How to Define Your Business Model
Defining your business model is important for your business plan. When management-types ask So what’s your business model?, they really want an answer to a much more direct and basic question: How do you plan to make money?
Behind that question is a lineup of other questions:
What, exactly, will you sell?
How will you deliver your products, for example through retail outlets, online, through franchises, by selling a product along with an ongoing service or supply agreement, through a free or low-cost offering with upgrade options, or through a combination of delivery approaches?
How much will you charge?
How will you reach, acquire, and keep customers?
How will you define your offering and differentiate it from similar offerings available to your customers?
What’s your cost structure? In people language, how much does it cost to produce, market, and sell your offering, and where and when are those costs incurred?
What’s your profit margin after subtracting all the anticipated costs from the revenue you expect to generate?
Will customers make one-time purchases, repeat purchases, or sign contracts or purchase agreements that deliver recurring revenue?
How much revenue and profit do you expect to generate?
In plain English, a business model basically is how you’ll generate revenue and turn a profit. Bankers and funding partners will ask about your business model because they’ll want to know your business can and will make money — soon and over the long-haul.