September 13th 2020

A tech business model is made of four main components: value model (value propositions, mission, vision), technological model (R&D management), distribution model (sales and marketing organizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.

Value model

It usually all starts by a value model which comprises:

An opportunity: the size of the opportunity will be determined by whether the market exists, it’s still building up, and its growth potential. From the opportunity, it’s possible to evaluate the potential market size (usually tech companies look at TAM).
A problem to be solved: a problem can be practical, or it can go beyond that. Companies like Nike and Coca-Cola focus most of their efforts on-demand generation. This also applies to tech business models. Before the iPhone people didn’t know they needed a smartphone in the first place.
A set of value propositions: from the above a company will develop a core value proposition. As it will scale it will be able to satisfy a set of value propositions, which is the glue that keeps together customers and the company.
Mission and vision: as the company builds up its various models, it also develops its own core beliefs, which are comprised in its mission and vision.

Value propositions

A value proposition is about how you create value for customers. While many entrepreneurial theories draw from customers’ problems and pain points, the value can also be created via demand generation, which is about enabling people to identify with your brand, thus generating demand for your products and services.

Mission and vision

A mission statement helps an organization to define its purpose in the now and communicate it to its stakeholders. That is why a good mission statement has to be concise, clear to able to articulate what’s unique about an organization, thus building trust, and rapport with an audience.

Technological model

The technological model is the enhancer of the product, and it helps merge together the value proposition with the distribution model. When engineering is done right, it helps bridge the gap between what customers still miss, the product and the way the product is distributed.

The technological model will help satisfy the need of larger and larger portion of the market. From early adopters, to potentially laggards. This will determine the ability of the company to scale up.

In his book, Crossing the Chasm, Geoffrey A. Moore shows a model that dissects and represents the stages of adoption of high-tech products. The model goes through five stages based on the psychographic features of customers at each stage: innovators, early adopters, early majority, late majority, and laggard.

In the technological model, the way R&D is managed to produce continuous innovation (to sustain the linear growth of the business) and breakthrough innovation (to enable long-term success of the business) is critical.

Distribution Model

A distribution channel is the set of steps it takes for a product to get in the hands of the key customer or consumer. Distribution channels can be direct or indirect. Distribution can also be physical or digital, depending on the kind of business and industry.

The distribution model helps to bring the product in the hands of customers. The company can leverage on engineering, marketing, sales or all of them, to make the product in fit with the market, via its distribution. That is why, based on what problems the product solves and for whom, it will have an organizational structure more skewed toward engineering and marketing, or engineering and sales, or perhaps a mix of the three. Other things like partnerships and deal making are also part of the distribution model.

Financial model

In corporate finance, the financial structure is how corporations finance their assets (usually either through debt or equity). For the sake of reverse engineering businesses, we want to look at three critical elements to determine the model used to sustain its assets: cost structure, profitability, and cash flow generation.

The financial model is what enables the company to keep generating enough cash to sustain its operations, not only in the short-term, but also toward R&D and innovation. And it is made of several components:

Revenue model.
Cost structure.
Profitability.
And cash generation and management.

Revenue model

Revenue modeling is a process of incorporating a sustainable financial model for revenue generation within a business model design. Revenue modeling can help to understand what options make more sense in creating a digital business from scratch; alternatively, it can help in analyzing existing digital businesses and reverse engineer them.

Cost structure

The cost structure is one of the building blocks of a business model. It represents how companies spend most of their resources to keep generating demand for their products and services. The cost structure together with revenue streams, help assess the operational scalability of an organization.

Profitability

From how the company generates revenues and its cost structure, profitability will be determined. When the revenue model isn’t yet efficient enough to cover up or sustain the cost structure in the long-term, there is when we have a lack of profitability. At the same time, it might happen that a company is profitable but it lacks cash, given its overall financial model. Or it might happen that a company has no profits, or very tight margins and yet it generates a continuous stream of cash.

That is why it’s critical to look at the next element.

Cash generation and management

The cash flow statement is the third main financial statement, together with the income statement and the balance sheet. It helps to assess the liquidity of an organization by showing the cash balances coming from operations, investing, and financing. The cash flow statement can be prepared with two separate methods: direct or indirect.

Profitability doesn’t tell us the whole story. We need to look at cash management. A company like Amazon have been running at very tight profit margins for years, and yet generating massive amounts of cash, invested back in its operations. A company like Netflix has been generating good profit margins, but running with a cash negative model.

This isn’t good or bad in absolute, but it gives us an understanding of the company’s financial mode. Perhaps, Netflix, with a negative cash flow model, it has been investing substantial cash in the development of original shows, which are both critical to generate revenue and also essential to its brand’s strategy. Thus, revenue generation, distribution, and marketing come together here.

Read next:

Value Proposition
Distribution Channels
How To Write A Mission Statement
Revenue Models
Financial Structure
Profitability
Cash Flow

Related business resources:

Successful Types of Business Models You Need to Know
The Complete Guide To Business Development
Business Strategy: Definition, Examples, And Case Studies
What Is a Value Proposition? Value Proposition Canvas Explained
Marketing Strategy: Definition, Types, And Examples

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