How to Define Your Business Model
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? Your business model is the key to your business plan and the formula for your success over the long term.
Your business model will provide answers and insight to several questions:
What, exactly, will you sell?
How much will you charge?
Who’s your target customer?
What customer problem or challenge do you solve?
What value do you deliver to customers?
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?
What’s your profit margin?
How much revenue and profit do you expect to generate?
Be sure to describe your business model in the Executive Summary of your business plan and early in your Company Overview section. Bankers, funding partners, and other important business partners will ask about your business model because they’ll want to know your business can and will make money.
To turn your thinking into a business model description, use the following questionnaire. It helps you think about how your company will make money. After completing it, ask two more questions:
Can I spot additional potential sources of revenue that I may be able to develop in the future?
Can I come up with alternative payment plans — such as membership or subscription fees — that would entice new customers, keep customers loyal to my company, and increase my revenue stream down the road?
Answers to these questions will guide development of your business model. Use your findings to adjust your financial projections. Your calculations don’t have to be fancy; you just want a good indication of the likely success of your business model.