business model

Why is a business model important?

So you’ve had your A-ha! Moment. You’ve come up with a great small business idea and are ready to start a small business.

But, are you?

Before you start your small business, you need to create a business model – your roadmap for small business success. And no, a business model is not a business plan. You can’t even begin to write a business plan until you’ve created a “blueprint” for your success with a business model. Confused? Let’s take a closer look at a business model.

A business model is a blueprint for small business success

Building a business is a lot like building a house – and who can imagine a house built without preliminary sketches? Creating a small business model means planning – on paper – the fundamentals of your business. It helps you, as an entrepreneur, to put aside the excitement and make a realistic evaluation of the potential success of your business idea. A proper business model helps you to figure out elements such as: Your business concept – what problem are you solving for whom; how you will create customer value; how your product or service will get to customers; how your business will stay competitive; and all revenue and costs you can anticipate.

Take your time creating a business model

You may have a few ideas scribbled down on a sheet of paper – name ideas, product prices and ideal locations. This is a great start, but a proper business model takes time. Starting a small business is exciting, but you also need the strongest foundation possible to ensure small business success. Don’t guess what your business’ customer value will be – research! Survey your friends and work your business network to find the true value of the solution that your product or service offers to the marketplace. Taking your time creating your business model will ensure you don’t underestimate – or overestimate – anything.

Consider all possible areas of concern

There are many moving parts when it comes to running a business and you don’t want to be caught unprepared. For example, how exactly will your product make its way to your customers? Make sure your business model is thorough and covers all the bases. Once you’ve proven the feasibility of your new business or your business expansion plan on paper with a business model, you’re ready to write a more comprehensive business plan. Proper planning takes time and effort, but you’ll see the return on that investment when your great idea has become the great, successful small business you envisioned.

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How are a business model and business plan different?

10 high growth business ideas

Last week, we talked about the importance of a business model. But how is it different from a business plan?

First, let’s talk a bit more about the business model.

The business model is a blueprint for your business. It’s an outline, showing how you’re going to run your business, and how you’re going to make money.

There are five elements of a business model:

Business concept: A short description of an opportunity, including a description of your average customer; the benefit of your product or service to the customer; the product or service; and the way you’re going to get your product or service to the customer.
Value chain position: Your business’ position on the chain of activities through which products and services pass to get from you all the way to the end user.
Calculating customer value: An estimate of the value of the tangible benefits your customers will receive by purchasing your product or service.
Revenue sources and cost drivers: Identifying your sources of revenue, and activities that come at a cost.
Competitive advantage: The state when customers perceive your products or services to be superior to your competition.

Business plan

Where a business model is a blueprint, a business plan is a roadmap. A business plan is longer than a business model. It’s a formal, detailed document that includes a description of the business you want to run, your business goals, and the plan for reaching those goals.

A business plan contains sections like: Marketing Plan, Startup Expenses and Capitalization, Management and Organization, Products and Services, and Operational Plan.

A business plan is usually developed around the answers to three common questions:

Where are we now?
Where do we want to be?
How are we going to get there?

It’s usually written for one or more of these five reasons:

To test the feasibility of your business idea and work out any bugs on paper first.
To develop strategies ahead of time for marketing, finance, operation and human resources, instead of when you’re in the fast-paced start-up stage.
To get funding, such as a bank loan.
To attract investors.
To have a roadmap to follow for at least the first year in business.

Why does your small business need both a business model and a business plan?

It’s easy to come up with business ideas, but just because you build a company, that doesn’t mean customers will come. Time and effort should be spent planning before your new company’s products and services ever reach the market. You need a good foundation and planning before you invest all your time and money.

To get started, check out our free One-Page Business Plan – happy planning!

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Why is a business model important for a business?

small business model

You’ve come up with a great small business idea and are ready to start a small business. You’re ready.

But, are you really?

Before you start your small business, you must create a business model.

A business model is a blueprint for small business success

Building a business is a lot like building a house. And who can build a house without blueprints? Creating a small business model means planning your business’ fundamentals. It helps you put make a realistic evaluation of the potential success of your business idea. A business model helps you to figure out things like:

Your business concept – what problem are you solving for whom
How you will create customer value
How your product or service will get to customers
How your business will stay competitive
All revenue and costs you can anticipate

How to create a business model

A proper business model takes time. You need the strongest foundation possible to increase your odds of small business success. Consider all possible areas of concern. There are many variables involved in entrepreneurship. For example, how exactly will your product make its way to your customers? What is the true value of the solution that your product or service offers? Is there even a market for what you’re offering?

Make sure your business model is thorough and covers all the bases. Once you have a business model that proves you have a viable business on your hands, you’re ready to write a more comprehensive business plan.

Taking your time creating your business model will ensure you don’t underestimate – or overestimate – anything. Proper planning takes time and effort, but you’ll see the return on that investment when your great business idea has become the great, successful small business you envisioned.

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The components of a business model

As we discussed in our last post, a business model is a blueprint for the business, outlining how you’re going to run your business, and how you’re going to make money. It’s made up of five elements:

Business concept
Value chain position
Calculating customer value
Revenue sources and cost drivers
Competitive advantage

Let’s take a closer look at each one.

Business concept

A business concept is essentially a clear description of your business. It’s made up of:

A description of your customer
A statement of the specific benefit your customer will receive
The product or service itself
The distribution channel – how your product or service will be delivered to the customer

Value chain position

Understanding the value chain, or more specifically, your business’ position in the value chain, is critical to further understanding your business on a larger scale.

A value chain is the series of activities that make products and services get from you to the end user. As products and services pass through the value chain, they gain value. For example, a leather bag involves researching the best design; designing the bag; sourcing leather; creating a prototype; tweaking the design; creating the final version of the bag; adding details such as pockets, straps or hardware; and packaging the bag for sale. All of these steps add value to the finished product.

In a value chain, there are two flows of activities: i) Upstream activities, involving the production or manufacturing of a product or service; and ii) Downstream activities which are associated with selling or marketing of the product or service, distribution of the product or service to the end user, product warranty and customer service.

If you’re going to operate a service business, your value chain is shorter because there is no manufacturing process. Most services are delivered directly to the customer only through downstream value chain activities like marketing, sales and distribution.

Where will your business sit in the value chain? Where can you add value for your customer along the way?

Calculating customer value

Are you 100% positive of the value you can bring your customers? Or are you only about 70% positive? It’s important to estimate the value of the tangible benefits your customers will receive through the purchase of your product or service.

After all, customers today are presented with a bewildering range of value and choice of products and services. They can shop for benefits and can buy from virtually any company worldwide. Figure out how exactly they will benefit from choosing you.

What does your customer value? What actual benefits will they get from doing business with you instead of your competitors? Once you understand customer value, you can better estimate what people will pay for your product or service.

Revenue sources and cost drivers

Next, it’s time to identify revenue sources and cost drivers (any activity that causes a cost to be incurred). A very healthy business model always has several sources of revenue from many different types of customers and multiple products and services. Diversification is good!

With multiple revenue streams, you not only reduce risk, but you also create several sources of income. If one revenue source isn’t doing so well, you have other sources to keep you going. Offering multiple products to multiple types of people also means you spread out your risks and minimize the costs of marketing and acquiring new customers.

Now – cost drivers. The most common ones are volume and time. The cost of an activity increases as more units are produced and the longer it takes to complete. For example, increased sales may also mean you have to hire a new employee – increasing your HR costs.

What are your cost drivers? How they can be improved and made more efficient?

Competitive advantage

Your business has a competitive advantage when customers believe you offer clearly superior products and service from your competitors. Craft a competitive strategy, which considers how your business will compete against others — either by being different, or by serving a niche market where there are no other competitors.

Why not just copy what others are doing? It seems like a good idea, but it can also get you into trouble. Why would customers buy from you if you’re the same as your competitor — one your customers already have history with?

Crafting a competitive advantage and clearly communicating your advantage to the customer will lower their risk and make them at least think about buying from you instead.

Small businesses can serve niche markets, or smaller markets with unsatisfied needs. For example, maybe your market research suggested that there were plenty of wedding cake bakeries in your area, but customers were complaining about not being able to find vegan or gluten-free wedding cakes. Sense a competitive advantage there?

Small businesses can change quickly; they can respond to changing market conditions faster than larger businesses, making them better able to satisfy customers. Understanding how your business will compete against the competition will help you stand out.

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