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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.

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