Business models and value creation
Introduced| English | Meaning |
|---|---|
| profit/ˈprɒfɪt/ | Total revenue minus total cost. |
| business model/ˈbɪznəs ˈmɒdl/ | How a business creates value for customers and earns money from doing it. |
| value chain/ˈvæljuː tʃeɪn/ | The chain of activities, from buying inputs to after-sales service, through which a business adds value. |
| revenue/ˈrevənjuː/ | Income received by a business from selling goods or services before costs are deducted. |
| cash/kæʃ/ | Money actually in the bank; a firm can profit and still run out of it. |
Same bread, different fate
- Two bakeries on one street sell almost the same bread. One makes a healthy profit; the other closes within two years.
- The difference is rarely the bread. It is how each one creates value for customers and turns that value into money. That plan is its business model.
Create, deliver, capture
- A business model 商业模式 answers three questions. How does the firm create value (whose life does it improve)? How does it deliver it (activities and channels)? How does it capture value (how does money come back)?
- Nimbus creates value with bread baked fresh every morning, delivers it through two shops and a pre-order pickup, and captures it with premium prices.
Create, deliver or capture?
Sort each part of Nimbus's business into the question it answers. A complete model needs at least one answer to each.
Which part of Nimbus's model is about capturing value?
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Capturing value is how money comes back to the firm. Fresh baking creates value; shops deliver it; training supports both.
The value chain
- The value chain 价值链 lists the activities that add value, in order: bringing in supplies, making the product, getting it to customers, marketing and selling, and service afterwards.
- Looking at each link shows where the firm adds value and where costs build up.
Put the value chain activities in order.
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The chain follows the product from supplies to the customer and beyond.
A model is a fit, not a list
- The links must support each other. Pre-order only pays because the morning bake can make the extra loaves cheaply in the same batch.
- Premium prices only hold because the bread really is fresher than the supermarket's. Change one link and check what it does to the others.
Test the model with arithmetic
- A model works only if the numbers do: sales × price, minus the costs that rise with each sale (variable costs), minus the costs that stay the same (fixed costs), must leave enough profit.
- Each loaf sold adds its contribution: price minus variable cost. Fixed costs are paid from the total contribution.
- Nimbus sells 420 loaves a day at £4.20. Ingredients cost £1.60 a loaf; fixed costs are £860 a day.
- Contribution per loaf: £4.20 − £1.60 = £2.60. Total: 420 × £2.60 = £1,092.
- Profit: £1,092 − £860 = £232 a day.
- Break-even: £860 ÷ £2.60 ≈ 331 loaves. Below that, every day loses money.
On a quiet day Nimbus sells 400 loaves. Each adds £2.60 contribution and fixed costs are £860 a day. What is the day's profit, in £?
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$400 \times 2.60 = 1040$, and $1040 - 860 = 180$. Twenty fewer loaves than usual cut profit from £232 to £180.
How many loaves must Nimbus sell each day to break even? Round up to a whole loaf.
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$860 \div 2.60 \approx 330.8$, so 331 loaves. At 330 the contribution is £858, still £2 short of the fixed costs.
Small changes, big effects
- Profit is the small gap between two big numbers, so a small change in costs can move it a lot.
- If ingredients rise by 10%, from £1.60 to £1.76, contribution falls to £2.44. Profit becomes 420 × £2.44 − £860 = £164.80, a fall of about 29% from one 10% rise. No adjective in a plan tells you that; the arithmetic does.
Revenue, profit and cash are different
- Revenue 收入 is the value of sales made. Profit 利润 is revenue minus the costs of making those sales. Cash 现金 is money actually in the bank.
- A firm can be profitable and still run out of cash: customers may pay late while wages and suppliers must be paid now. Growth uses cash before it brings any in.
Match each term to what it measures.
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They move at different times. A sale on credit adds revenue and profit today, but cash only when the customer pays.
A business that makes a profit every month cannot run out of cash.
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If customers pay late, or growth needs money up front, cash can run out while the accounts still show a profit.
Check the key assumption
- Every model rests on a few assumptions. For pre-order, the key one is that the orders are extra sales, not customers who would have bought in the shop anyway.
- 60 pre-orders a day at £6 contribution each look like £360 a day. If 40 of those customers would have bought in the shop anyway, only 20 are new, and the real gain is £120 a day.
Which evidence would show that pre-orders are extra sales rather than shifted ones? Select all that apply.
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The count of pre-orders and customers' opinions cannot tell new buyers from old ones. New customers and steady shop sales can.
Marks that slip away
- Describing a model with adjectives. "Innovative" and "customer-focused" are not tests; numbers are.
- Listing links without the fit. Say how each link supports the others.
- Mixing up revenue, profit and cash. A profitable firm can still fail for lack of cash.
- Counting shifted sales as new. Ask how many customers would have bought anyway.
You've got it
- A business model says how a firm creates, delivers and captures value; the value chain shows the activities, and the links must fit together.
- Test the model with arithmetic: contribution = price − variable cost; profit = total contribution − fixed costs. Small cost changes can move profit a lot.
- Revenue, profit and cash are different. Check the key assumption, such as whether new sales are truly extra.