Recently, the business model has become a point of focus for entrepreneurs. Slowly, business plan competitions are being replaced by business model competitions. If you are new to the entrepreneurial frontier, you may wonder, “What exactly is a business model and how does it pertain to my business planning?” If so, I’ve written this article to provide an explanation just for you.
A business model outlines how a business creates value and interjects that value into commercial operations. In plain terms, it is simply a way of getting all the ideas which go into the creation of your business down on paper. It outlines how your business will go about creating and delivering value to customers. It helps you to organize your thoughts, and presents all the information in a clear and logical way. Think of it as more or an idea-based overview of what you are trying to accomplish and how you will area or manner in which you intend to accomplish it.
Below is an explanation of the components of a business model.
Overview of the Business Model Creation Process
The busines model illustrates the concept for value creation and delivery of services or sale of products. The business model is at the heart of your business plan, which outlines the procedures and purpose for executing each facet of your business model. It also makes it easier for potential investors and others to quickly understand your business. Generally, a business model will cover 4 different areas: Infrastructure, Offering, Customers, and Finances.
The Tables below show two slightly different models for diagraming the business model:
What is the Infrastructure?
The infrastructure consists of the Core, Partners, and Values of the business.
Core: What are the things that are necessary, in order for your business to do what your business does?
Partners: What other people or businesses are you working with to conduct your normal business?
Values: What are those things which make the business something good for you to be doing, and what makes it something good for your customers?
What are the Product or Service Offerings?
Product or Service: Define what are the business’s products and services?
Product Justification: What is the justification for your product. (I.e., What is the need or want you are trying to satisfy? Why is your product prefereble or better than a competitor’s product?)
Who are our Customers?
Market Analysis: What did your market analysis reveal about your target customer segements?
Delivery Method: What means will your business use to deliver the products or services to the customers? (Ex. Online, in-store, sales team, 3rd party distributors)
Logistical Solutions & Strategy: What strategy can you employ to maximize benefit to customers under your delivery method?
Business Development and Customer Retention: What type of relationship do you envision with future customers and how will that relationship fit into your business model?
Costs: What is the total cost of the business, based on your projected costs at the given level of production and growth?
Revenue Streams: What will be all of the sources of revenue for your business? (Income, Loans, Capital Investment)
Conclusion: To create a functioning business model that you will ultimately translate into a business plan, focus on answering the questions in the above listed quadrants. As you begin answering these questions, you will see how the functional areas begin to overlap. You will also begin to create new questions that will have to be answered in order to completely understand your value creation process and how you will deliver that value to customers.
The Business Professor
The Business Professor provides free business and legal resources for entrepreneurs and small businesses.