All business plans describe the business model in one way or another and for a good reason. The business model is the heart and soul of the business because it explains how the business makes money or the economic and conceptual basis for operating. It describes how an organization creates and delivers value to the marketplace, and in return captures value for ongoing operations.
Yet, people use the term loosely because a business model can take many different forms. The first step is identifying the elements of the business model, eventually putting them together in a way that creates the most value. The first piece is the customer set. Who will the business sell to, creating value for the customers and the business in the process? Embedded in this question is the identification of the particular problem or need of the potential customers.
Offering a Solution
The next piece is determining what solution the business offers to solve the problem or fulfill the need. Value is created when a solution is offered that the market likes and appreciates. It is also generated on different levels. Sales have economic or extrinsic value, but meeting a customer need also offers intrinsic value. When people experience a higher quality of life because of a product or service a business offers, they will experience satisfaction and are more likely to become repeat customers.
The next piece of the business model are the distribution channels that will be used to get products or services to the customers. These channels include the internet, delivery services, wholesalers or distributors, and over-the-counter or in-person sales, to name a few. Logistics often do not get enough attention, yet they can make or break a business. For example, late deliveries, wrong deliveries, or failed deliveries can give a business a poor reputation for reliability.
Getting the Flows Right
That leads to customer service and customer engagement. Getting and keeping customers requires a business model that successfully puts the pieces together in a way that delivers the greatest value to the marketplace and produces a revenue stream that sustains the business. At this point, the business model addresses product and service pricing and customer payment processes. How will the customers pay and keep a flow of revenue going on a routine basis? The next question is how the business will keep products and services flowing to the customers? Who are the suppliers that will keep supplies, materials and parts flowing to the business so that it can serve customers?
An important element of the business model is operating costs. Realistically, if it costs too much to operate, forcing prices too high, the business will not survive. Competitors will soon step in with lower prices. The cost structure also has a direct impact on the profit margin.
Clearly, each element of the business model is answering the question: How does the business plan on making money? For a business startup, the business model also considers the timing of the revenue stream in relationship to costs. A new business will often have upfront costs and a period of time when costs exceed revenues while developing a customer base. One of the questions an investor will want answered is: When does the business expect to show positive net revenues?
Once the business model is defined, it is much easier to develop an attractive investor business plan or a business plan for obtaining a loan because the pieces have been carefully fit together to create the most value. Successful business owners think through the details piece by piece to ensure decisions about markets, operations and costs make sense. Even a one-person business needs a business model because it serves as the conceptual foundation for the business purpose, goals and action plans.
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