Every great business starts with a solid foundation. If you’re planning on opening your own small business and taking the entrepreneurial plunge, you’ll need to build up that foundation before you can open your doors and sell your first product. Creating a business plan is a wonderful first step, but there are still additional steps to make to ensure that you’re ready to enter the industry.
This is where the business model comes into play. A business model is a design for the successful operation of a business: by identifying revenue sources, your customer base, your list of products, and detailing your finances, you develop a firm understanding of the environment you are entering as an entrepreneur. Although your business plan will help you understand some of the basics, your business model will really help you flesh out those details to their fullest.
Let’s dive into making a strong business model and look at some samples of successful model types from the past. Creating this model today will bring you one step closer to opening your business.
Table of Contents
What Is a Business Model?
Business models are much more than a list of questions with answers. They are also personal explorations into the future of your business. They explore all the nuances of how you make money and from what source. They can look at the long term, make predictions about industry changes and fluctuations, and can be flexible in making those changes work for the business.
One author with the Harvard Business Review, Joan Magretta, stated that business models are “at heart, stories — stories that explain how enterprises work. A good business model answers […] ‘Who is the customer? And what does the customer value?’ It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?”
Magretta goes on to explain that business models can sometimes come in two parts: the first being the process of building the business and product (materials, design, manufacturing, and more) while the second part explores the process of selling those products (identify and reach customers, transactions, distribution and delivery, and more).
However, your business model doesn’t have to be a concrete set of answers to these questions. There are other forms of business models that function off of a hypothesis. Another author with the Harvard Business Review, Andrea Ovans, lays out the various different ways that a company can construct a business model. Some models will be concrete, such as Joan Magretta’s suggestion, while others will be making a series of assumptions about how your business will conduct itself. Sometimes those assumptions will change dramatically once your doors open. It can help you stay flexible, but they can also prove to be challenging when managing your new business.
It is all dependent on how your mind works. If you’re the sort of person that loves big ideas, but doesn’t always excel at planning them out, then you might want to go with the hypothetical option. You can live on the edge of your seat and be prepared for potential challenges along the way. However, if you’re a methodical planner, you will definitely feel more comfortable with the two part model that Magretta suggests.
Of course, as your business opens, fluctuates, and matures, you may come to the point where your business model no longer works for you. What happens then? Ovans suggests reinventing your business model, and offers up a list of scenarios that can help you plan out your new design. Just because your business model wasn’t able to predict your future doesn’t mean your business will fail. You just need to be prepared to make adjustments.
Questions to Ask When Building Your Business Model
When you get down to the fine details of your business model, there are some questions you should always answer. Primarily, those questions will be related to your customers, your product, your cash flow, and your industry and competitors.
Here are some samples questions to help you get started:
- What is your industry? What need are you trying to meet for your customers?
- What is the “pain point” that you are trying to alleviate for your clientele?
- Who are your direct competitors? How are you offering a unique or superior service compared to them?
- Who is your ideal customer? Can you create a picture of who exactly is interested in your product or service?
- How will you reach your target market? What is your marketing plan?
- What is your budget for, or expected expenses for:
- The product? (creating and your profit margin)
- Marketing? (reaching target audience, social media, traditional marketing?)
- Everyday expenses? (employee paychecks, rent, utilities, etc)
- Opening the business? (building, renting, cost of filling the space?)
- What is your cash flow? How do you expect to make money, and how will you pay back your small business loans, or get more loans or investors if you need them?
Business Model Examples
There are a plethora of examples and rough templates you can refer to when it comes to creating your business model. Since there is no black and white answer to how you should be constructing your model, here are some ways in which you could start constructing the model that works best for you. These suggests were offered by HuffPost writer, Nina Tamaro:
- The MiddleMan
- Also known as the “Warbly Parker” model, after the eyewear company who utilized it. Casper, the mattress wholesaler, also uses this model.
- The idea goes that a company joins a market that has a product already in place and a plethora of consumers that are already paying through the roof for that product. By becoming the middleman and reducing prices, you can make a profit while saving your customers money. You have a pricing advantage, and you have more power to negotiate with your suppliers and distributors.
- The Marketplace
- AirBNB is well known for utilizing this model to create their “shared economy” hotel and rental homes. Uber, Lyft, and other “shared economy” companies also use this model.
- Essentially, if you are becoming a marketplace, you know that there is a demand for an item or service, and you know that others can supply it. You just have to give them the connections to make it happen. You are — in essence — the point of sales system that facilitates the transaction. You just, also, get a share of that transaction for providing the service.
- The Subscription Model
- This model is becoming increasingly popular as subscription boxes become the new shopping experience for many busy customers. Dollar Shave Club, Ipsy, Birchbox, Netflix, and Spotify all utilized this model.
- This model works well for the busy customer, as it provides them a no-hassle shopping experience for a small monthly fee. However, it works well for the company, too. Companies that use this model can expect a regular source of revenue from their customers, and that will make them more desirable to investors and potential buyers.
- Customized Everything
- This is essentially everything within the fashion, car, and general retail arena. Everything that is offered by a company can be customized in size, color, and accessories. Additionally, this format fits well for e-commerce sites that are looking to fill a specific niche and can find a unique market demand for their product. For example, Superfit Hero is an athletic clothing company that sells plus-size athleisure wear. Many athletic companies are limited on size, and Superfit Hero saw this gaping hole in their desired market. Thus they capitalized on their consumer’s needs.
- According to Nino Tamaro’s research: “A rising percentage of the population is interested in build-to-order products and are willing to spend 25% more according to a study by Mashable.com for products built specifically to their needs. Production time and lowering costs of customization configurators also bring much more potential to the market, compared to previous years.”
- This is essentially what the internet marketplace has created: products at the push of a button. Handy is a company that has utilized this model. They provide servicemen to fix things within a day for customers that cannot afford to make appointments that are weeks out when something happens in their home or business.
- In our modern day — with smart phones and the internet — this model has been able to be more successful than ever. It is also extremely cost-effective, as it allows you to utilize the labor of freelancers or contractors.
- Modernized Direct Sales
- This is essentially the model that caters to the “side-hustle.” Companies like Ebay, Etsy, and others use this to help customers receive customized or unique items from sellers around the world.
- This model is becoming more and more popular as people are looking for ways to supplement their income, and companies are needed to help them reach a customer base. Additionally, this model can help you save on marketing costs, as many of the sellers within your network will be able to use social media to market themselves and their wares.
- Freemium (“free” + “premium”)
- This is another model that is becoming more popular in our modern day. Essentially, you offer a free service to people, and offer premium perks for a price. Every free app on the market uses a similar model, and companies like Spotify, Hulu, Match.com, and others use this as a way to entice customers to get commercial-free premium options.
- Customers love being able to assess a free service without feeling like there are strings attached. This method works far better than the typical “30 day free trial” models, as customers can feel secure knowing that they won’t be charged until they’re ready to purchase the service. The trick is finding a balance between what you want to offer for free, and what you want to offer paid customers. Both need to be enticing for it to work.
- Reverse Auction
- This model is essentially the opposite of Ebay, where the company becomes the customer, and the customer becomes the ultimate decider in who gets their money. Travel companies like Kayak and Priceline utilize this model well.
- This model works well for the customer, as they feel like they’re getting the best bargain for their buck, and are happy with their purchasing decision knowing all the options. For you, this model could work well in that it makes you desirable to clients that are trying to reach your customer base.
- Virtual Good
- This model is also popular with smartphone apps. Essentially, you offer a service for free, but also offer additional point bonuses in games, or in-app features for a price. Pokemon Go utilized this with their in-app coin purchases, and CandyCrush offers this with their in-app bonus purchases.
- The objects you will be selling need value, and customers will be more than willing to spend a few bucks to get that product. It increases the fun they’re having in a game, or the satisfaction they can feel in connecting with people. Since our world is increasingly becoming app or virtual-focused, this model will work well in terms of longevity.
Finding Your Model
When completely constructed and finalized, your business model will work as the foundation on which you build your empire. You will better understand your competitors, your audience, and your cash flow. You will also be better prepared for any changes within the industry, and will be able to adapt your business to overcome any hardships.
Your business plan may be your blueprint to success, but your business model will be how you execute your day-to-day. Find the right model that will work for you, and get ready to meet your customers. You’re one step closer to opening day!
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