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3 Business and Training Pricing Models for Companies
Posted by Sandi Lin on April 12, 2021 in Customer Success , Training Strategy
The decision of whether to charge for customer training is a strategic choice with multiple paths your company can choose to take. Some companies choose to offer training for free, as a way to enable industries and customers for success with their product (s). Other companies think of training as a standalone profit & loss center driving revenue for the organization. Still others take a hybrid approach, where training is expected to be cost neutral: customers are charged just enough to cover direct expenses, typically classroom instructors and facilities.
At Skilljar, about one-third of our customers choose to charge their customers for training. In this blog post, we walk through the 3 most common business training models for revenue-generating customer models of training:
- À la carte
- Subscription
If you’re interested in more information on customer training models, download our ebook How to Measure the ROI of Customer Training .
1. À La Carte Training
In this model, customers pay for training on a per-class basis. For example, a two-hour administrator training class might cost $300 per attendee.
This is the most common pricing model, particularly for organizations that are relatively new to offering customer training. Characteristics of organizations that use à la carte training courses include:
- The product can theoretically be implemented and used without requiring training — thus, training is considered an optional expense for customers.
- The training course has clear variable fees, such as a live instructor, classroom facilities, and/or proctored certification exams.
- Attendees are expected to take training only once — for example, as required continuing education credit.
- The organization has a limited number of training courses, often fewer than 5.
In all of these cases, organizations can choose to take payment via invoice, via web (e-commerce), or both. While invoicing can require manual work on behalf of your team, payments via the web are always seamless and fast. Some organizations also use a “training credits” model where a purchase corresponds to a designated number of seats or units based on the classes offered. While training credits can make purchasing easier for your customers, it will require setting up a system of management on your team’s end to apply and track credits.
2. Subscription Training Pass
In this model, customers pay for access to an entire library of corporate training content. Usually this is for 1 year, either ending on a fixed date (e.g. expiring Dec 31) or using a rolling window (e.g. 12 months from the date of registration).
Characteristics often include:
- A well-stocked training library where many courses are relevant to any particular student over a long period of time. Usually this is eLearning-based (also known as on-demand training or self-paced training).
- Products tend to be more complex, or have a logical time progression from beginner to intermediate to advanced levels.
- Companies commit to a continuous release of new and refreshed content in order to keep subscribers engaged month after month.
- Companies have a well-resourced training and content development team.
- Customers often pay for the core product on an annual subscription basis via a sales team.
- The subject naturally lends itself to a variety of self-paced content, such as designing different types of jewelry using custom CAD software.
We typically see the training for companies’ business model in organizations with more mature training organizations. We also see this among companies that need a corporate training model to target enterprise-level end users expecting comprehensive training.
3. Bundled Training
The final business training model we’ll discuss wraps training fees into an onboarding model or premium support plan. For example, customers might pay a flat implementation fee that includes a mix or services, training, and other customizations. Or, customers might opt into support SLAs (service level agreements) that also provide access to certain training options.
We see this business training model in organizations with a heavy professional services component, such as on-premise software or implementations requiring extensive configuration. In these scenarios, customer success calls for a high-touch implementation where launch success is critical. It doesn’t make good business sense to offer training as a separate product when that training is critical to a successful implementation.
Bundled training also gives organizations more flexibility in allocating costs across the entire client project. The organization can shift resources towards the training components that will best serve the specific client, rather than providing one-size-fits-all training for a set price.
Charging for training is a strategic decision that depends on your customer philosophy, product types, and evolution of your training team. This analysis will point you to the appropriate business model, whether that’s an à la carte, subscription, or bundled model.
Editor’s Note: This article was originally published in 2017, and has been updated in 2021.
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Training Industry
New business model for corporate training at community colleges.
Many colleges and universities have difficulty successfully implementing a business model that allows them to be competitive in the corporate training market. There are many inhibiting reasons for their lack of success; things like state laws, local political requirements, college policies, and the list goes on. In my recent blog post, 5 Success Factors for Community College Corporate Training , I identified what I believe leaders of corporate training divisions must do to be successful in the corporate training market.
But let’s be clear, if Corporate Training functions are going to be successful in delivering training services to business and industry, they need to look, feel and perform like a business – as opposed to a traditional academic institution. What’s the best way to do that? I propose colleges look to a radically different model where they spin-off their Corporate Training function as a separate organization. This means creating a wholly owned subsidiary of the college, and put it in the position to operate as a for-profit business. They need to give the unit the autonomy to make decisions for the betterment of the business, and separate it from the bureaucracy and politics that is inherent in most educational institutions. I believe this would enable the Corporate Training function to have complete flexibility to meet client expectations.
One of the most important things I’ve learned in my 25 plus years in the education and training industry is that Community Colleges have a great potential to help businesses deliver training cost effectively. They have access to curriculum, technology and resources. Colleges by their very foundation have education and adult learning at their core. They are a great community asset, resource and value for business and industry to leverage to their advantage. Imagine an educational organization that has all these attributes and has the operational structure of a business to meet client expectations. This model could revolutionize the training industry.
I thought for many years that this model could be a solution, but I was not aware that it had recently been implemented successfully. I had the opportunity to meet Mr. Don Baxter, President and CEO of Mohawk College Enterprise Corporation (MCEC) in Ontario, Canada. MCEC was established by Mohawk College of Applied Arts and Technology as a Business-2-Business Corporation. MCEC is a separate corporate entity, supported by the College, and bridges the College to the private sector through the delivery of training services, enhanced partnerships and management of training facilities.
Why did they do it? Similar to many colleges Mohawk is looking for a new revenue streams. Their goal is to use this new revenue to fund innovative start-up programs for the mother institution. Good news is that their strategy may pay off sooner than expected. Projections are they will show a profit in their very first year.
Don is very optimistic that this new model will work. They had to work through many start-up issues, one of which was to arrange agreements between the business and many of the departments at Mohawk College. These agreements permit them to leverage capabilities of the college staff and re-sell them to their external clients.
Time will tell if this is a trend that other colleges will follow. I know I’ll be watching and learning from their success in the next few years. If successful, I believe this model could radically change how colleges position themselves for the next generation of learning services – and how the corporate training market views community colleges as a part of the supply chain of learning services.
Please let me know your thoughts. Feel free to post your comments to this blog or send me an email at [email protected] ; or you can visit my website at www.seidelconsulting.net.
Paul Seidel
Paul Seidel is the Founder and President of Seidel Consulting LLC, a consulting and analyst firm specializing on assisting community colleges and corporate training organizations to better their business relationships. Since his retirement from Delta College Corporate Services (DCCS), Paul has championed the cause for community colleges to become more adept at doing business in the corporate training market.
As Executive Director of Delta College’s Corporate Services Division, Paul led one of the most successful organizations in the training outsourcing market, where DCCS was the only community college named to the Top 20 Training Outsourcing Companies list for 5 straight years. Paul has over 25 years of experience in Corporate Training. Using his training background he has sold and established training programs and training centers globally. These activities have occurred in China, Morocco, Puerto Rico, Saudi Arabia, UAE, Bahrain, Israel, Mexico, and with many training centers and programs in United States.
His educational background includes a Master of Science in Educational Administration from Central Michigan University, a Bachelor of Science in Trade Technical Teaching from Ferris State University, and an Associate of Applied Science degree in Automotive Service Technology from Delta College.
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Business Model Canvas Template
The executive summary of a business
What is the Business Model Canvas?
The business model canvas is a strategic planning tool used by managers to illustrate and develop their business model. The business model canvas template clearly identifies the key elements that make up a business. Additionally, it simplifies a business plan into a condensed form. In this way, the business model canvas template acts like an executive summary for the business plan.
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History of the Business Model Canvas
The business model canvas template was originally introduced by Alexander Osterwalder in his 2004 thesis, “The Business Model Ontology – A Proposition in a Design Science Approach”. Since then, the business model canvas template has been taught at business schools and iterated upon to fit more niche businesses.
Structure of the Business Model Canvas Template
There are nine main building blocks in the business model canvas template:
- Key Partners
- Key Activities
- Key Resources
- Value Propositions
- Customer Relationships
- Customer Segments
- Cost Structure
- Revenue Streams
The following is a breakdown of each of these nine elements. These elements all link and work with each other to ensure the success of the business.
#1. Key Partners
Key partners are the companies or people your business works with to create a strategic relationship. A few examples of key partners are suppliers or distribution partners in the supply chain .
Here are a few things to consider about key partners:
- What key resources does your company receive from these partners?
- What key activities are performed by these partners?
- What is your company’s motivation for working with these key partners? Is there something specific that only they can provide? Do they help lower costs?
#2. Key Activities
Key activities are specific activities or tasks that are fundamental to the operation of your business. An example of a key activity would be the procurement of fresh produce in bulk for a restaurant.
Here are a few things to consider about key activities:
- What key activities are necessary to deliver your value proposition ?
- What activities set your company apart from others?
- How do your revenue streams , distribution channels , and customer relationships differ from competitors? How do your key activities affect these?
- Do you need to procure specific niche resources?
- Do you need to streamline to keep costs and prices low?
#3. Key Resources
Key resources are the assets necessary to operate and deliver your value proposition. For example, a diamond mining company cannot operate without mining equipment . Alternatively, an automotive company cannot operate without the human capital and expertise that goes into designing cars.
Here are a few things to consider about key resources:
- What specific assets are necessary to operate your business and deliver your value proposition ?
- What resources do your distribution channels and revenue streams need to function?
- What resources are needed to maintain customer relationships and customer satisfaction ?
- Does your company require significant capital or human resources?
#4. Value Propositions
Value propositions are arguably the most important element of the business model canvas template. The value proposition determines the fundamental offering the company is trying to give its customers. It is the primary driver of business operations. For example, Spotify’s value proposition, “Music for everyone.” , eloquently states its mission and offering. Spotify wants to be a music streaming platform that has music selections for everyone.
Here are a few things to consider about value propositions:
- What exactly is your company trying to give to customers?
- What problem is your company trying to solve and what needs are your company satisfying?
- How do you offer something different that satisfies the demands of your customer segments (e.g. price, quality, design, status, etc.)?
#5. Customer Relationships
Customer relationships are the different types of interactions a company has with its customers. For example, a designer suit company will provide significant help for the customer, tailoring to their needs and working directly with them to create the suit they want. Conversely, telecommunications companies often have poor reputations and customer relationships as many practice aggressive and predatory sales practices through their call centers. Compared to telecommunications companies, the designer suit company has significantly richer and more fulfilling customer relationships.
Here are a few things to consider about customer relationships:
- What type of relationship does your company have with its customers? For example, do you provide dedicated assistance or are they expected to self-serve their needs through provided support channels?
- How does the business interact with customers and how does this differ between customer segments ?
- Does your company frequently communicate with customers?
- How much support is provided by your company?
#6. Channels
Channels are the different structures and methods that are used to deliver your company’s product and value proposition to its customers. Channels encompass all of a company’s supply, distribution, and marketing channels. It is important to consider all channels of a company and make sure they are functioning cohesively. For example, a company like Amazon needs to consider how its fulfillment centers and shipping services are integrated to send out timely shipments.
Here are a few things to consider about channels:
- How do you deliver your value proposition ?
- How do you reach your customer segments ? What channels are used?
- Are your supply, distribution, marketing, and communication channels well-integrated and cost-efficient? Are they being utilized effectively?
#7. Customer Segments
Customer Segments are the different types of customers that a company manages. A company that produces different products will need to interact with different types of customers.
An example of this would be airline companies. Airlines offer tickets for economy, business, and first-class customers. First-class passengers have access to exclusive benefits and luxury travel arrangements. Conversely, economy passengers are provided much less support, thus costing less, but also coming in significantly larger amounts.
Here are a few things to consider about customer segments:
- Who is the main focus of your value proposition? Who are you creating value for?
- Who are your most important customers? What are they like? What do they need? What do they enjoy?
- What are your different types of customers ?
- What is the customer market like? Is your company targeting a small niche community or a mass market?
#8. Cost Structure
The cost structure refers to how a company spends money on operations. It consists of the company’s key costs and the company’s level of focus on costs. If a company is cost-driven, it focuses on minimizing costs and, thus, prices for customers. Alternatively, if a company is value-driven, it focuses on creating value for its customers, with less focus on cost.
An example of this would be a comparison between fashion retailers, Forever 21 and Gucci. Forever 21 is a fast-fashion company focused on delivering the newest styles at low costs – a cost-driven company. Alternatively, Gucci is a luxury brand focused on delivering high-quality clothes and accessories designed with the latest trends in the fashion industry – a value-driven company.
Here are a few things to consider about cost structure:
- What are the key costs in your company’s business model
- What are the major drivers of cost ?
- How do your key activities and key resources contribute to the cost structure?
- How do your costs relate to your revenue streams?
- Is your company properly utilizing economies of scale ?
- What proportion of costs are fixed and variable ?
- Is your company focused on cost-optimization or value?
Check out CFI’s course on Budgeting and Forecasting Course to learn more about estimating future cash flows, revenues, and expenses!
#9. Revenue Streams
Revenue streams are a company’s source of cash flows . They are the final element of the business model canvas template. Revenue streams are the different ways your company’s value proposition generates money. A company might have multiple revenue streams. For example, Apple has multiple revenue streams between its variety of products and its services, such as Apple Music.
Here are a few things to consider about revenue streams:
- Does your company have multiple methods of generating revenue ?
- What is the pricing strategy for the products offered by your company?
- Through what channels do your customers pay?
- Does your company offer multiple forms of payment (up-front, payment plans, financing, etc.)?
Example of a Business Model Canvas
Here is a simple example built for an automotive company using our business model canvas template!
Additional Resources
Proper financial management is the backbone of any business. Corporate Finance Institute has resources that will help you expand your knowledge, advance your career, and manage the financials of your company! Check out the helpful CFI resources below:
- Financial Modeling & Valuation Analyst (FMVA)® Certification Program
- Corporate & Business Strategy
- Budgeting and Forecasting
- Three Financial Statements Summary
- See all management & strategy resources
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The 3 PROVEN Consulting Business Models (2023)
What is the best consulting business model?
These days, I see advertisements all over the web — and even in workshops and in seminars — of people talking about the “best” consulting business model.
They claim that you should be selling high ticket offers. Or, you should be doing products and setting up passive income streams. Or, you should be jumping on webinars, podcasts, Instagram, and Pinterest.
All these flashy ideas and models that people are marketing are bound to confuse. And because they often do such a good job of marketing the idea, people get excited about it.
However, all the options and excitement lead many consultants to feel overwhelmed and wondering: “What is the right business model for me?”
Take a minute and step back. Don’t rush into choosing your consulting business model based on what seems to be hot right now.
By the end of this article, you’ll know how to determine the best consulting firm model for you .
QUICK LINKS:
Find The Right Consulting Business Model
- The Firm Model
- The Solo/Independent Model
- The Productized Model
- The Hybrid Model
- What Type of Impact Do You Want To Make?
- The BEST Consulting Business Model For You?
Get Help Creating Your Profitable Consulting Business Model
You want to choose a consulting firm model that is the right fit for you and your consulting business.
First, you’ll have to think about how big you want your firm to be:
What size firm do you want to create?
- Do you want to be a solo consultant or an independent consultant?
- Do you want to have a consulting firm that has two, three, four, five employees — or do you want a firm that has 10 or 20 or 50 or 100 employees?
- How do you feel about managing teams, people, systems and processes?
Your answers to these questions will influence what type of model, offers, and price points you use.
What about your revenue goals? Consider…
- What level of income do you want to achieve?
- Are you happy generating a quarter of a million dollars a year, or do you want to reach half a million dollars — or even a million dollars in personal income?
- Is profitability what you value most, or are you okay delaying big payouts to scale your consulting business?
- Do you want to see revenues of $5 million, $10 million, $50 million?
Your revenue goals will also influence what type of model, strategy, and tactics you use to achieve it.
You’ll also have to consider the amount of complexity you want in your consulting business:
- How do you feel about a business that has many moving parts — where you require more infrastructure, more employees or contractors, and more systems?
- Or would you prefer to have a business that is much simpler — where you provide one type of product or service or offering?
- Would you prefer to spend time creating products or offerings but not as much time working directly with clients?
Think carefully about these questions first. Once you’ve answered them, then you can start exploring the different models out there.
[Would you like to have true clarity on your business model for your situation and a marketing plan that helps you to reach your full potential? Each month, we work closely with a select handful of consultants to accelerate the growth of their consulting business. If you’re interested, schedule a Free Growth Session Call to learn more .]
3 Proven Consulting Business Models
There are 3 tried and true consulting business models.
1. Firm Model
Think of the typical large consulting firm. These firms employ many consultants, associates, junior, and senior people.
As the owner, your role starts off as doing a bit of everything — but quickly becomes more about how to hire, train and manage people .
You move from spending all your time on delivery of client projects and business development to management, strategy and business development. It’s your team of consultants who will do most of the client-facing work.
Money is made on the margin: the difference between what clients pay your company, and what you pay your team.
The more clients running through the business — at higher value engagements — the better.
Growth comes from working with more clients and hiring more staff.
The pros of the firm model are…
- Firms scale well you can add more consultants to take on more work
- Removes you from doing the day-to-day client work
- The business can run without you
- Firms are a higher-value asset and are much easier to sell
The cons of the firm model are…
- Requires a lot of people management
- There is a lower profit margin
- Firms requires more infrastructure to keep running
- More people depend on you (and you’ve got to make payroll)
% Of Consultants Who Have Teams (according to our How To Start A Consulting Business Study ):
- 63% of consultants do not have a team and do everything alone.
- 23% of consultants have a team of 2-9 employees or contractors.
- 11% of consultants have an assistant/admin to help them stay organized.
- 3% of consultant business owners have 10 or more employees or contractors.
2. Solo / Independent Model
As a solo consultant , your business is usually just you — maybe some contractors or assistants.
You’re doing everything from client work to marketing and sales.
Your work tends to be customized for each client. Your focus is on working with fewer, higher dollar-value clients.
The pros of the solo model are…
- Lean and profitable
- Flexible and easy to adapt or change
- Lifestyle focus — you can customize it to the type of life you want to live
The cons of the solo model are…
- Hard to sell because you become the face of the business
- You are the business — if you stop working, it’s difficult to earn revenue
3. Productized Model
The productized consulting firm model often stems from one of the above models.
You identify one problem your ideal clients have, and you develop a solution to that one problem.
With a productized model, everything is focused on solving that core problem for a specific type of client. You develop systems and processes to solve the problem. You do the same thing over and over. This repetition causes you to become very efficient at solving it.
Often 80% of what you’re doing is the same for each client, with about 20% being customized to them.
With systems in place, your focus moves from doing it all one-by-one — to delegating or hiring people (full time or freelance/contractors) to manage delivery, service, sales, and marketing.
With these systems in place, you can scale. You’ll go for high volume and low, medium, and high-value clients.
The pros of the productized model are…
- You’re creating a salable asset
- High multiple potential with recurring revenue
- There is a big opportunity to scale
- You can remove yourself from the day-to-day work
The cons of the productized model are…
- Some find doing the same thing over and over to lack excitement
- You have to hire people to carry out the work
- Training and managing people is required
- Management of many clients is a must
4. Hybrid Model
There’s also a fourth consulting business model: and that’s the HYBRID model.
With the hybrid model, you take elements from more than one of these models to create the perfect consulting business model just for you.
( Learn more about our Clarity Coaching Program — and how we’ve helped over 370 consultants create their own hybrid models to reach their desired income and lifestyle goals with a stable, consistent and confident plan.)
What Type Of Impact Do You Want To Make?
Give some thought to the impact that you want to make in your consulting business.
If you want to make a greater impact, you might have to work closely with your clients.
For example: writing a book or recording a course usually won’t allow you to make the same level of impact compared to if you’re providing direct consulting, coaching, or ‘done for you’ services for your clients.
When you work up close and personal with your clients, you’re more involved — and thus, will often have a greater impact on their business.
The BEST Consulting Business Model for YOU?
The reality, my friend, is that there is no BEST business model .
Each of these factors will influence the model that you choose.
You shouldn’t jump on a model because it’s the latest thing. Just because someone is marketing it to you effectively online doesn’t mean that it’s the right model for your business.
Selling $50,000 or $500,000 projects to corporate clients is a great model. But so is offering $5,000 or $25,000 packages .
For others, selling $1000 to $2500 products can be extremely rewarding and profitable.
There is no right or wrong answer. There is no “one-size-fits-all” best consulting model.
Consider your business, your situation, and your goals carefully first — and then, you’ll make a much more informed decision about the best consulting firm model for you.
If you’d like help to develop and refine a profitable consulting model for your business, check out our Clarity Coaching Program .
We’ve helped over 370 consultants just like you create tailor-made business models that help consultants earn their target income — and live their ideal lifestyle.
> Clarity Coaching Program: The proven coaching program for consultants to develop a predictable pipeline of clients and build a successful business
6 thoughts on “ The 3 PROVEN Consulting Business Models (2023) ”
Best advice you have given to all your listeners; Business models are individualistic. I have changed mine three times in my career. Great advise.
Glad you’re enjoying these Carmine!
Thanks, Michael. I always find your podcasts, emails, and videos like this very compelling. I’m continuing to develop my independent consulting practice and I also have responsibilities overseeing student consulting at a nonprofit educational institution. Your videos are instructive and right on the money. Quite reassuring. If you plan to visit Southern California, it would be a pleasure to host you!
Thanks Nevin! Appreciate YOU and your support.
Hi, I just went through your process of what model should I choose and it was helpful to clarify my decision-making, and with a vision to scale the business starting with 3 teams focusing on 3 disciplines. Also, 80 Staff with career development, training and succession planning. I have almost finished all the modules under the Momentum program, any insight would be appreciated. What this program has does is help me understand I don’t need to have all the answers just keep telling the story. Thanks Raymond Ward Australia, Queensland. Townsville
Congratulations on that Raymond and so nice to hear you’re getting a lot from the Momentum course.
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Organizational Training and Development Models That Can Help Your Team Thrive
October 21, 2021 by Katie Carpen, PhD, Thought Leader
Table of Contents
What is a learning management system, 1) centralized training model, 2) functional model, 3) matrix model , 4) university model, 5) business-embedded model.
If staff turnover is high, morale is low, or productivity has taken a nosedive, it’s time to consider changing your organization’s approach to training. More specifically, it’s worth looking at organizational training and developmental models you can adjust to fit your needs.
Proper training can go a long way toward improving team member retention, engagement, and performance. If you offer employees training to develop their skills, the prospect of opportunities for promotion may encourage them to advance their careers within the company.
In fact, 94% of employees say they would stay at a company longer if it invested in their learning and development .
But training can be an enormous commitment, especially for a small or medium-sized company. Right now, you may be asking yourself…
- How do I maximize the return on our training investment?
- How do I meet the training needs of all staff and departments?
- What’s the best way to deliver the course material to employees?
- How do I make sure the training is in line with the company’s vision ?
The answer to these questions will depend on your business, its size, how it’s organized, and what you want the training to achieve.
By examining the various organizational training and development models out there, you can determine which will provide the right framework to improve productivity, morale, and the bottom line for your company.
To get you started with your journey, we’ll be looking at five of them:
- Centralized Training Model
- Functional Model
- Matrix Model
- University Model
- Business-Embedded Model
Now, with today’s technology, an increasing number of organizations are opting for online training. If that’s the case, you may consider investing in software to manage and distribute your training programs where employees work or live.
With that in mind, let’s begin by talking about how a learning management system can help manage your remote training program.
A learning management system (LMS) is a software application for the administration, documentation, tracking, reporting, and delivery of electronic educational technology (also called e-learning) courses or training programs.
They range from systems for managing training and educational records to software for distributing online or blended/hybrid college courses over the internet with features for online collaboration.
LMSs are widely used for the following purposes:
- Colleges, universities, school districts, and schools use LMSs to deliver online courses and augment on-campus courses.
- Corporate training departments use these systems to provide online training and automate record-keeping and team member registration.
Further, LMSs can be used to augment lessons that teachers provide in a brick-and-mortar environment.
The focus of an LMS is to deliver online courses or training to learners while managing students and keeping track of their progress and performance across all types of training activities. An LMS is NOT used to create course content.
The Top 5 Organizational Training and Development Models
Now, let’s look at organizational training and development models, which provide insight, structure, and relevance for specific initiatives that align with your business strategy.
Depending on your organizational objectives, the training and development models may vary.
The ability to identify and understand the different organizational training and development models (centralized, functional, matrix, university, and business embedded) will aid in facilitating the necessary competencies to achieve corporate objectives.
Discover the pros and cons of each model below…
With this model, all the resources, training and development programs, and people are in the same location. Since training management and delivery are centralized, the model helps to ensure greater alignment with business strategy, specific initiatives, metrics, delivery, and monitoring. It provides a consistent learning experience and standards across the entire organization, rather than depending on different departments that may have conflicting visions.
- It ensures overall training goals are met effectively.
- It improves return on training investment.
- It saves the need to travel to different learning centers.
- It reduces flexibility with how training is delivered.
- Training times may not be convenient for every team member.
- It’s harder to accommodate the diverse needs of individuals, departments, and branches.
The Functional Model focuses on achieving a particular training goal. The model ties together all parties and resources that are relevant to a specific training initiative. Here, the training and development initiatives are customized based on expertise and relevant parties involved.
- It may suit small organizations with limited resources.
- It’s compatible with a stable working environment.
- Some may struggle with training continuity and keeping information up to date.
- There may be conflicts over allocating resources to specific training initiatives.
- This approach could create friction between priorities of training and duties.
With the Matrix Model, trainers report to a training manager and a specialized manager who has a particular area of expertise. This ensures consistency between the training needs of a specific function within the organization.
- It improves the coordination of trainers.
- It expands the expertise of training for distinct functions in the firm.
- It motivates participation between parties in different functions.
- A perception that training is “forced” may lead to more time spent discussing than implementing training.
- It may cause more time constraints for trainers because of having to report progress to training managers and functional managers.
The University Model is an educational unit within the corporation. It combines a variety of training subjects for internal and external stakeholders depending on the corporation’s interests and needs. An organization using this model can focus training programs on topics that reinforce the company’s culture, values, best practices, policies, and processes.
Typically, an LMS is used to manage and deliver the programs, along with on-ground training facilities. The hybrid approach provides versatility to accessibility and deliverability of content. A built-in system to monitor and track metrics makes it an effective way to manage participants’ progress.
- It helps maintain corporate competitiveness as markets change.
- Reinforces company culture by consistently disseminating the company’s ethos and brand.
- The company has more control over teaching methods to better match different learning styles.
- It’s more suitable for large companies with ample resources to invest in long-term training.
- There may be conflicts related to the curriculum of content areas.
- It’s challenging to ensure successful remote engagement.
This model focuses on ensuring the curriculum, design, delivery, and metrics of the training align with the vision and strategy of the organization. The objective is to provide a direct alignment with the current business environment and organizational needs.
The Business-Embedded Model ties together the specific competency needs to achieve strategic and day-to-day objectives while balancing quality to internal and external stakeholders. The model is customer-centric and treats trainees and managers as customers.
The training, activities, objectives, and outcomes are clearly defined, specific, and assigned. Further, participants are accountable for their performance.
- It helps improve competitive advantage by focusing on organizational needs.
- The training goals are focused on the customer, making it a favored model for the service industry.
- Unlike other organizational training and development models, it focuses on ensuring there is a measurable return on training investment.
- The model aims to adapt to changing circumstances.
- Conducting a comprehensive needs analysis, though essential, can be time consuming.
- Many organizations neglect to perform training evaluations.
- Organizations must be careful to avoid a waste of resources.
Every company has different training and development needs. Likewise, the resources available to create training and development programs may vary.
To facilitate new training and development initiatives, it will help to identify the following factors:
- The specific training needs of the organization and employees
- What training initiatives will best facilitate knowledge and skills
- Which model(s) that best fit the organization
Budget constraints of small and medium-sized firms will limit what training model you can implement. Yet, even with a limited budget for training, it’s essential to select the best model that fits the firm’s training needs.
Investing money in cheaper training and development models may make sense from a financial standpoint. However, it’s also essential to investigate what return on training investment can be expected from each model.
Strategic thinking about scalable training can help offset initial costs and deliver a steady investment over time, which may be more doable for small and medium-sized firms.
The key to a successful organizational training and development program is to ensure alignment across the board. Once your training plan meets your organization’s needs, the benefits will begin flowing from a well-trained, motivated staff whose values will align with the company’s objectives.
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Filed Under: Analytics , Leadership Tagged With: Business-Embedded Model , Centralized Training Model , Corporate University Model , Functional Model , Katie Doseck PhD , Matrix Model , Training and Development Models
About Katie Carpen, PhD, Thought Leader
Katie has 14+ years of experience in higher education, consulting, recruitment, and mortgage finance industries. Her areas of specialty include change management, conflict management, corporate social responsibility, emotional intelligence, leadership, organizational culture, strategy, and work-life-balance. Katie has served as a relationship manager, associate dean, consultant, subject matter expert, and coach. She is currently active in higher education, coaching, and various causes. She enjoys fostering critical, creative, and strategic thinking by applying concepts across a variety of domains.
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What Is a Business Model?
Understanding business models, evaluating successful business models, how to create a business model.
- Business Model FAQs
The Bottom Line
Learn to understand a company's profit-making plan
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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 new, developing companies attract investment, recruit talent, and motivate management and staff.
Established businesses should regularly update their business model or they'll fail to anticipate trends and challenges ahead. Business models also help investors evaluate companies that interest them and employees 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.
- There are dozens of types of business models including retailers, manufacturers, fee-for-service, or freemium providers.
- The two levers of a business model are pricing and costs.
- When evaluating a business model as an investor, consider whether the product being offer matches a true need in the market.
Business Model
A business model is a high-level plan for profitably operating a business in a specific marketplace. 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, ideally 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. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands .
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. Admittedly, the business model may not tell you everything about a company's prospects. But the investor who understands the business model 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 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 and 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. 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 are as many types of business models as there are types of business. For instance, 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. A manufacturer can also sell goods 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 by 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 what becoming an upgraded member can hold.
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 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 are somewhat straight-forward: in exchange for hosting a platform for business to be conducted, the marketplace receives compensation. Although transactions could occur without a marketplace, this business models 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 of 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 or freight.
Example: ReMax
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 one can take to create their 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 understand 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, your business may struggle to find its footing if there isn't a demand for your services or products.
- 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. Until now, we haven't talked about how your company will make money. A business model isn't complete until it identifies how it will make money. This includes selecting the strategy or strategies above in determining your business model type. This might have been a type you had in mind but after reviewing your clients needs, a different type might now make more sense.
- 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. The airline industry is a good place to look to find a business model that stopped making sense. It includes companies that have suffered heavy losses and even bankruptcy .
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 off product usage (i.e. the amount of data being uploaded to SharePoint).
- Intelligent Cloud: Microsoft offers server products and cloud services for a subscription. This also provide services and consulting.
- More Personal Computing: Microsoft sells 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 retails may or may not make the actual goods they sell.
What Are the Main Types of Business Models?
Retailers and manufacturers are among the primary types of business models. Manufacturers product their own goods and may or may not sell them directly to the public. Meanwhile, retails 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, feel free to 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 in 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 systematically create long-term value for its customers. After building a business model, a company should have stronger direction on how it wants to operate and what its financial future appears to be.
Harvard Business Review. " Why Business Models Matter ."
Bureau of Transportation Statistics. " Airline Travel Since 9/11 ."
Microsoft. " Annual Report 2021 ."
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How to create a profitable and repeatable business model as a freelance trainer
- By Sharon Gaskin
- June 23, 2016
Whether you’re just starting a training business or you’ve been a freelance trainer for a while, it’s helpful to spend some time thinking about your business model.
In its simplest terms, a business model is a rationale for how you plan to create, deliver and capture value – or, simpler still, how you plan to make money. By pinpointing how your business will or does run and what you do better than your rivals, it can help you to stay better focused on your goals and the profitability of your training services.
Creating a successful business model
A quick search on Google shows that there is an abundance of business models , from the simple to the complex. One respected starting point for creating a successful business model is the ‘Business model canvas’ by Alex Osterwalder, which asks you to answer the following nine questions:
- Who is your customer?
- What is your value proposition? In other words, what makes your training services attractive to potential customers?
- What channels will you use to market and sell your services?
- What relationship will you offer your customers? For example, do you offer one-to-one mentoring, ongoing training, one-off training programmes, or a membership club?
- What is your revenue stream?
- What are your key resources?
- What are your key activities?
- Who are your key partners?
- What does your cost structure look like?
Answering these questions can help you pinpoint how your business can generate revenue and increase profitability. It may also uncover some topics that you need to think about in more depth.
Focus on value
For many potential customers, whether or not they will book your services will be less dependent on price and more dependent on your perceived value.
People have free access to information 24/7 via the internet, which fosters a DIY mentality, making decision-makers less inclined to hire a trainer. Your business model and strategy, therefore, needs to show that hiring you has distinct benefits. For example, you can share best practice, bring niche expertise, a fresh perspective, and external influence that can’t be found in the faceless online realm.
A simple but repeatable business model
Some of the highest performing consultants (and businesses in all industries) follow a simple and repeatable business model where there may not be many variations to their offering but they do what they do extremely well. This business model focuses on differentiation .
In other words, high-performing consultants often look for that one thing that sets them apart from their competitors and then seek to build on this. They rarely choose to reinvent their brand but instead focus on what makes them truly distinctive and how that is relevant to every aspect of what they do. Most importantly perhaps, they get specific about how this differentiation is relevant to their core customers.
Each time they add a new product or service to their offering, they repeat the same business model by identifying how their core, fundamental differentiation adds value.
Examples from other industries
I found an excellent article on the Harvard Business Review website about this very topic. Companies highlighted in the article that use a simple differentiation business model include:
- Tetra Pak, a company that is known for extending the shelf life of products, eliminating the need for refrigeration, and efficient stacking design. Its differentiating principle is that all products must save more money than they cost to make.
- Nike differentiates on the power of its brand, its relationship with top athletes, and performance-focused design.
- Apple differentiates on simple design, deep technical capability coupled with easy-to-use software, and iTunes integration.
- Vanguard is one of the highest performing companies in the Harvard Business Review article and differentiates based on a belief in the value of index funds and the commitment to cut out third parties and give customers direct contact with the business.
- Olam is another company that was able to repeat its business model through differentiation. The company initially established itself by working with local farmers in Nigeria, managing the supply chain from the farm where the product was grown right through to the customer. Over the years, Olam repeated this approach by working with small farmers in other countries with other products. It was these nurtured relationships with local farmers – achieved by managers living in the rural farming areas – that set the business apart from its competitors.
So, what is it that sets you apart from other trainers?
Perhaps you have niche expertise, hands-on experience, an established reputation, or you collect measurable data for your clients. How can you communicate this differentiation consistently across all of your marketing?
It’s might be helpful to identify what values are non-negotiable for you as this can be built into your business model and may prove to be the one thing that differentiates you from your competitors.
Many businesses wrongly believe that they need to diversify or broaden their offering to be successful but, in my experience, some of the highest performing businesses keep focused on a simple and practical business model, and create growth through differentiation rather than implementing new ideas all the time.
Ask your clients
If you’re struggling to identify what differentiates you from other trainers, you could ask your clients for feedback. What do they think sets you apart? How do they feel you add value? What are their takeaways from the training you have delivered?
You may find that some common themes emerge.
Why not spend some time thinking about what you do particularly well? What would you like to be known for? What aspect of being a trainer makes your heart sing? Once you’ve identified this, think about how you can build that into your business model. If you build your training business around what you love, it will be far easier to keep focused.
Do you have a business model? If so, what is it? Has it changed over time? How did you create your business model? I’d love to hear your experiences in the comments section below.
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Training and development initiatives are educational activities within an organization that are designed to improve the job performance of an individual or group. These programs typically involve advancing a worker’s knowledge and skill sets and instilling greater motivation to enhance job performance.
Training programs can be created independently or with a learning administration system, with the goal of employee long-term development. Common training practices include orientations, classroom lectures, case studies, role playing, simulations and computer-based training, including e-learning.
Sometimes referred to as Human Resource Development (HRD), most employee training and development efforts are driven by an organization’s HRD function. These efforts are roughly divided into two types of programs:
Employee Training and Development A strategic tool for improving business outcomes by implementing internal educational programs that advance employee growth and retention.
Management Training and Development The practice of growing employees into managers and managers into effective leaders by the ongoing enhancement of certain knowledge, skills and abilities.
Successful businesses understand that it’s more beneficial and cost-effective to develop their existing employees instead of seeking out new talent.
The top ten benefits of employee training and development programs include:
- Increased productivity: When employees stay current with new procedures and technologies, they can increase their overall output.
- Reduced micromanagement: If workers feel empowered to perform a task, they typically require less oversight and work more independently. 1
- Train future leaders: Organizations must have a solid pipeline of well-trained and innovative potential leaders to grow and adapt over time.
- Increased job satisfaction and retention: Well-trained employees gain confidence in their abilities, leading to greater job satisfaction, a reduction in absenteeism and overall employee retention.
- Attract highly skilled employees: Top recruits are attracted to firms with an identifiable career path based on consistent training and development.
- Increased consistency: Well-organized training ensures tasks are performed uniformly, resulting in tight quality control that end users can trust.
- Increased camaraderie: Training and development helps create a sense of teamwork and collaboration.
- Bolstered safety: Continuous training and development helps ensure employees have the knowledge and skills to perform a task safely.
- Ability to cross-train: Providing consistent training creates a knowledgeable team overall where employees can help train or assist each other as needed.
- Added innovation: Consistently trained employees can help develop new strategies and products, contributing to the company’s bottom line and continued success.
Read why the traditional corporate training and development model is gone and how IBM is creating personalized learning experiences.
The corporate marketplace is quickly changing, and businesses must be flexible and easily adapt to change. Technology is one of the key drivers in this rapid change, with automation and artificial intelligence (AI) in the forefront.
Here are four key trends impacting how organizations must rethink training and development:
Today’s corporations have discovered that it’s no longer just about what employees need to know, but also when, where and how the development experience enables performance. With the advancements in mobile technology , companies are relying more on mobile workforces . Training is migrating to mobile devices where apps provide “just-in-time” information and recommendations to workers across industries.
AI systems can process unstructured information in a similar way to humans. These systems understand language patterns and sensory inputs including text, pictures and auditory cues. AI-based software can customize how training content is delivered to a learner, based on their learning style, suggest content based on a learner’s past performance and predict what information is most important for them to learn next.
Agile learning is a process that encourages employees to learn by doing and iterate often, inspiring organizational change and buy-in. For example, IBM has introduced IBM Garage , a tool for executing, scaling and managing an organization’s multiple transformation initiatives. Companies like Ford Motor Company and Travelport are using IBM Garages around the world to create cultures of open collaboration and continuous learning.
While distance learning has been around for a long time, the COVID-19 pandemic has underscored the need for companies to have resilient, flexible, mobile workforce management. Organizations have learned that remote workforces need to be productive, engaged, and continually working towards learning and improvement.
Recent articles and industry surveys suggest that a lot of corporate training may be ineffective. Most training won’t be fully retained by learners. Businesses must build a culture of ongoing self-directed, self-motivated learning with focused distance learning programs and mobile "just-in-time" training.
Organizations also have to rethink the larger framework of what skills will be needed in the near future. A recent meta-level IBM study (PDF, 916 KB) predicts that more than 120 million workers in the world’s twelve largest economies may need to be retrained in the next three years because of AI-enabled automation.
Several insights from the study include:
- Skilled humans fuel the global economy : Digital skills remain vital, but soft skills have become more important.
- Skills availability and quality are in jeopardy : The half-life of skills continues to shrink, while the time it takes to close a skills gap has ballooned, forcing organizations to find ways to stay ahead of skills relevancy.
- Intelligent automation is an economic game changer : Millions of workers will likely require retraining and learning new skills, and most companies and countries are ill-prepared for the task.
- Organizational cultures are shifting : The digital era has introduced the need for a new business model, new ways of working and a flexible culture that fosters the development of critical new skills.
The study concludes that traditional hiring and training are no longer as effective, that different strategies and tactics can have a strong impact on closing the skills gap. Several strategies and tactics include:
- Make it personal : Tailor career, skills and learning development experiences uniquely to your employees' goals and interests.
- Improve transparency : Place skills at the center of the training strategy and aim for deep visibility into the skills position across the organization.
- Look inside and out : Adopt an open technology architecture and a set of partners able to take advantage of the latest advancements.
Learn new strategies for building and maintaining a skilled workforce, from the IBM Institute for Business Value study.
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- Maintain a competitive edge with a skilled workforce
IBM Skills Gateway
The IBM training and certifications offers you the ability to earn credentials to demonstrate your expertise. It is designed to validate your skills and capability to perform role-related tasks and activities at a specified level of competence.
- Validate your skills and capabilities
Training & development resources
With recent market changes and disruptions, organizations need a workforce with digital skills and innovative processes to respond to both customers’ and employees’ evolving needs.
Key areas of focus will ensure that your workforce is empowered to be productive today, while strengthening your business resiliency strategy to aid in re-entry to the new normal.
The enormous opportunities and benefits artificial intelligence can bring to an organization require skills development programs designed to ensure consistency and intentional outcomes.
Discover a new approach to training and development based on partnership networks, user experiences and emerging technologies. (PDF, 136 KB)
Find out how to close the skills gap with a modern three-pronged workforce strategy to quickly reskill an organization’s workforce. (PDF, 488 KB)
Discover how training and development fits into the larger scope of next-generation enterprise transformation. (PDF, 1.1 MB)
1 The 6 key secrets to increasing empowerment in your team (link resides outside of ibm.com). Joe Folkman. Forbes article. March 2017. Where Companies Go Wrong with Learning and Development (link resides outside of ibm.com). Steve Glaveski. Harvard Business Review blog. October 2, 2019.
The 2 Most Profitable Types Of eLearning Business Models
- "Night School" eLearning Business Model
- "Academy" eLearning Business Model
Which eLearning Business Model Should You Choose?
Tell me if this sounds like you.
You’ve got an idea for an online school or eLearning business .
You’ve outlined the skills you want to teach, and you’ve even got an idea of who your ideal student is. But, you’ve hit one major roadblock…
You don’t know how to make money from it .
Sound about right?
If so, you’re in the right place. Today you’re going to learn how to change all of that.
In this article, I want to show you the two best online education business models you can follow. So, no matter who or what you want to teach, you’ll have a clear idea of how to turn your idea into income.
Here’s what we’ll cover…
What You’ll Learn
- The “ night school ” and “ academy ” eLearning business models
- The major pros and cons of each
- How much you can earn with each model
- How to choose the right one for your business
The “Night School” eLearning Business Model
Night School is a classic eLearning business model.
Its name is rooted in the night classes you can take at your local community college. You know, where you go to learn languages or pick up skills to help in your job. The simple business model which drives these traditional courses can provide a profitable blueprint to sell courses online.
This style of business model is all over websites like Udemy, where customers pay for access to a course which teaches them a specific skill.
Let’s say you’re going on holiday to Germany and you want to be able to understand the basics before you go so that you can blend in like these two cheeky chaps here:
You could head over to Udemy, search for “learn German” and find a course which teaches you the basics you need.
From there the process you saw earlier kicks in:
You log in. Watch your video lessons. Take tests. Contact your tutor when you have trouble. And, by the time you get to Berlin, you’ll hopefully be able to order a Schnitzel without offending anybody.
It’s pretty simple. But what kind of eLearning business is this model best suited to?
Who Is The “Night School” eLearning Business Model For?
This type of eLearning business model is flexible and can be adapted by any type of online school or teaching business.
It’s been the default model for the majority of online eLearning businesses over the last few decades, but it’s the best fit for:
- New businesses: If you’re testing products and your audience’s reaction to them, this can be a great way to generate cash flow and get feedback.
- High-ticket businesses: If you want to sell one-off products at a $2000+ value
- Online course-only businesses: If you only want to sell one-off courses, without all of the frills and support of a “school” environment
Basically, if you like to go deep into a specific skill or ability, this type of eLearning business model is for you. Which can be done across multiple topics in one niche, as you’ll see in the next section.
How Do You Make Money With It (And How Much)?
The key to making money with the night school eLearning business model is to create standalone courses which solve your customer’s major problems.
These courses can differ in value and depth, but they guide your customer to a specific endpoint. Let me show you what I mean.
One business who does this brilliantly is Ramit Sethi’s; I Will Teach You To Be Rich .
The business is grounded in one “umbrella” niche, which is financial success. But for each of the barriers his customers have to getting there, he has a course to help them get through it.
This includes topics like mental frameworks and having better conversations:
The starting retail cost of these courses is around $350 and work there way up to $2000-$2500 range. Which, as you can imagine, is really lucrative.
This is easily adaptable to any business niche, too. Let’s say you’re going to start a business around videography; you could focus on pain points like:
- How to create the perfect YouTube video
- How to edit videos in Final Cut Pro
- How to sell your videos to a TV channel
- How to find, source and add music to your videos
Each of these would become a standalone course and retail at a different value, depending on the depth and demand for the course content.
With this business model, you could be looking at the $2,000+ range a month with a brand new business.
The 5 Pros And 5 Cons Of The Night School Model
Before you make your decision to choose this online learning business model, I want to break down the five pros and cons of choosing it.
- Lucrative: You can create a broad spectrum of products and retail them at high-ticket prices
- Specific: You can create products which solve problems and cause transformation.
- Low overheads: You can create courses in cheap (or free) formats like PDFs.
- Outsourceable: You can easily build teams to help you manage your workload.
- Evergreen: When you create a course you can sell it for years to come.
- Time-intensive: You’ll need to invest lots of time and effort into creating high-quality courses which generate results.
- Complicated: Each course requires its own unique sales funnel.
- Launching: You’ll have to consistently launch (and relaunch) your products to make sales.
- Non-recurring income: You have to sell people multiple times to keep your cash flow high.
- Marketing: Requires a constant stream of new leads to make sales.
The “Academy” eLearning Business Model
The academy business model has been part of a renaissance for eLearning.
Instead of creating an online course business model, as you saw with night school a second ago, you create a comprehensive school where students learn all of the skills they need to achieve their desired goal.
Let’s look at this in real-world terms first.
When a student enrolls into an academy – say, a soccer school – they don’t focus just on one aspect or skill. Instead, they come away with a well-rounded education in:
- How to pass, dribble and shoot the ball
- How to eat the right foods and how much water to drink
- How to recover from a tough game
- How to communicate with teammates
- How to apply for college scholarships
If it sounds like I have an overly intimate knowledge of soccer academies it’s because, a) I’m British and, b) I spent a year coaching in an American one. (Did somebody ask for blue steel?)
But, I digress…
In the online world, the Academy eLearning business model works a little like a Netflix subscription .
For a monthly recurring fee, students get access to your entire library of lessons and courses. They can pick and choose what they learn, and when they learn it, and build their education.
The academy can also come with lots of different community features, like:
- Live Q&As
- Coaching calls
- Facebook groups
Depending on how you choose to run your business. As long as they pay their monthly subscription, they can have access to all of it. When they cancel, they lose it.
Because this eLearning business model relies on a subscription system, it has the potential to be profitable, scalable and much more manageable than the night school option.
But, who does this business model work for, and is it the right choice for you?
Who Is The Academy eLearning Model For?
The academy business model can work in any broad niche with multiple skills to teach. But it works best for:
- Niche experts: Who want to teach a wide range of skills in a specific niche
- Health and Fitness pros: Who want to share up-to-date advice to their clients
- Creatives: Who want to teach different artistic practices or disciplines
- Enterprise experts: Who want to provide training to corporations
If you want to cover a broad topic and provide depth in the areas, you think matter, without creating multiple standalone courses, this is for you.
The academy eLearning business model is based on a subscription service to get access to both short and long-from training videos on a topic .
The price point is usually affordable – between $9.99 and $49.99 per month – and on a recurring basis. These prices can vary depending on the package someone signs up for.
Let’s look at this online education business model in action so you can see what I mean.
Magic Stream teach people how to perform incredible magic tricks with their online academy.
For $12.99 a month students get access to hundreds of hours of training material covering lots of different topics.
Behind each of these thumbnails is an intense training video which teaches you a specific skill. Instead of a “course” style, this is individual sessions or walkthroughs.
Running the business this way allows them to create a comprehensive library of content to help magicians learn a wide range of skills.
This is an attractive offer for a would-be magician who finds their product. For a small investment, they can get lots of value.
But that may be causing you a few worries right now. Because $12.99 per sale doesn’t sound anywhere near as lucrative as the $350 courses you saw in the last section, does it?
Well in the short term you probably could make more money with the Night School model. Over the long term, however, the academy model wins. Why?
Because you have a constant source of recurring passive income which has the potential to grow infinitely .
Let me explain…
Let’s say you launch your academy and you make ten sales of $13.00. That’s a pretty modest $130 for your troubles, right?
Well, that’s $130 which you will get paid every month from those customers. And, if you pick up an average of 10 new customers (absolute worst-case scenario) every month, here’s how your income will look over a year.
- Month #1: $130 (10 subscribers)
- Month #2: $260 (20 subscribers)
- Month #3: $390 (30 subscribers)
- Month #4: $520 (40 subscribers)
- Month #5: $650 (50 subscribers)
- Month #6: $780 (60 subscribers)
- Month #7: $910 (70 subscribers)
- Month #8: $1,040 (80 subscribers)
- Month #9: $1,170 (90 subscribers)
- Month #10: $1,300 (100 subscribers)
- Month #11: $1,430 (110 subscribers)
- Month #12: $1,560 (120 subscribers)
That’s a pretty quick increase in recurring income. This is what you’re guaranteed each month, save for a complete mutiny or catastrophe. And that’s before you look at the compound effect, where you’ve earned a total of $10,140 over the year .
At the point of launch, those $350 courses look deceptively lucrative. But over the long game, you can earn more money for less work with the academy model. In fact, the Uscreen customers who apply this business model earn an average of $5,700 per month!
The 5 Pros And Cons Of The Academy eLearning Business Model
Before you decide to choose this model, let’s take a look at the major advantages and disadvantages of using it:
- High-retention: Customers are “hooked” to your service because they want the new content you release
- Attractive pricing: You can bring new customers in with a low-cost but high-value offer
- Passive income: You can make money without being there at the point of sale
- Scaleable: Easy to grow or shrink to your desired business size
- Simplicity: You only need one sales funnel leading to one offer
- Content creation: You need to periodically create new content
- Lower initial earnings: It can take time to build momentum
- Hosting: You’ll need a more expensive platform to run this
- Innovation: Your content needs to hit a broad range of topics to keep people hooked
- Zombie-accounts: The ethical question of people paying who aren’t using your service
By now you should have a clearer image of the two major online education business models, and which one is going to be a better fit for your business.
If you’re still not sure, here’s a little recap:
You should choose the Night School model if you want to go to depth on topics and create high-ticket offers for your customers. Launching products doesn’t phase you, and you prefer the big payout they provide.
You should choose the Academy model if you want a long-term profitable business which is easy to manage and has high levels of customer retention. You want to create one offer and deliver as much value to people as possible, and you’d prefer to keep customers for the long-term.
Now before you go, it’s important to note you can change business models whenever you want. It’s not uncommon for people to create three or four courses and then bundle them together into an academy-style product.
But an academy model should probably be the overall end goal for your business, if not now, then in three to five years.
Wrapping This Up …
Phew! That was a lot of information. Well done for making it to the end!
You can sign up for our video business school, where we’ll share even more about how to start a profitable online learning business!
James Johnson
James is the Content Marketing Manager at Uscreen. He's a guitar-playing, book-reading, film-watching, language-learning, lo-fi-hip-hop-listening kind of guy who loves being creative.
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20 Business Model Examples (And How To Pick The Right One)
By: Dale Cudmore Digital Marketing and Sales Expert
If you’ve heard the term “business model,” but don’t know exactly what it means, you’re not alone .
It’s used all the time by business analysts, and even they disagree on the exact definition of a business model.
But you know a business model is important.
And it is. Your model sets your business on the path to success or failure , so you need to get it right.
- How Does This Article Serve You?
This is a practical guide to:
- What a business model is
- Why it’s important
- How to create one.
It doesn’t require any previous experience or knowledge and will leave you with everything you need to know to pick the right business model for your next venture or reevaluate your current model.
- What is a Business Model?
As mentioned, there’s no single definition of a “business model,” so let’s look at the most common interpretations .
Long ago, the concept of a business model was simple – how will your business make money .
It wasn’t until the 1990s or so where people started realizing that your business model can make or break your company.
So it evolved from that basic definition.
While he didn’t specifically mention business models, Peter F. Drucker’s theory of business is often cited as the start of a shift. Instead of just focusing on monetization, he proposed that businesses should also consider customers, goals, and strategy.
Verifying Your Business Model
A modern business model should at the very least answer Drucker’s famous five questions :
- What is your mission?
- Who is your customer?
- What does your customer value?
- What results do you seek?
- What is your plan?
Still, that’s a bit open-ended.
Finally, Alex Osterwalder developed a comprehensive system to define a business model .
His view of a business model was that a business model is a combination of assumptions and guesses.
The Business Model Canvas
He developed the Business Model Canvas, which we’ll be looking at in more detail later.
It divides a model into 9 main sections that provide an organized way to break down all the important assumptions you have about a business.
Video: Alex Osterwalder provides a brief overview of the Business Model Canvas
What’s the Difference Between Business Models and Business Strategy
They both seem similar at first but have different scopes .
Business Model
A business model covers how a business will operate , but a business strategy defines how that business will carve out a position in its market.
In other words, a business model gives you a set of limitations . It might tell you how much you’ll charge, and what customers you’ll target.
Business Strategy
However, your business strategy will focus on how you actually reach those customers and distinguish yourself from competitors.
You’ll see both terms used interchangeably (incorrectly), but it’s good to know the difference.
- Why Do Business Models Matter in the Modern Economy?
The right business model can catapult you to glory or collapse, and that’s not an exaggeration.
Business model innovation is arguably the biggest form of competition that exists in modern business.
Clay Christensen, a professor of business administration at Harvard sums it up well:
Most managers think the key to growth is developing new technologies and products. But often this is not so. To unlock the next wave of growth, companies must embed these innovations in disruptive new business models.
IBM’s Institute for Business Value conducted a study in 2009 and found that 70% of companies are actively engaging in business-model innovation.
They also found that 98% of businesses were continually modifying their model to some extent.
Core Values and Competitive Advantage
You’ve seen examples of this, perhaps without realizing it.
Consider taxis and Uber, which both have essentially the same core value to customers of providing flexible, on-call transportation.
Uber has a drastically different business model. When they started up, their business model was their main competitive advantage .
Fast forward to today, and Uber and other similar businesses have overtaken taxis .
- 3 Traits of a Good Business Model
Before we look at specific models you may want to consider using, let’s briefly go over the attributes of a solid business model .
1. They Match Up With Company Goals and Values
Your business model comes after you define what your company is trying to do.
Certain models will match up with your goals and values , and some won’t. If you start a diamond shop but try to implement a freemium model, there’s essentially no way you’ll succeed.
Pick a model that complements your mission and the way you want to accomplish it .
2. A Business Model Should be Robust
You don’t want to base your entire business off a model that might not be effective after a year or two.
Your business model needs to consider:
- Resources available – If your business model requires an upfront investment, but you have limited access to funding, you’re in trouble.
- Imitators – Can competitors easily copy or improve upon your business model?
- Consumer trends – Will customers still want your solution in the future? Can they substitute it for another?
Taking time to think of these when picking a business model may save you from a big mistake.
3. They Leave Opportunity for Innovation
You’re likely not going to get everything in your business model right the first time.
As Osterwalder noted, business models are based on assumptions. Things rarely go as planned.
If your business model depends heavily on all your assumptions being correct, it’s too rigid. Create a business model that you can re-evaluate and improve upon over time.
- The 20 Types of Business Models (with Examples)
Mark W. Johnson has a great book called How to Seize the White Space for Transformation .
In it, he covers 20 types of potential business models that you can choose from and their primary method of monetization.
I’ll summarize them here and provide examples of each, but if you’d like more detail, it’s a good book to pick up.
Affinity Club
An affinity club model is based on partnerships with other organizations. By buying or using your products, customers also get special access to other perks, giving them extra incentive.
Of course, you’ll need to provide an incentive to those partners to get them on board.
This is best used in competitive fields where products are all similar.
A great example of this is MBNA, who uses this model with their credit cards. Different cards come with different perks , so they can target a wide audience.
For example, one card is targeted towards football (soccer) fans. If you sign up for a Manchester United card, you get points that can be exchanged for their merchandise.
There are also monthly draws and other perks .
Automation-Enabled Services
This model relies on technological advancement and is tough to use unless you have a good deal of specific technical knowledge yourself.
The goal is to automate services that typically use human labor , so your operating costs are reduced.
For example, instead of going to a financial advisor, you can go to Betterment . It’s an automated online financial advisor that gives you a similar quality of advice as most financial advisors would.
Video: An overview of how Betterment uses technology to provide financial advice.
A broker connects buyers to sellers and gets a small fee for each transaction.
There are many examples of this:
- Kickstarter.
Any marketplace that allows others to sell on it, and focuses on bringing in customers for those sellers is using a brokerage model.
A bundling business model packages related products together to make a more convenient and enjoyable experience for customers.
A classic example of this is the fast-food value meal, but that can be replicated fairly easily.
A better example is the combination of iPod and iTunes. You can’t use an iPod without iTunes, so each new iPod customer results in a new iTunes user (and potential customer).
Bundling is very effective when a company is launching a new business and can leverage existing success as Apple has done.
Crowdsourcing
Don’t confuse a crowdsourcing business model with crowdsourcing funding from sites like Kickstarter.
A crowdsourcing business model relies on user-generated content . The business focuses on making contributions easy and providing an incentive for users to contribute (usually money or a charitable goal).
YouTube is one example of a crowdsourcing model, where users upload videos, and most hope to generate revenue from those videos.
Wikipedia is another great example, where all the content on the site has been created for free by willing users who want to spread knowledge.
Data-Into-Assets
The idea behind a data-into-assets is to obtain valuable data that can be sold to willing buyers.
This is one of the few that can run into real ethical dilemmas.
For example, this is the business model that Facebook uses. The site is free for users, but in return, Facebook collects massive amounts of data about users and uses that to generate revenue through advertisers.
The Dangers of Data
They are facing large privacy lawsuits that could set a precedent for other businesses.
It’s hard to know where to draw the line, as Google is another data-into-assets business that most have no big issues with. They scrape data from just about all sites and transform that into search results that users desire.
Then they sell ads to advertisers on the search results.
Digital Platforms
Since the beginning of the Internet, creating a digital platform has been a viable business model for some companies.
For example, OpenTable started in 1998, which is a site that provides an online restaurant-reservation service.
There are still opportunities to be innovative in an industry simply by providing a useful product online.
To use this, you can apply modern technology to outdated industries , or apply new technology to any industries ready for it.
We’re also seeing new digital platforms innovate upon old ones by leveraging new technology like machine learning and blockchain technology. These could almost be considered business models of their own.
Disintermediation
This mouthful simply means directly delivering a service or product instead of through a middleman.
Tesla is a great modern example of this. Instead of selling cars through a dealership, you buy online and skip the salesman. Not only is it more convenient, but it reduces costs for consumers .
Fractionalization
Fractionalization consists of letting customers buy a portion of a product or service.
A good example of this is a time-sharing condo. People buy part of the condo and can use it during a certain time of the year that they purchased it from.
It’s a great model when your target customers only want your product or service part of the time . They get the full benefits but don’t have to pay full price.
Freemium is a modern business model that is often used by software companies.
Because there’s very little overhead in serving data, businesses can choose to provide a portion of their service or product for free, but requiring payment for full access .
Spotify and Dropbox
Dropbox gives you a small amount of free cloud storage and asks you to upgrade to a paid plan if you need more space.
Spotify offers free music but has ads. If a user buys a paid plan, they get rid of the ads.
Freemium lets you reach a wider audience, and often get more referrals, which can lead to a steady stream of customers.
Leasing is nothing new and has been used by car dealerships for many years. It works best for expensive products.
When a customer often can’t afford to pay cash or only needs a product one time, you offer them use of the product for a rental fee .
A low-touch model takes a high-end offering and reduces the cost (and quality) of that product or service.
Competing on cost is a difficult business model to succeed with, but can work if you get enough customer volume.
Walmart is a great example of this, who sell lower-quality products than most competitors, but at a better price.
Negative Operating Cycle
This is a business model popularized by Amazon.
It’s especially popular with online retail businesses and allows businesses to sell products at a low-profit-margin (or even at cost), and still be highly profitable.
How Does It Work?
By maintaining a low inventory and getting payment upfront. Of course, you need a reliable and fast fulfillment process for this to work effectively.
The profits then come from the volume of sales that are attracted through low prices, or by utilizing the money sitting around before having to pay suppliers.
That money generates interest or can be used to fund long-term investments or research and development.
Pay-As-You-Go
This business model is exactly what it sounds like, customers pay as they use your service.
This can only be used in certain industries where customers regularly consume varying amounts.
For example, car2go lets you pay for car rentals by the minute, hour, or day.
Some web hosts , like Cloudways , let’s you pay only for the resources your websites actually use .
Razors and Blades
Razors and blades can be interpreted literally or symbolically.
This business model consists of bundling 2 products together that require each other. Then, you sell the main component (razor) at no profit or even a loss but recoup that because the complementary product has high margins (blades).
Another good example of this is the personal printer. They’re cheap to buy, but the ink is very expensive and high margin.
Reverse Razors and Blades
This is the same as above, but the two products are split.
You offer the “blades” at a very low cost in order to get people to buy the expensive and high margin “razor.”
One example of this is Amazon Kindle books, which are very cheap, and may tempt consumers into purchasing an expensive Kindle to read the books on.
Product-To-Service
There are many times that people want to use a product, without buying it. A product-to-service model lets people pay a service fee to have access to a product.
It’s similar to leasing and fractionalization .
A good example of this is Zipcar, which is a car-sharing company. Members pay a monthly or annual fee to have access to car reservations as needed.
Standardization
If you can take something that has a lot of variabilities and create a consistent, standardized product, you stand out from competitors.
Dominos did this with their “30 minutes or it’s free” offer for pizza delivery, which at the time was unheard of.
Subscription Club
A subscription club lets customers buy a product on a regular basis.
This is a popular model for software businesses that most SAAS (Software As A Service) platforms fall under.
Netflix and Dollar Shave Club also would be subscription clubs.
User Communities
Finally, some businesses create paid user communities that generate revenue from fees and possibly advertising.
The most famous example of this is Angie’s List, a home services review community that required payment until a little while ago.
It’s a tough model because most people prefer free forums and other types of communities, but good if people will pay for higher quality information.
- How to Design Your Business Model
We can finally get to some practical work on your business model.
As mentioned before, monetization methods are not enough on their own.
There are 2 main approaches that you can take if you would like to create a new business model or refine an existing one.
Business Model Canvas
The Business Model Canvas comes from Alexander Osterwalder.
It’s a chart that includes the 9 important elements of a business model.
9 Sections of The Business Model Canvas
Let’s go through the 9 sections, each one includes questions to prompt you if you get stuck:
- What value do we deliver to the customer?
- Which one of our customer’s problems are we helping to solve?
- What bundles of products and services are we offering to each Customer Segment?
- Which customer needs are we satisfying?
- For whom are we creating value?
- Who are our most important customers?
- Through which channels do our Customer Segments want to be reached?
- How are we reaching them now?
- How are our Channels integrated?
- Which ones work best?
- Which ones are most cost-efficient?
- How are we integrating them with customer routines?
- What type of relationship does each of our Customer Segments expect us to establish and maintain with them?
- Which ones have we established?
- How are they integrated with the rest of our business model?
- How costly are they?
- What are the most important costs inherent in our business model?
- Which Key Resources are most expensive?
- Which Key Activities are most expensive?
- What Key Activities do our Value Propositions require?
- Our Distribution Channels?
- Customer Relationships?
- Revenue streams?
- What Key Resources do our Value Propositions require?
- Who are our Key Partners?
- Who are our key suppliers?
- Which Key Resources are we acquiring from partners?
- Which Key Activities do partners perform?
- For what value are our customers really willing to pay?
- For what do they currently pay?
- How are they currently paying?
- How would they prefer to pay?
- How much does each Revenue Stream contribute to overall revenue?
Lean Business Model Canvas
The Business Model Canvas is a general model that works well in most cases.
However, the Lean Canvas has been created by Ash Maurya as an adaption that’s more suited to startups and small businesses with lots of uncertainty. You can find an image file to print out here .
Lean Canvas Sections Explained
Again, there are 9 sections, but it’s “easier” to fill out for these types of businesses.
Here’s a brief description of each section:
- Problem (P) – What are the main 3 problems that your business solves?
- Solution (S) – What are the essential features of your product(s)?
- Unique Value Proposition (UVP) – What’s your business’ differentiating factor from competitors that make you better for your customers?
- Unfair Advantage (UA) – What part of your business can’t easily be copied by competitors?
- Customer Segments (CS) – Who are your target customers? Be as specific and niche as possible.
- Key Activity (KA) – What are the key interactions that lead to revenue? For example, creating their first blog post on a blogging platform.
- Channels (CH) – What channels will you be using to acquire customers?
- Cost Structure (C$) – List both your fixed and variable costs, estimate if needed.
- Revenue Streams (R$) – Specify your revenue model (refer to the previous section of this guide).
If you got this far, you understand business models more than most entrepreneurs.
I’d highly recommend spending just another ten minutes or so and quickly work through either the Business Model Canvas or Lean Canvas .
Even if you can’t fill it out completely, you’ll quickly realize which areas of your business models need more attention and strengthening.
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The Easy Guide to the Business Model Canvas
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.
Why You Need a Business Model Canvas
- The BMC provides a quick overview of the business model and is devoid of the unnecessary details compared to the traditional business plan.
- The visual nature of the business model canvas makes it easier to refer to and understand by anyone.
- It’s easier to edit and it can be easily shared with employees and stakeholders.
- The business model canvas can be used by large corporations as well as startups with just a few employees.
- It clarifies how different aspects of the business are related to each other.
- You can use a BMC template to guide a brainstorming session on defining your business model effectively.
How to Make a Business Model Canvas
There are nine building blocks in the business model canvas and they are customer value proposition, customer segments, channels, customer relationships, revenue streams, key resources, key partners, key activities, and cost structure.
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.
What are the 9 Components of the Business Model Canvas?
- Customer Segments
- Customer Relationships
- Revenue Streams
Key Activities
Key resources, key partners.
- Cost Structure
- Value Proposition
Let’s look into what the 9 components of the BMC are in more detail.
Customer segments
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.
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.
Customer relationships
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.
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.
Revenue streams
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
Cost structure
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).
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.
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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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An innovative product doesn’t always achieve commercial success. So what makes the difference between success in the lab and success in the marketplace? It all comes down to the business model.
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- Analyze the business models of both new and mature companies
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Four Training Process Models Explained
June 26, 2020
Lisa Aharon Guest Author
When designing anything, it is usually helpful to begin with a model, a template so to speak. This cuts down on employee development time by giving you a base. Then, you can tweak the model to better meet your needs.
Same with training. Starting with a model keeps you better focused on all the “moving parts” needed to achieve your training goals. Here is a closer look at 4 of the top training models.
1) Organizing Training with Centralized Training Design Model
As its name indicates, this training and all its resources are in one location (for the most part) and managed by one person, group, or team. This means that a company with several branches would require employees to travel to their dedicated training location for training sessions.
A huge advantage of the centralized training model is consistency. The organization can be sure that methodologies and content are standardized, not a case of each department or branch organizing their own thing. This better ensures that overall training goals are met effectively and a better training ROI is achieved.
On the downside, this consistency does not allow for flexibility. People learn differently, and all the learners of a single organization are not always in the same working conditions. For example, the sales team of a pharmaceutical company might feel that having to do “X” hours of in-house training cuts into their earning capacity since it keeps them off the road.
Thus, one of the challenges of centralized training is keeping things the same while allowing for the different needs of individuals, departments, and branches.
2) Organizing Department Training with Functional Training Process Model
Of all the training plan models and theories, this one is unusual because it originated in sports rather than directly in business. The sports trainers and therapists focus on what can be with the body or what needs to be fixed in order to allow the body to regain lost function. So, functional training is geared towards action and behavior rather than knowledge and theory .
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One of the best examples of a functional model training program is the Business-embedded Model.
Business-embedded Model
As I mentioned above, this training model is a type of functional model training program. Its purpose is to make sure the training aligns with the strategies , needs, and vision of the organization. Since the business-embedded model is completely customer-centric—all participants are seen as customers—it is a preferred model for organizations in the service industry sector.
What are the 5 phases of training?
Glad you asked! The 5 phases of training in this training model are:
- Strategic direction: a set of customer-focused, training goal(s) and direction(s)
- Training program design: a multi-departmental collaboration, sometimes including key customers, to create the training content and methodology
- Structural versatility of the training program: the ways in which the training will be able to adapt to new elements as they emerge [such as moving to online training in the face of COVID-19]
- Training delivery: which techniques are going to be best at giving the trainees the knowledge and skills, information, and motivation they need? One of them is on the go training .
- Accountability for results: measuring your training ROI is critical; otherwise, how can you ethically justify putting resources into such a program?
3) University Training Model Management
Consider a private, higher-level training campus solely dedicated to one organization. This is the basic definition of a corporate university.
It should be noted that corporate universities are not just training centers, although there is usually a training component. However, as stated by the Global Council of Corporate Universities (Global CCU), the overall goal is to “ help implement—through education—the organization’s strategies in human, economic, financial, technological, social and environmental terms .” Today, the Global CCU represents corporate universities on five continents.
One of the first corporate universities was Disney University, established in 1955. From the start, Walt Disney realized the importance of having each and every Disney employee trained in the Disney “3 V’s”: virtues, values, and vision of the Disney organization. Albeit in an evolved form, this same training continues for today’s Disney workforce.
4) Kirkpatrick Training Model
To know the ROI of your training program, you are going to need an effective training evaluation method. The Kirkpatrick Model will help you build the kind of training evaluation form you need.
Similar to Bloom’s taxonomy , the Kirkpatrick Model is a four-level, triangular-shaped model: reaction, learning, behavior, results. It was created to be used at any stage of training: pre-training, during training, and post-training.
Base level: Reaction
A training evaluation form or “smile sheet” asks trainees questions. The training evaluation questions should find out to what degree trainees enjoyed the training and how relevant they found it to their work needs.
Next level up: Learning
Let’s say we found out that the training was fun and totally relevant. Great! Yet, how much did the participants actually take away from the hours they put in? To what degree are they farther along the path towards reaching the training measurable goal(s)?
One way to assess learning and development is, of course, tests. A pre-test prior to training and a post-test following training can give a very good measure of what was learned.
Other online test maker tools are peer/instructor observation (especially in skills or attitude training) and in-depth interviews.
Level 3: Behavior
Just because you know something doesn’t mean you use it. This component evaluates to what degree trainees actually put into practice what they have learned during their e training .
Typically starting 3-6 months after the training course is completed, the behavior level measures trainee performance on the job. Assessment tools for this level are primarily observations and interviews repeated over time. You want to actually see the results, not just hear about them.
Top/final level: Results
So, what was the overall ROI? To what degree did your corporate training achieve the targeted outcomes? In general, was the process worth the resources it required?
Assessment measures for this level need to be put into place the training actually begins. In this way, it will be clear what is being measured and how it is being done. One such useful tool is a control group: a number of employees in the same work situation who will not be receiving the training. The demographics of the control and training groups should be as similar as possible to enable the truest comparison.
After you’ve chosen your training model, created content, and built assessment, you are going to need to put it into a “do-able form”.
Don’t worry, we’ve got you covered . .
You may be interested in the Leadership and Coaching Management Styles course from EdApp learning management system’s free content library! Check it out here.
Disney University (Google Books) https://theintactone.com/2018/12/02/td-u1-topic-9-models-of-training-faculty-customer-matrix-corporate-university-and-business-embedded-model/ https://www.atlasfitnessdc.com/three-models-of-functional-training/ https://www.coursehero.com/file/p2a707/The-business-embedded-model-and-the-corporate-university-model-or-a-blended/ https://www.kirkpatrickpartners.com/Our-Philosophy/The-Kirkpatrick-Model https://www.researchgate.net/publication/228271752_Effects_of_Business_Embedded_Traditional_Training_Models_on_Motivation https://www.slideshare.net/hefazot2013/corporate-university-model https://www.slideshare.net/maiveur/business-embedded-model-73251150 https://www.ukessays.com/essays/management/effects-of-business-embedded-and-traditional-training-models-management-essay.php
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How to Develop a Corporate Training Model
Developing your corporate training model involves defining the amount of training that employees can expect to receive from experiences on the job, self-paced resources and formal education. Although it's commonly used in large companies, even an unincorporated business with 10 employees or more could adopt and adapt a corporate training model. A training model also describes ways for workers to learn the skills necessary to support your business.
Performance Management
Creating a corporate training model involves defining the skills and experience associated with each job role in your company. Describe what needs to be accomplished at the novice, experienced and expert levels. Use this competency model to evaluate employees during their annual reviews. For example, rate each employee’s work as needing improvement, achieving goals or exceeding expectations. Reward and compensate employees according to their achievements. If an employee lacks expertise in a key area, create a development plan and direct the employee to take action and get the required skills and knowledge to progress to the next level.
A typical corporate training model includes on-the-job learning. Workers may achieve as much as 70 percent of their development through experience. By allowing employees to volunteer for assignments that allow them to stretch their abilities, you provide them with opportunities to learn on the job. This typically leads to increased morale and job satisfaction.
Relationships
Corporate training models usually include coaching and mentoring opportunities for staff members. Employees may achieve as much as 20 percent of their development by learning from other people at their company. Experienced employees usually act as mentors to less experienced staff members. Together, they establish a plan that sets specific, measurable, attainable, realistic and time-constrained goals that help the less experienced employee develop new skills.
Formal Courses
A corporate training model typically includes formal courses, workshops, seminars and self-paced alternatives. As much as 10 percent of learning may come from formal education in a corporate training model. Depending on your company’s core competencies, your formal course catalog might include courses designed to improve technical skills, professional aptitude or adherence to local, state or federal regulations to ensure a safe and productive workplace. Formal courses usually teach about a single topic, provide opportunities for practice and finish with an exam. Upon completion, participants typically receive a certificate. Some programs allow participants to earn a credential that enables them to advance in their careers.
- MindTools: Kirkpatrick's Four-Level Training Evaluation Model
- The Encyclopaedia of Informal Education: Malcolm Knowles
Tara Duggan is a Project Management Professional (PMP) specializing in knowledge management and instructional design. For over 25 years she has developed quality training materials for a variety of products and services supporting such companies as Digital Equipment Corporation, Compaq and HP. Her freelance work is published on various websites.
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OpenAI releases GPT-4, a multimodal AI that it claims is state-of-the-art
OpenAI has released a powerful new image- and text-understanding AI model, GPT-4, that the company calls “the latest milestone in its effort in scaling up deep learning.”
GPT-4 is available today to OpenAI’s paying users via ChatGPT Plus (with a usage cap), and developers can sign up on a waitlist to access the API.
Pricing is $0.03 per 1,000 “prompt” tokens (about 750 words) and $0.06 per 1,000 “completion” tokens (again, about 750 words). Tokens represent raw text; for example, the word “fantastic” would be split into the tokens “fan,” “tas” and “tic.” Prompt tokens are the parts of words fed into GPT-4 while completion tokens are the content generated by GPT-4.
GPT-4 has been hiding in plain sight, as it turns out. Microsoft confirmed today that Bing Chat , its chatbot tech co-developed with OpenAI, is running on GPT-4.
Other early adopters include Stripe, which is using GPT-4 to scan business websites and deliver a summary to customer support staff. Duolingo built GPT-4 into a new language learning subscription tier. Morgan Stanley is creating a GPT-4-powered system that’ll retrieve info from company documents and serve it up to financial analysts. And Khan Academy is leveraging GPT-4 to build some sort of automated tutor.
GPT-4’s first app is a ‘virtual volunteer’ for the visually impaired
GPT-4 can generate text and accept image and text inputs — an improvement over GPT-3.5 , its predecessor, which only accepted text — and performs at “human level” on various professional and academic benchmarks. For example, GPT-4 passes a simulated bar exam with a score around the top 10% of test takers; in contrast, GPT-3.5’s score was around the bottom 10%.
OpenAI spent six months “iteratively aligning” GPT-4 using lessons from an internal adversarial testing program as well as ChatGPT, resulting in “best-ever results” on factuality, steerability and refusing to go outside of guardrails, according to the company. Like previous GPT models, GPT-4 was trained using publicly available data, including from public webpages, as well as data that OpenAI licensed.
OpenAI worked with Microsoft to develop a “supercomputer” from the ground up in the Azure cloud, which was used to train GPT-4.
“In a casual conversation, the distinction between GPT-3.5 and GPT-4 can be subtle,” OpenAI wrote in a blog post announcing GPT-4. “The difference comes out when the complexity of the task reaches a sufficient threshold — GPT-4 is more reliable, creative and able to handle much more nuanced instructions than GPT-3.5.”
Without a doubt, one of GPT-4’s more interesting aspects is its ability to understand images as well as text. GPT-4 can caption — and even interpret — relatively complex images, for example identifying a Lightning Cable adapter from a picture of a plugged-in iPhone.
The image understanding capability isn’t available to all OpenAI customers just yet — OpenAI’s testing it with a single partner, Be My Eyes, to start with. Powered by GPT-4, Be My Eyes’ new Virtual Volunteer feature can answer questions about images sent to it. The company explains how it works in a blog post :
“For example, if a user sends a picture of the inside of their refrigerator, the Virtual Volunteer will not only be able to correctly identify what’s in it, but also extrapolate and analyze what can be prepared with those ingredients. The tool can also then offer a number of recipes for those ingredients and send a step-by-step guide on how to make them.”
A more meaningful improvement in GPT-4, potentially, is the aforementioned steerability tooling. With GPT-4, OpenAI is introducing a new API capability, “system” messages, that allow developers to prescribe style and task by describing specific directions. System messages, which will also come to ChatGPT in the future, are essentially instructions that set the tone — and establish boundaries — for the AI’s next interactions.
For example, a system message might read: “You are a tutor that always responds in the Socratic style. You never give the student the answer, but always try to ask just the right question to help them learn to think for themselves. You should always tune your question to the interest and knowledge of the student, breaking down the problem into simpler parts until it’s at just the right level for them.”
Even with system messages and the other upgrades, though, OpenAI acknowledges that GPT-4 is far from perfect. It still “hallucinates” facts and makes reasoning errors, sometimes with great confidence. In one example cited by OpenAI, GPT-4 described Elvis Presley as the “son of an actor” — an obvious misstep.
“GPT-4 generally lacks knowledge of events that have occurred after the vast majority of its data cuts off (September 2021), and does not learn from its experience,” OpenAI wrote. “It can sometimes make simple reasoning errors which do not seem to comport with competence across so many domains, or be overly gullible in accepting obvious false statements from a user. And sometimes it can fail at hard problems the same way humans do, such as introducing security vulnerabilities into code it produces.”
OpenAI does note, though, that it made improvements in particular areas; GPT-4 is less likely to refuse requests on how to synthesize dangerous chemicals, for one. The company says that GPT-4 is 82% less likely overall to respond to requests for “disallowed” content compared to GPT-3.5 and responds to sensitive requests — e.g. medical advice and anything pertaining to self-harm — in accordance with OpenAI’s policies 29% more often.
Image Credits: OpenAI
There’s clearly a lot to unpack with GPT-4. But OpenAI, for its part, is forging full steam ahead — evidently confident in the enhancements it’s made.
“We look forward to GPT-4 becoming a valuable tool in improving people’s lives by powering many applications,” OpenAI wrote. “There’s still a lot of work to do, and we look forward to improving this model through the collective efforts of the community building on top of, exploring, and contributing to the model.”
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Banking Turmoil: What We Know
Regulators trying to stem panic among customers shut down Silicon Valley Bank and Signature Bank within days.
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By Vivian Giang
On Friday, Silicon Valley Bank , a lender to some of the biggest names in the technology world, became the largest bank to fail since the 2008 financial crisis . By Sunday night, regulators had abruptly shut down Signature Bank to prevent a crisis in the broader banking system. The banks’ swift closures have sent shock waves through the tech industry, Washington and Wall Street.
Here’s what we know so far about this developing story.
Why did Silicon Valley Bank fail?
Silicon Valley Bank provided banking services to nearly half the country’s venture capital-backed technology and life-science companies, according to its website, and to more than 2,500 venture capital firms.
For decades, Silicon Valley Bank, flush with cash from high-flying start-ups, did what most of its rivals do: It kept a small chunk of its deposits in cash, and it used the rest to buy long-term debt like Treasury bonds. Those investments promised steady, modest returns when interest rates remained low. But they were, it turned out, shortsighted. The bank hadn’t considered what was happening in the broader economy, which was overheated after more than a year of pandemic stimulus.
This meant that Silicon Valley Bank was left in the lurch when the Federal Reserve, looking to combat rapid inflation, started raising interest rates. Those once-safe investments looked a lot less attractive as newer government bonds kicked off more interest.
But not all of Silicon Valley Bank’s problems are linked to rising interest rates. The bank was unique in ways that contributed to its rapid demise. Because the bank’s business was concentrated in the tech industry, Silicon Valley Bank started to see trouble when start-up funding began to dwindle, leading its clients — a mixture of technology start-ups and their executives — to tap their accounts more. The bank also had a significant number of big, uninsured depositors — the kind of investors who tend to withdraw their money during signs of turbulence. To fulfill its customers’ requests, the bank had to sell some of its investments at a steep discount.
Once Silicon Valley revealed its huge loss on Wednesday, the tech industry panicked, and start-ups rushed to pull out their money, resulting in a bank run.
By late last week, Silicon Valley Bank was in free fall. The Federal Deposit Insurance Corporation announced on Friday that it would take over the 40-year-old institution, after the bank and its financial advisers had tried — and failed — to find a buyer to step in. The takeover put about $175 billion in customer deposits under the control of the federal regulator.
The F.D.I.C., created by Congress in 1933 to provide consumer deposit insurance to banks, is responsible for maintaining “stability and public confidence in the nation’s financial system,” according to its website.
The failure of Silicon Valley Bank, based in Santa Clara, Calif., is the largest since the 2008 financial crisis. In the aftermath of that crisis, Congress passed the Dodd-Frank financial-regulatory package, intended to prevent such collapses.
In 2018, President Donald J. Trump signed a bill that reduced how often regional banks had to submit to stress tests by the Federal Reserve. Last week, as news of Silicon Valley Bank’s failure spread, some banking experts said the Dodd-Frank package might have forced the bank to better handle its interest rate risks had it not been rolled back.
Why did Signature Bank fail?
Two days after the F.D.I.C. took control of Silicon Valley Bank, New York regulators abruptly closed Signature Bank on Sunday to stymie risk in the broader financial system.
Signature Bank, which provided lending services for law firms and real estate companies, had deposits of less than $100 billion across 40 branches in the country. The bank’s clients included some people associated with the Trump Organization, Mr. Trump’s company. In 2018, the 24-year-old bank began taking deposits of crypto assets — a fateful decision after the industry’s bottom fell out after the collapse of the FTX cryptocurrency exchange.
Like Silicon Valley Bank’s clients, most of Signature bank’s customers had more than $250,000 in their accounts. The Federal Deposit Insurance Corporation insures deposits only up to $250,000, so anything more than that would not have the same government protection. Close to nine-tenths of Signature Bank’s roughly $88 billion in deposits were uninsured at the end of last year, according to regulatory filings. As Silicon Valley Bank’s troubles began to spread last week, many of Signature’s customers panicked and began calling the bank, worried that their own deposits could be at risk.
Signature saw a torrent of deposits leaving its coffers on Friday, according to a person with knowledge of the matter, and the bank’s stock, along with the stocks of some of its peers, also continued to tank.
What have regulators done so far?
Regulators have been rushing to contain the fallout , and the collapse of two banks in three days is prompting a swift re-evaluation of the Fed’s interest rate increases. Before the fallout from the banks’ collapse this weekend, the Fed had been expected to make a half-point increase at its next meeting, March 21-22.
In announcing the closing of Signature, regulators said on Sunday that depositors of the bank and Silicon Valley Bank would be made whole regardless of how much they held in their accounts and would have full access to their money by Monday.
On Monday morning, President Biden reassured Americans that the financial system was stable and that customers’ deposits would “be there when you need them.”
Treasury Secretary Janet L. Yellen said on Sunday that regulators had been working over the weekend to stabilize Silicon Valley Bank — and she tried to assure the public that the broader American banking system was “safe and well capitalized.”
At the same time, she acknowledged that many small businesses were counting on funds tied up at the bank.
Ms. Yellen suggested that a possible solution could be an acquisition of Silicon Valley Bank, emphasizing that regulators were trying to address the situation “in a timely way.” According to a person familiar with the matter, the F.D.I.C. on Saturday started an auction for Silicon Valley Bank that was set to wrap up Sunday afternoon.
On Sunday, the F.D.I.C. invoked a “systemic risk exception,” which allows the government to pay back uninsured depositors to prevent dire consequences for the economy or financial instability. Also on Sunday, the Fed announced that it would set up an emergency lending program, with approval from the Treasury, to provide additional funding to eligible banks and help ensure that they are able to “meet the needs of all their depositors.”
Are other banks at risk?
The demise of both Silicon Valley Bank and Signature Bank put a spotlight on the challenges surrounding small and midsize banks , which tend to focus on niche businesses and can be more vulnerable to bank runs than larger peers. The most immediate concern is that the failure of one would scare off customers of other banks. Both Silicon Valley Bank and Signature are small compared with the nation’s largest banks — Silicon Valley Bank’s $209 billion and Signature’s $110 billion in assets pale next to the more than $3 trillion at JPMorgan Chase. But bank runs can happen when customers or investors panic and start pulling their deposits.
On Monday, smaller banks rushed to reassure customers that they were on firmer financial footing.
Shares of U.S. regional banks plummeted on Monday, as investors tried to get a handle on the sudden collapse of Signature Bank and Silicon Valley Bank. First Republic Bank took the worst beating on the day, down 60 percent. Western Alliance in Arizona tumbled 45 percent, KeyCorp and Comerica both tumbled nearly 30 percent, and Zions Bancorp in Utah fell about 25 percent.
Shares of bigger banks were not affected as much: Citigroup and Wells Fargo each fell more than 7 percent, Bank of America fell more than 3 percent, and JPMorgan dipped around 1 percent. The KBW bank index, which tracks the performance of 24 major banks, fell 10 percent, adding to sharp losses last week that erased nearly $200 billion from the aggregate value of the banks in the index.
How is this different from the 2008 bailouts?
Over the past few days, as regulators took control of two banks and guaranteed deposit protections at the institutions, some compared the moves to the 2008 bank bailouts.
On Monday, President Biden tried to distinguish these moves to prevent more bank runs and those taken during the 2008 financial crisis, when hundreds of billions of dollars were provided to rescue the bank industry. Taxpayers shouldered much of that rescue, while the costs to make depositors of Silicon Valley Bank and Signature Bank whole will be financed by fees paid by banks into the F.D.I.C.
“This is an important point: No losses will be borne by the taxpayers,” Mr. Biden said in his statement on Monday morning. “Let me repeat that: No losses will be borne by the taxpayers.”
But he said that “investors in the banks will not be protected.”
“They knowingly took a risk, and when the risk didn’t pay off, investors lose their money,” the president said. “That’s how capitalism works.”
Jessica Silver-Greenberg contributed reporting.
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