The Business Model Is Your Profit Engine
Hatching an idea for a business involves much more than inspiration. Your entrepreneurial idea must also include a strategy for making the idea profitable. That strategy is known as the business model. The function of a business is to provide products and/or services that help clients solve their business or consumer needs. In addition, your business must work for you and generate a reliable and, ideally, abundant revenue stream from which you derive your annual income.
Before we go any further, let’s clarify the meanings of business model and business plan. Your business plan is a document in which you describe the mission of your business: the target customer groups; the marketplace and competitive environment in which it will operate; its marketing, financial and operations plans; and the legal structure it will be given.
Your business model will detail how the venture will reach and sustain profitability. The cornerstone of a good business model is a competitive analysis, which will help you verify target markets (customer groups) and establish your competitive advantages in the presence of other enterprises that offer similar products and services.
The primary ingredient of your competitive analysis is customer knowledge, an asset that I frequently recommend aspiring entrepreneurs to cultivate. Information gathering is a vital and ongoing business function. James King, Director of the New York (state) Small Business Development Center, notes that “Customer purchasing patterns change rather rapidly and if you’re not ahead of your customers, you’re not making sales.”
Along with the selection of products and services that your venture will provide and your customer acquisition strategies, operational aspects, that is, the process by which products or services will be manufactured or acquired and made available to the marketplace, must meet the often fluid expectations of customers and for that reason, an operations component must be included in your venture’s business model.
Once you’ve developed a draft business model, you may find it instructive to ask a trusted potential customer or non-competing business owner friend to give feedback on what you’ve proposed. Discovering and closing immediately obvious gaps is something you’ll want to do before your business is up and running.
King recommends that aspiring entrepreneurs “Sit down with someone who doesn’t have a vested interest and ask that person to poke holes in your model. If they do a good job, you’re going to be better prepared for any eventuality. The more risk you can eliminate, the higher the probability that you’re going to be successful.”
One is advised to revisit the business plan and business model every couple of years, or at least when changes in your industry, local business environment, or technology have the potential to impact your sales revenue or how your do business. This practice will also give you the benefit of reviewing your projections as regards expected vs. actual target customers and allow you to refine planning for growth and expansion, as you create strategies for sustainable business success.
Thanks for reading,
Kim
