A business model of an organization is a tool to understand its business and its future possibilities for researchers, managers, and investors interested in the organization. The business model components present a coherent framework that explains how the business works and sustains. The purpose, the strengths and weaknesses, and sustainability of a business can be identified from a business model. A business model may look simple and trivial, but it requires people of insight to construct a robust business model. Most managers consider business models as a means to communicate information about an enterprise to customers, investors, creditors, service providers, and other stakeholders.
A well-drawn business model is a graphic representation of the core components of a business. Though Business models are represented graphically, it is a network of abstract and complex functions that explains the way of doing a specific business. It depicts how an enterprise creates, delivers, and captures value. Most startups do not pay sufficient attention to the business model and due to this, the core components of a business are not strong enough.
Technically, various theories and sources of information are required to develop a business model i.e. information from business strategy, resource-based activities, coalition and cooperative principles, transaction-based economics, etc., have contributed to the development of business model elements and their interrelations (Morris, Schindehutte & Allen 2005).
Osterwalder, & Pigneur (2010) proposes nine component canvas for constructing a business model for any business, which include Customer Segments, Value proposition, Customer relationships, Key business activities, Key partners, Key resources, Channels of communication, cost structure, and revenue streams. A company called ‘Honest Company’ is analyzed based on this canvas.
Figure 1: The Business Model Canvas proposed by (Osterwalder, & Pigneur, 2010)
The Honest Company
In the year 2011, Jessica Alba of California founded the Honest Company (HC). She was prompted by the thought of where to source safe and effective products that work. She felt that the combination of safety and quality of the products do not often converge i.e. products that perform are not safe and vice versa.
The Honest Company is well aware of the concerns of a family and empathizes with them in crafting the service for the customers. The company merchandises everyday products that are suitable for parents of younger children assuring safety and product performance to them. The founder of the company sensed a need for the company to satisfy the safety needs of parents.
The company believes in the values of wellness and encourages its customers to lead happy and healthy life. To make the customers achieve the happiness status, the company asserts the wellness products so that the young parents can choose products for their children with assurance of safety and goodness. The company believes in transparency, awareness, community living, and superior product designs. The company managers meticulously source products that are safe from the producers and sell the goods in one single brand called ‘Honest”.
Some of the principles that are strictly followed in Honest Company are given below.
The company sells its products to customers through third-party retail outlets spread across the United States and through a website dedicated to e-commerce.
Though there are many firms to offer kids’ products to the parents, Honest Company is unique in providing safety and goodness of children’s products. Only a few companies emphasize safety, environmental sustainability, and quality of products together. The elements of the business model referred to on Osterwalder’s canvas are deconstructed here to understand the real essence of Honest Company.
Every successful organization provides solutions to the customer’s problems or fulfills the critical needs of its customers. The value proposition element of the business model indicates value created to the customer segments by its bundle of products and services (Osterwalder, Pigneur, Bernarda, & Smith, 2014). It is due to the value propositions customers come to the company again and again.
The value proposition presented by the honest company to its customer segment is the safety and effectiveness of the products and services. The company projects how it selects and merchandises the products for the customer. The customers can have the assurance that the products they buy for their children are safe, and effective and do not create harm to the environment.
Customers are central to every business and business model. Without customers, no business firm can survive for long. To serve their customers effectively, companies group their customer segments based on common needs, behaviors, or attributes (Trkman, Mertens, Viaene, & Gemmel, 2015). An organization must make a conscious decision about which segment it is going to serve and take efforts to understand the segment as much as possible.
The Honest Company is targeting the parents of young children who are concerned about the safety of their children and people who are sensitive to the harmful effects of chemicals on their bodies. The company offers various products in the category of diapering, feeding, food supplements, personal care, beauty, and gifting.
This element describes what channels are used by a company to reach its customer segments and deliver the value propositions. Communication such as advertisements, retail merchandise, logos, websites, blogs, social media, etc. is the common channel used by the business organizations to reach their customers. Channels are the touchpoints that link the company to its customers (Mahadevan, 2000) For Honest Company, its e-commerce website and its retail partners across the United States are the primary channels for delivering its value proposition. For raising awareness about the products and attracting feedback from the customers, the company is using Facebook, Instagram, Twitter, Google+, and Pinterest. The company also has a blog to report about the new products and community events.
The type of relationships a company maintains with its customers is very critical (Schaefer, 2017). The relationship can range from personal to automated one depending on the value proposition. The company acquires customers through specific merchandising in specific retail outlets and e-commerce websites. Maintenance of relationships is carried out through the social media sites such as Facebook, blogs, etc.
This element defines the important assets required to make the business successful. Key resources may include, financial, infrastructure, geographical, intellectual, social, or human resources that are critical for the business (Iskoujina, Ciesielska, Roberts, & Li, 2017). For Honest Company, the founder, her team, the values of the company, and the supplier relationships are critical for the business.
Key activities describe the critical activities carried out by the business to achieve its competitive advantage (Jeansson, Nikou, Lundqvist, Marcusson, Sell, & Walden, 2017). There are a few core activities that determine the success of a company. Key activities differ among organizations. In Honest Company, selection of products that are free from harmful chemicals, identification of suppliers who care for environmental sustainability, packaging of the products with the highest standards of aesthetics and function, and maintaining a team that complies with the safety standards set by the company.
Companies cannot work independently; they must have partnerships with the suppliers and the sellers to offer the intended standard of service (Warner, 2017). Honest Company has links to the suppliers of organic products and has established relationships with retailers who sell health and wellness products. The company management can establish strategic alliances and obtain cooperation from the suppliers and retailers (Breuer, & Lüdeke-Freund, 2017).
Every company must generate sufficient cash flow to sustain itself in the market and the cash flow must exceed the costs incurred to provide the service (Brown, 2018). As we have seen earlier, a business model not only must create value for its customers but also must capture value for its sustenance. The honest company receives revenue from sales through retailers and the e-commerce website. The profit formula used by the company is not evident from the website or blogs, but it can be inferred from the activities it undertakes for the community. Since the company has survived for about seven years and is forward-looking indicates that the company is making sufficient profits. Cost Structure
The costs incurred to run the business defines the cost structure of a business (Linder & Williander, 2017). There are fixed costs, variable costs, economies of scale and scope, etc. that determine the cost of running a business. Since the Honest Company proposes its products as value-driven, the company emphasizes the quality of products than their cost.
The Business model canvas functions like a machine that interlinks various elements and functions in an integrated manner. Each of the elements in the model affects the function of other elements (Aversa, Haefliger, & Reza, 2017). For example, the customer’s preference to pay lesser value for the products will affect the cost structure, key activities, etc. significantly.
Though the Honest Company is unique in its value proposition, since the entry barriers to this business are not strong, it may attract competitors in this segment i.e. parents of young children. The company can get good prices for its products, but it must develop a system to offer organic and safe products at a lesser cost to mitigate the risks from the competition and retain its customers (Nielsen, 2017).
One of the offers the company can extend to the customers is the loyalty benefits and reinforcing the value of honesty among the customers. Also, constant communication is required to be driven in the market that being honest keep up the value and it must not be demolished by a preference for the low-cost products.
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