Once you have determined your product strategy and understood which market problems you plan to solve, you must then determine how you will earn revenue from selling your product. This involves creating a business model.

Business models enable you to describe how you translate your product’s value into revenue for your company. This includes understanding:

  • Who your customers are
  • How you will price your product
  • How you plan to distribute it

During the product management process, companies spend significant effort on delivering the actual product. However, without the basis of a solid business model, there is no business.

Product managers have a unique view into what prospective customers are willing to pay and how they will buy a product. This positions the project manager perfectly to define the business model.

Creating a business model for new products

To create a business model, answer the following questions:

  • Who are you selling to?
  • What are they willing to pay for the solution to their market problem?
  • How will customers pay for the solution (each time they use it, every year, over time)?
  • How will you price your product?
  • How will you sell your product (that is, directly or through a channel)?

Review these articles for background information on creating your business model

  • Business model: Understand how your company can deliver value to your target market, and how you will charge for that created value.
  • Distribution: Determine how you will sell your product. Is it sold directly to customers, through a channel or through partners? This will affect your pricing and revenue model.
  • Revenue model: Determine what type of revenue model you would like to employ (that is, recurring, transactional, services or project-based revenue).
  • Pricing: Once you decide on the revenue model, you must determine how you will price your product for each transaction.

For more information about developing a business model, download the MaRS workbook, Business model design.

The information and exercises will help you design a business model by working through the key variables in executing a market strategy—competition, partnership, distribution, pricing and positioning.

References

IBM Global Services. (2006). Business model innovation—the new route to competitive advantage. White paper.
IBM Global Services. (2008). The Enterprise of the Future. Whitepaper.
Kurtzman, J., and Rifkin, G. (2005). Startups That Work. London: Penguin Group.
Shenoy, G. (2010). Is product management needed in a software startup? Pragmatic Marketing. Retrieved October 26, 2010, from http://www.pragmaticmarketing.com/resources/Creating-Product-Management-at-a-Startup