When you’re getting ready to start your small business, you want to create as solid a foundation as you can – and that involves education and planning. You might have heard that you should start with a business plan, or a business model. That’s great! But what are they, exactly, and how are they different from one another?
The 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.
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.
Where a business model is a blueprint, a business plan is a roadmap. A business plan is a formal written 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 is a detailed document that contains sections such as: 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?
And is 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. A great deal of 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!