What is A Business Model?
Which comes first; the business model or the product?
Unfortunately many small business owners fall in love with their product but never take the time to think through how they plan to make money.
This is the role of business model development. Your first goal is to create a business model that outlines the key components that produce the value your company delivers.
A business model describes how your company creates, delivers, and captures value.
Your daily activities produce the value that allows you to earn a profit. The better organized the activities, the better the odds of producing consistent profits.
Business Model Definition
A business model is how you plan to make money. It’s similar to a business plan but much more practical. Your company makes money by producing and delivering value. A business model is the framework for how that happens.
It forces you to state your who, what and how;
Who is your ideal customer?
How you provide unique value?
What relative price you plan to charge?
This is known as your value proposition, which is the core of your business model. Other components of a business model outlines activities, expenses and revenue sources.
Why Entrepreneurs Need Business Model Mastery
The benefit of crafting a business model versus a business plan is path clarity. A business model is built on “Okay, how do we make money? What do we do every day?” whereas a business plan is a document of assumptions with an org chart component. It doesn’t say we will do on Monday.
To be successful in the daily grind of entrepreneurship you need clear answers to the who, how and what questions. This is after all how you pay the bills. Spreadsheet assumptions don’t see the real world after the business is open and running.
Business model development allows you to adapt smoothly to changes in your market quicker because its focus is on the activities. This benefit is especially important for a business competing against slower moving rivals.
What Goes into a Business Model?
There are essentially 3 core sections to develop around your value proposition of who, how and what:
- Customer interaction
- Profit formula
- Which key joint-ventures, employees, virtual partners and suppliers are needed?
- Which key activities need to be planned and fulfilled?
- What resources do you need?
- Who is your ideal customer segment? There can be more than one.
- What is your plan communicate with them?
- Define your method of delivery and communication.
- Lead generation.
- Lead capture.
- Customer engagement (creating customers).
- Customer ascension.
If you have ever attempted to write a business plan you can see this is a far cry from that process. There are no assumptions in your BM. It’s all action centered around how you make money.
An interesting benefit to this process as well, is that it’s much easier to see if your business makes sense from a practical standpoint. This is much quicker and less expensive than the business plan route. You map it out on one sheet of paper. It’s very similar to creating an outline for a movie. You put the concept in one place from start to finish, then you see if it makes sense before you spend money.
When Should You Develop Your Business Model?
The best answer is before you open for business, which can be tricky.
If you find most of your day is spent doing “busy work” and your days fly by without getting much accomplished, you need to make the time to get it done.
This is a symptom of being disorganized. If you have hectic days now, imagine how your day would be if your business was busy!
What if you crafted a terrific marketing calendar around your new shiny value proposition and everything worked perfectly? New leads, new prospects and customers galore! Could your current model business activities handle the flow? For most business owners the answer is no. They stay small because that’s all they can handle. There’s no plan for growth, only to survive.
How to be Different and Succeed
Your value proposition is the center of your business universe. The other components support and produce the value that earns our company a profit.
Be bold and choose an ideal client. Don’t try to create value for everyone.
Make sure you are clear in your marketing messages. Say “This is what I can do for somebody!” Say “I can help you accomplish this.”
Be decisive on the price you intend to charge for value. Either be a cost leader or choose to charge a premium. Then follow up that declaration, with activities that match the price you intend to charge. Don’t make the mistake of charging more but not supporting the price point.
Grab a sheet of paper and ask; who, how and what price.
Make it a priority and build a business around the lifestyle you want to live.