Business model. It’s one of the first things every new business owner hears about, yet the importance of creating a strong, clear one often gets lost in the noise. With so many components, it can be easy to overlook how essential a well-thought-out business model actually is—it sets the tone for everything that follows in the developmental process. Your business starts as an idea, but it only becomes a real plan when you map out its structure and strategy: that’s your business model. Think of it as the blueprint for everything from how you’ll reach customers to how you’ll make money.
We aim to equip you with the knowledge and tools to design a business model that not only survives but thrives in today's competitive market. Whether you're just planting the seeds of your startup or looking to refine your existing operations, understanding the power of a well-structured business model can transform the way you view and run your business.
Buzzword Breakdown
First thing first: a business model is not the same as a business plan and cannot be used interchangeably. Although both documents explain how a business will operate, their intended function and audiences are different.
A business model is the 10,000-foot overview of how a business creates and sustains value for its customers, like a blueprint. Diving into the details is the responsibility of the business plan, which acts as the step-by-step instruction guide to meet the objectives in the business model. Both pieces are vital to the direction and development of a business, so it’s important not to skimp out on any portion, as small or tedious as they might feel.
There are many sections that build the business model, and they all need to be thoroughly researched and considered. The business model is the paperwork that explains the core of the company, guides decisions, and keeps all internal and external communications aligned, so having a complete, holistic view of the company is crucial to the future success of any venture.
The components of a business model include:
1. Value Proposition
2. Revenue Streams
3. Customer Segments
4. Channels
5. Cost Structure
6. Key Activities
7. Key Resources
8. Key Partnerships
9. Customer Relationships
Clarifying the Concept: What a Business Model Really Means
Definition
In simplistic terms, a business model describes way a company will make money. It looks at key factors in revenue generation, like market segments and customer problem statements, the resources and partnerships needed to acquire the goods for the product or service you will offer.
However, the most important part of a business model that its value proposition: how will you genuinely meet your customers’ needs in a unique and distinct way? More specifically, how will you address the value disparity between where they are now versus where they want to be?
Shifting the focus of the business model away from just money making and onto value production, we have redefined the concept:
A business model outlines the method you will use to fulfill your value proposition.
In order to establish a solid value proposition to base your business model on, it is imperative you understand two factors:
1. your target audience and the missing value they are not currently receiving that you can provide (aka the customer problem statement), and
2. the market as it currently stands. Know who your direct competitors (businesses competing for your target customers’ attention) and indirect competitors (businesses that may attract your target customers as a byproduct).
When you understand your audience and what is missing from their current options, you can establish a promise that will fill that gap (aka your value proposition). From there, that is how you decide the rest of the sections that build out a complete business model.
Component Breakdown
To provide a brief overview of the business model, here is a quick breakdown of each component that builds the document:
1. Value Proposition: This is the heart of your business, answering how you are solving your customers’ problems in a way that’s useful to them in their current state.
2. Revenue Streams: Outlining how your business will make money (direct sales, subscriptions, ads, etc.); there can be more than one earning avenue.
3. Customer Segments: Since not all customers are alike, differentiating the different groups you serve helps to meet each group’s specific needs.
4. Channels: This is knowing where your customers spend their time, both physically and virtually, so you can connect with them, build awareness, and make sales.
5. Cost Structure: Determining the pricing of your offering includes some backend math, considering the expenses it takes to run a business, like production, staffing, and materials.
6. Key Activities: These are the core actions your business needs to take to deliver its product or service, from creating it to marketing and selling it.
7. Key Resources: Resources are anything your business needs to succeed, including physical supplies, intellectual property, people, and money.
8. Key Partnerships: Consider partnerships trusted allies who help in every step of the business, from suppliers and distributors to partners who help you deliver your offering.
9. Customer Relationships: Knowing how does your business will interact with customers, whether it’s through personal service, self-service, or even community engagement, will keep them engaged and coming back.
Each component within the business model touches on an a vital area of business that needs to be fully thought out in the development stages. Not everything will come immediately or easily, but having put time and consideration into each area will help prevent major gaps in the future as your business grows.
Keep It Simple: Fancy Grilled Cheese for the Fun People
Imagine starting a food truck. A business model is the outline for how you’ll make this food truck successful. First, you determine what customers are looking for (market research) and what is not currently being provided (value gap). If your cheese-loving community (target audience) is tired of basic sub sandwiches on their lunch breaks, you have found your customer problem statement. Then you build your value proposition, the thing that makes your food truck unique and worth people’s money. For this demographic, you consider opening an on-the-go sandwich truck serving gourmet grilled cheese sandwiches. Fun, unique, and meeting that lunchtime munchy need.
Next, you learn more about your target audience. Figure out who your customers are - maybe it’s lunchtime office workers or families at a park. Then, you choose where you’ll park, when you’ll open, and how you’ll let people know where to find you (channels). To stay in business, you’ll need to plan how much to charge to cover costs like ingredients and gas (cost structure) and what your menu will look like, possibly including sides, drinks, or desserts as well (revenue streams).
In short, a business model for your food truck covers all the details of how it’ll run day to day, keep customers coming back, and stay profitable over time.
Impact on Your Business
Understanding and building a solid business model is critical in the early planning phase, and here’s why: it’s your business’s blueprint. A well-thought-out business model doesn’t just help you make money; it clarifies your value to customers, identifies who they are, and outlines how you’ll reach them. This clarity impacts every part of your operations, from the products or services you develop to the way you market, sell, and manage expenses.
Starting with a defined business model saves time, money, and headaches in the long run. It guides decision-making by giving a clear view of your revenue streams, cost structure, and essential resources, ensuring every move you make aligns with your overall goals. Whether you’re creating a product, deciding on customer service approaches, or planning growth, a solid business model gives your team a shared direction.
Ultimately, a business model isn’t just paperwork; it’s the foundation for sustainable growth. When you understand exactly how you’ll deliver value to customers in a way that sets you apart, you’re setting yourself up to build a business that thrives—ready to adapt, grow, and succeed.
Building a Blueprint for Success
At its core, a business model is about building a clear and effective framework for how your business will operate, grow, and serve customers. By defining each component, from your unique value proposition to your revenue streams and customer relationships, you’re creating a foundation that supports every decision and action your business will take.
A strong business model doesn’t just guide your startup phase; it’s a tool you’ll refine and rely on as your business evolves. Equipped with this blueprint, you’ll be better prepared to navigate challenges, seize opportunities, and stay focused on delivering value.
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About the Author:
Em is the co-founder of L2Business and Director of Communication. With a passion for writing and helping others, "Kill the Jargon" is Em's favorite L2 project. When she's not busy with the business, you can find her yelling at the TV watching her alma mater Texas Tech or any hockey game she can find. If you have any questions, reach out via our contact page or connect on Facebook!
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