A business model confirms the mechanisms by which an operation will make money. Without determining a viable business model before getting a business going, the CEO and management team must scramble to devise one that makes sense in the current market. To do this, it’s beneficial to use a business model canvas starting with a template and building out the model step-by-step. Doing so allows the team to visualize it and confirm that every part is feasible.
What is a Business Model?
A business model is designed to break down the steps for what the company fundamentally does to conduct business transactions.
What is the Unique Selling Point or value proposition of the company? Is it sufficient to beat out other competitors to the sale? Is it sustainable over the long term? Can competitors steal a march on them by developing something better?
Also, consider the sustainability of the business model. What would derail it? Could new technology do so? Will part of the process become impossible at a later time? Is the business seasonal where it cannot be run at certain times of the year – i.e., a local snow clearing business in Alaska – or are parts difficult to source from manufacturers?
It’s important to consider all these issues to ensure that the business model won’t work today but fall over two financial quarters from now.
How Is it Different from a Business Plan?
The business model and business plan are often confused by new entrepreneurs and people who haven’t studied business in college.
A business plan describes the strategy that the firm will have and how it expects to perform. While it will touch on the business model including how the business will make money, primarily this document covers expected sales, expenditures, and other considerations. Financial lenders will likely request to see a business plan to view the projected numbers. Then they’ll want to know how those estimates were arrived at.
Also, while the plan is helpful to develop, it changes with the operational reality. However, a business model is unlikely to do so unless it’s fundamentally wrong or how business is conducted changes significantly. For instance, while the products being sold may change, how they’re produced and where they’re sold may not. Due to this, the business model may remain largely unchanged.
Why Is the Business Model Essential for Businesses?
A business model is essential because it clarifies the way that the company will solve existing problems in the marketplace. The value creation must be evident to encourage customers to purchase their product(s).
Production costs must be low enough to allow for other expenditures and to still turn a profit. Could generic alternatives reach the market to dampen sales? What can be done, such as patents, copyrights, and trademarks, to prevent this?
Direct distribution or other methods employed so customers can receive the products is also important (the same is true of provided services too). How will this occur, will they remain viable channels, and will the cost of access remain the same?
Business models need to not fall apart when scaled in size fivefold or tenfold. The Zoom app at the beginning of the pandemic is a good reference point for successful rapid growth.
Must Business Models Necessarily Evolve?
Business models do need to evolve with the times. A good example of this is Blockbuster which failed to evolve sufficiently when media went digital. It took the creation of Netflix and faster internet access to completely change how filmed media was accessed and consumed by the public.
Why would people take a trip to the local Blockbuster store if they could access a movie instantly from their home? And on a big-screen TV? This question wasn’t explored by executives who believed their market position to be unassailable.
Business models need to evolve with changing markets and different customer expectations. However, companies must also stay on the lookout and be ready to seize on new ways to deliver their goods or services too. At which point, massive business model changes might be necessary.
Is Pivoting Always a Good Idea?
Business owners love to pivot from one idea to the next. Should this be done? There is a degree of shiny object syndrome when doing this. Entrepreneurs are no less susceptible to this than other people. It can sometimes be a good idea when the current plan isn’t working or there are better opportunities elsewhere in the market. However, it usually requires years for a new brand and/or product to establish itself. Switching strategies doesn’t always allow enough time for growth to happen.
While a pivot may still rely on the same business model, it will play havoc on existing plans. Pivots should be justified not just to demonstrate the viability of the new idea, but also to confirm that the old idea was wrong or won’t work.
Business models are an essential part of a successful business. When the founder is unaware of what the model is, then they won’t be clear when something has broken down or proven it to be invalid. The future from that point will not bode well.