Why is it important to have a business model?

First question, what is a business model? A business model is a framework, the engine room that you use to run and have visibility to your business. It answers the questions for all business decisions that you make. How do you intend to make money and what model will you use to sustain your business.

According to wisegeek.com “The business model is simply a working description that includes the general details about the operations of a business. The components that are contained within a business model will address all functions of a business, including such factors as the expenses, revenues, operating strategies, corporate structure, and sales and marketing procedures. Generally speaking, anything that has to do with the day to day functionality of the corporation can be said to be part of the business model.”

A business model is focused on value creation. It acts as a framework to take what you create or make and turn that innovation into an economic equasion. It takes into account the entire value chain of the organisation.

BUSINESS MODEL: Connecting Resources, Capabilities, and Innovation to Economic Outputs

BUSINESS MODEL: 6 Components of Business Models

What is the business model of your organisation? Is it complicated. It is easy to understand. Is it used to make decisions? According to Changewave a business model means: What does a company do? How does a company uniquely do it? In what way (ways) does the company get paid for doing it? How much gross margin does the company earn per average unit sale?”

Business knowhow blog give some good examples of some simple business models for a  consultant:

Monthly Retainer – When you ask clients to pay by the month in advance, you can charge for your availability, not just service delivered. Your retainer can guarantee you a fixed number of hours. If the client uses less, you still get paid.

Product-Based Models

Flat Fee – A wide variety of items can be sold for a flat fee to increase revenue to your business. “Products” can also include services delivered in a defined package. Your buyers may be either existing clients, or others who can’t afford to hire you individually.

Subscription – Providing products or services by subscription can provide a steady source of income and reduce marketing time. A sale made only once can continue to provide revenue.

Bait and Hook – Also called the “razor and blades” model.

Examples: A time management consultant offering a training program including day planners that must be re-ordered; a web designer providing proprietary modules under a license that must be renewed annually.

Any one of these models can be used to build an entire business, or you can combine different models together. For example, a consultant could charge a flat fee for assessments, then a day rate to deliver services. A coach could charge a subscription fee for group clients and a monthly retainer for clients worked with individually.

You can see how the business model does shape your business and it is important to flesh out exactly what model is going to work best for you and importantly your customers.

MOST BUSINESSES DON”T HAVE ONE! this is the scary truth but most small businesses I see don’t. Maybe it is about time you looked at how you operate. How do you make decisions? What information do you have about the process? Do you forecast and choose your customers? If not maybe you need to create a business model.

Here is a good model to look at in terms of a starting point to ask the right questions:

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