Nick was nervous. He had been hired into Beacon Products, Inc.'s marketing department just two months ago, and already Annie, the marketing director, has asked him to come up with marketing strategy ideas that Annie could present to Beacon's CEO at the upcoming quarterly strategy review.
Nick decided to begin by analyzing trends in the competitive environment. He then drafted a plan that he showed to Annie later that week. "I think this is really the way to go," he said as Annie flipped through his report. "A lot of our competitors are getting great results with low pricing and very aggressive promotions of new products. I feel confident that we can get similar results with these strategies."
Annie looked up at him, a puzzled expression on her face. "Nick," she said, "low pricing and aggressive promotions would be fine if we used a velocity business model here. But we work from margin. We're going to need a very different set of strategies."
Nick's heart sank. Velocity? Margin? What was Annie talking about? He thought to himself. Nick realized he still had a lot to learn.
Name That Business Model
Nick had made an all-too-typical mistake: ignoring his company's business model while formulating marketing strategies. The phrase "business model" crops up frequently in organizations everywhere—but what exactly does it mean?
A business model defines who a company's customers are and how it plans to generate cash by providing them with value. In broad categories, there are three types of business models:
- Margin—generating high profits on sales. For example, IBM sells complex, expensive business solutions comprising products and services—and customized to individual customers.
- Velocity—selling products or services rapidly. For instance, Wal-Mart seeks to turn over its inventory as quickly as possible through low pricing.
- Leverage—extracting money from assets that other organizations own. To illustrate, Disney generates cash every time other firms buy rights to its characters and use those characters in merchandise or toys.
Companies can use all three of these models—though in any particular firm, one of the three will likely dominate. By supporting your company's business model through your marketing strategies, you demonstrate marketing's strong links to cash flow. Let's take a closer look at how you might support each of the three business models.