • The team may also include a modified NRCS Curve Number, a new concept, developed by collaborators from the University of Agriculture in Krakow, Poland.
  • Use future climate model projections based downscaled high resolution precipitation intensity information, as an option for engineers/managers for climate resilient culvert sizing, provided by the Environmental Protection Agency under a memorandum of understanding with the USDA Forest Service.
  • Assess culvert failure risk due to flooding by comparing their estimated hydraulic capacities to projected design discharges for a flood frequency (25-yr, 50-yr or 100-yr) of interest.
  • Assess culverts for their risk of failure due to stream-bank erosion, siltation, and other hydro-geomorphological phenomena driven by extreme precipitation and flooding.
  • Develop new and/or modify existing erosion prediction models to assess pre-fire and post-fire flooding and associated debris flow.
  • Publish the papers on hydrological and hydro-geomorphological risk assessment model applications.
  • Create a hands-on Toolbox (Geospatial Models) for easy dissemination and replication.

Phase 2: Developing the Decision Support System (DSS) 

In this phase, the team will build the two types of web applications that comprise the tool: a static interactive dashboard that showcases results of culvert vulnerability assessments stored in the server, and a quasi-dynamic tool released in two different versions.  Both versions of the quasi-dynamic tool will let users generate culvert vulnerability assessments. Version 1 is designed for users who have their own culvert geodatabase. Version 2 will identify potential culvert locations from road and stream intersections. Version 2 will also allow users to save the location of these potential culvert locations to their own geodatabase. During Phase 2, the team will be working to: 

damaged culvert in a forest

A damaged culvert in a forest. 

Design and develop the DSS user interface with the ArcGIS platform.

  • Integrate vulnerability assessment and flood discharge models into the DSS.
  • Test a Quasi-Dynamic Decision Support Tool Dashboard for Road Culverts Vulnerability Assessment using the Forest Service ArcGIS Enterprise portal.
  • Develop functionalities for data input, visualization, and output reporting. 
  • Conduct beta testing and incorporate user feedback for refinement.
  • Finalize and deploy the tool.
  • Ensure the tool is fast, runs smoothly for all users, and can cache raster data.
  • Develop a user guide and tutorials. 

Phase 3: Training and Evaluation

In this phase, the team will monitor the effectiveness of the tool in real-world applications and prepare a final report summarizing project outcomes and recommendations for future improvements. The team will also conduct workshops on how to use the tool and interpret the results. The workshops will be designed for experts at the Forest Service, Department of Transportation, Environmental Protection Agency, U.S. Geological Survey, and other interested collaborators.  

Principal Investigators

2393

Devendra M. Amatya

Sudhanshu panda, key personnel.

Sourav Mukherjee

Sourav Mukherjee

2374

Shawna L. Reid

Laura (lola) d. roghair, related programs.

Forested Watershed

Center for Forest Watershed Research (RWU-4353)

Publications.

  • D. M. Amatya, S. Tian, D. A. Marion, P. Caldwell, S. Laseter, M. A. Youssef, J. M. Grace, G. M. Chescheir, S. Panda, Y. Ouyang, G. Sun, J. M. Vose. 2021. Estimates of precipitation IDF curves and design discharges for road-crossing drainage structures: Case study in four small forested watersheds in the southeastern US
  • S.S. Panda, D.M. Amatya, J.M. Grace, P. Caldwell, D.A. Marion. 2022. Extreme precipitation-based vulnerability assessment of road-crossing drainage structures in forested watersheds using an integrated environmental modeling approach
  • Sourav Mukherjee, Devendra M. Amatya, Anna M. Jalowska, John L. Campbell, Sherri L. Johnson, Kelly Elder, Sudhanshu Panda, Johnny M. Grace, Duncan Kikoyo. 2023. Comparison of on-site versus NOAA’s extreme precipitation intensity-duration-frequency estimates for six forest headwater catchments across the continental United States
  • Sourav Mukherjee, Devendra M. Amatya, John L. Campbell, Landon Gryczkowski, Sudhanshu Panda, Sherri L. Johnson, Kelly Elder, Anna M. Jalowska, Peter Caldwell, Johnny M. Grace, Dariusz Młyński, Andrzej Wałęga. 2024. A watershed-scale multi-approach assessment of design flood discharge estimates used in hydrologic risk analyses for forest road stream crossings and culverts
  • R. B. Foltz, W. J. Elliot, N. S. Wagenbrenner. 2011. Soil erosion model predictions using parent material/soil texture-based parameters compared to using site-specific parameters

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Elektrostal Population157,409 inhabitants
Elektrostal Population Density3,179.3 /km² (8,234.4 /sq mi)

Elektrostal Geography

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Elektrostal Geographical coordinatesLatitude: , Longitude:
55° 48′ 0″ North, 38° 27′ 0″ East
Elektrostal Area4,951 hectares
49.51 km² (19.12 sq mi)
Elektrostal Altitude164 m (538 ft)
Elektrostal ClimateHumid continental climate (Köppen climate classification: Dfb)

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DaySunrise and sunsetTwilightNautical twilightAstronomical twilight
8 July02:53 - 11:31 - 20:0801:56 - 21:0601:00 - 01:00 01:00 - 01:00
9 July02:55 - 11:31 - 20:0801:57 - 21:0501:00 - 01:00 01:00 - 01:00
10 July02:56 - 11:31 - 20:0701:59 - 21:0423:45 - 23:17 01:00 - 01:00
11 July02:57 - 11:31 - 20:0502:01 - 21:0223:57 - 23:06 01:00 - 01:00
12 July02:59 - 11:31 - 20:0402:02 - 21:0100:05 - 22:58 01:00 - 01:00
13 July03:00 - 11:32 - 20:0302:04 - 20:5900:12 - 22:51 01:00 - 01:00
14 July03:01 - 11:32 - 20:0202:06 - 20:5700:18 - 22:45 01:00 - 01:00

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Located next to Noginskoye Highway in Electrostal, Apelsin Hotel offers comfortable rooms with free Wi-Fi. Free parking is available. The elegant rooms are air conditioned and feature a flat-screen satellite TV and fridge...
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Located in the green area Yamskiye Woods, 5 km from Elektrostal city centre, this hotel features a sauna and a restaurant. It offers rooms with a kitchen...
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Ekotel Bogorodsk Hotel is located in a picturesque park near Chernogolovsky Pond. It features an indoor swimming pool and a wellness centre. Free Wi-Fi and private parking are provided...
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Surrounded by 420,000 m² of parkland and overlooking Kovershi Lake, this hotel outside Moscow offers spa and fitness facilities, and a private beach area with volleyball court and loungers...
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Surrounded by green parklands, this hotel in the Moscow region features 2 restaurants, a bowling alley with bar, and several spa and fitness facilities. Moscow Ring Road is 17 km away...
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State Housing Inspectorate of the Moscow Region

Phone 8 (496) 575-02-20 8 (496) 575-02-20

Phone 8 (496) 511-20-80 8 (496) 511-20-80

Public administration near State Housing Inspectorate of the Moscow Region

COMMENTS

  1. How 'As-A-Service' Models Can Improve Business Outcomes

    This business model was initially pioneered by the software industry and dubbed Software-as-a-Service, or SaaS, and it allowed software companies to lease their products. Instead of buying the ...

  2. How to Design a Winning Business Model

    Ramon Casadesus-Masanell is a professor at Harvard Business School and the author, with Joan E. Ricart, of "How to Design a Winning Business Model" (HBR January-February 2011). JR. Joan E ...

  3. The Most Complete Primer on Business Model Innovation for Service

    Increase returns to shareholders. Animate the purpose of your practice. To make your business model innovation sustainable, combine societal, environmental and financial priorities. That is: Expand the service business's canvas by mapping your ecosystem of stakeholders and societal issues in which you operate.

  4. What is a Business Model with Types and Examples

    Business Model: A business model is a company's plan for how it will generate revenues and make a profit . It explains what products or services the business plans to manufacture and market, and ...

  5. SaaS business model: Stages, metrics & essential tools

    That, however, is the final and most successful stage of the SaaS business model. Broadly speaking, a SaaS business's life can be broken down into three stages: 1. Early-stage. In the early stage of your SaaS business, you as the business owner or entrepreneur are still operating at the bare-bones level. You're unlikely to have many ...

  6. New Business Models For The New Economy: How Professional Services

    From a recent survey by SAP-Oxford Economics with 300 senior executives from professional services firms, we see three key business models emerging. 1. Knowledge-as-a-service: Going beyond the in ...

  7. Business Models and Service Strategy

    The debate on business models provides a useful structure for comparing different approaches to creating value by the development of new or alternative forms of service-orientated business model. The chapter has highlighted the three primary elements that form a business model: value propositions, value networks and a value-capturing or revenue ...

  8. Business Model Strategy by McKinsey Alum

    4. Go-to-Market. 5. The Organization. The way a business model works is: " The organization efficiently & effectively develops and delivers the customer value proposition and go-to-market to fulfill the needs of the target customers better than competitors, all for the purpose of achieving the mission."

  9. Business Model Canvas

    The business model canvas is a synthetic chart providing an overview of the service in terms of value proposition, infrastructure, types of customers and financial model. It helps understand what activities are needed in order to build and deliver a service, and identify potential trade-offs.

  10. Transitioning to as-a-service business model

    Many attempts to transition to FCMs falter because of the scope and complexity of the necessary changes. First of all, FCMs are customer-centric models, whereas traditional business models are more product-centric; this difference places different demands on a company's operating model. To effectively implement an FCM at a company that has ...

  11. Business Model Canvas: Explained with Examples

    Here's a step-by-step guide on how to create a business canvas model. Step 1: Gather your team and the required material Bring a team or a group of people from your company together to collaborate. It is better to bring in a diverse group to cover all aspects.

  12. Business Model Development Towards Service Management 4.0

    In this paper a framework for business model development is proposed that connects technological development with service needs and business modelling, transforming the O & M services, especially maintenance, from being a technical product into a concept of value creation and business creation: Service Management 4.0. 2.

  13. 8 Types of Business Models & the Value They Deliver

    8. Agency/Promotion. Agents create value by marketing an asset, which they don't own, to an interested buyer. They then earn a fee or a commission for bringing the buyer and seller together. Thus, instead of using their own assets to create value, they team up with others to help promote them to the world.

  14. The Ultimate Guide to Business Development and How It Can Help Your

    The purpose of a business development plan (or strategy) is to set realistic goals and targets that allow your reps to grow the business, close more deals, identify prospects, align members of the sales team (and other teams, company-wide), and convert more leads. 1. Craft an elevator pitch.

  15. Service Innovation: Embracing design thinking in business model innovation

    Successfully addressing intangibility, simultaneity, perishability and variability requires a nuanced approach to business model innovation enriched with service design thinking. With this in mind, any changes should be firmly rooted in customer needs, always thinking of the user and focusing on the end experience.

  16. Four Steps to Sustainable Business Model Innovation

    The core practice for SBM-I is an iterative innovation cycle, shown in Exhibit 1. With each round, the company gains scale, experience, and market presence for its initiative; these reinforce both the business advantage and the environmental and societal benefits generated. 1. Expand the Business Canvas.

  17. The Four Things a Service Business Must Get Right

    In this article, Harvard Business School's Frei explains why and urges companies to add some new ones to the mix. After years of extensive research and analysis, she offers an approach for ...

  18. A Game-Changing Business Development Strategy to Achieve Consistent

    A business development strategy is a document that describes the strategy you will use to accomplish that goal. The scope of business development can vary a lot from organization to organization. Consider the model professional services organizations use to get new business shown in Figure 1. Figure 1.

  19. Business Models: Types, Examples and How to Design One

    Example: A business that rents machinery like backhoes, augers and dozers to individuals for their home construction projects is using a leasing business model. 8. Franchise model. A franchise is ...

  20. What is Service Design?

    Utilize tools like the business model and value proposition canvases for a strategic foundation. ... development of service scenarios and use cases. ... can be found here "How to Design a Service." European Journal of Marketing 16(1): 49-63. and here, "Design Services that Deliver." Harvard Business Review(84115): 133-139. They are available ...

  21. What Is a Business Model? Best Practices and Examples

    Fee-for-service business model examples: McKinsey & Company, MedExpress, Walmart. Franchise. Builds on existing successful business and receives a percentage of earnings from franchises who invest in, operate, and promote new locations. Franchise business model examples: Ace Hardware Stores, McDonald's, The UPS Store.

  22. SaaS business model: Main Stages, Metrics & Tools

    Development stage. In the early stage, you're operating with minimal resources. Customer numbers are low, and your product is still in development. ... Have you started crafting a software as a service business model that will help you secure appropriate funding and use it effectively? 2. Growth stage. The growth stage is when things start to ...

  23. What business model designers can learn from lean startups

    Business model design and innovation are profoundly entrepreneurial at heart, and as such, the lean startup model has clearly been taking notes: considering the business as a system of interdependent activities aimed at value creation, delivery and opportunity development based on needs discovery.

  24. The remote-work transformation of industrial services

    Although the workload of the services team increased significantly, the credit for the higher revenues went to the product development team—a recipe for morale issues. Business model leakage, damaging long-term prospects. In one industry we studied, a third-party company developed an online services marketplace that greatly reduced the ...

  25. Culverts for climate resilience: Developing the CULVERT tool

    Road culverts are part of the transportation infrastructure on national forest lands. Current national forest road infrastructure was designed to accommodate historical climate conditions.Climate change brings increasing threats, such as extreme precipitation, to roads and culverts. Floods, sediment-laden floodwaters, and debris flows after wildfires are among the threats. Damaged culverts can ...

  26. List of towns and cities with 100,000 or more inhabitants/country: P-Q

    This is a list of towns and cities in the world believed to have 100,000 or more inhabitants, sorted by countries beginning with letters between P and S. Unless otherwise noted, populations are based on United Nations estimates from 2022. [1]

  27. Elektrostal

    A model attribution edit summary is Content in this edit is translated from the existing Russian Wikipedia article at [[:ru:Электросталь]]; ... Elektrostal Business Directory (in Russian) This page was last edited on 26 March 2024, at 16:22 (UTC). Text is available under the Creative Commons Attribution-ShareAlike ...

  28. Elektrostal, Moscow Oblast, Russia

    Elektrostal Geography. Geographic Information regarding City of Elektrostal. Elektrostal Geographical coordinates. Latitude: 55.8, Longitude: 38.45. 55° 48′ 0″ North, 38° 27′ 0″ East. Elektrostal Area. 4,951 hectares. 49.51 km² (19.12 sq mi) Elektrostal Altitude.

  29. Build your own copilot with Microsoft Azure AI Studio

    Shah Muhammad, Head of AI Innovation at Sweco, appreciates the "one-click deployment of the models in Azure AI Studio and that it makes Microsoft Azure AI offerings transparent and available to the user." 1 Since its deployment, nearly half of Sweco's employees use SwecoGPT and report increased productivity, giving them more time to focus on creativity and helping customers.

  30. State Housing Inspectorate of the Moscow Region

    State Housing Inspectorate of the Moscow Region Elektrostal postal code 144009. See Google profile, Hours, Phone, Website and more for this business. 2.0 Cybo Score. Review on Cybo.