What is your business model? Amazingly many people who start a business can’t answer this question. In its most basic form, the business model is the diagram of how you will convert your product or service into money in your pocket.
Many entrepreneurs suffer from the Field of Dreams affliction. They are sure that their product or service is so fabulous that everyone will want it without taking into account how their potential customers buy things or even how they will finance the gap between the sale and the cash coming in the door.
To create your business model, you need to answer the following questions:
- to whom are you going to sell your product?
- what problems does your product or service solve for the customer?
- how you are going to reach your customers?
- how and when the customers will pay you?
- how your products will get from concept stage into your customers’ hands?
- who are your competitors and how are you different?
In business speak, the business model needs the following components:
Value Proposition – this term is highly overused by every MBA and VC associate out there, but the concept is important. The value proposition is a description of the value that you bring to your customer; ie, what problem are you solving? In short, is your product faster, better, or cheaper?
Market Segment – who are you going to sell your product or service to. This is the type of customer that you will target. You need to determine why they are the right group who are willing to pay money to you.
Value Chain – another good b-school term. You need to determine where you are in the value chain. If you are making a widget that improves a driver’s experience, but it can only be installed by the car manufacturer, then you have a place in the automotive value chain. You need to understand how you fit in this chain and what prices you can charge as a result of that place.
Revenue and Margin – How will you price the product and how will people pay you? License, fee upfront, payment over time. What are your costs? Will you be able to bring them down over time. If there is a big profit margin in your business, expect other company to try to enter the same business.
Competitive Strategy – who is your competition and how will you differentiate yourself from them. Are you better, faster or cheaper? Does your competition have the ability to improve in response to your entry into the market? Don’t forget that your customer choosing to do nothing can be competition.
Many entrepreneurs think that the business model is the same as the business plan. Your business plan is actually how you plan to execute on your business model. Build the model first, find your strengths and weaknesses and write the plan on how you will reach your goal.