A business model is a plan for the successful operation of a business, identifying sources of revenue, the intended customer base, products, and details of financing and it is also a clear, concise way of picturing how a business operates. The management team should be able to describe the business model in a few sentences. All companies strive to provide value to their customers. The stronger this value proposition, particularly when compared to that of competitors, the more likely it is large numbers of customers will purchase from the company. The business model is a means of translating the value proposition into the potential for rapid revenue growth and profitability.
The business model describes the methods the company will use to generate revenue. This could be selling products or services, charging subscription fees, selling service contracts on products — any means to create revenue opportunities. The model also shows the factors about the operation of the business that will enable it to be profitable. The company might have higher margins than competitors because of its lower cost sources of supply. A business that benefits from word-of-mouth recommendations from current customers to prospective customers can be more profitable because this type of marketing is considerably less expensive than other means, such as advertising.
For a startup company, the business model is one of the first things developed, often before product development is completed or the management team is assembled. The model demonstrates the feasibility of the venture. The management team must be convinced that the model gives the company a reasonable chance of success in order to be willing to take the risks of starting the venture. A company may adapt a business model successfully used by other companies in other industries. With Internet companies, word-of-mouth marketing is termed “viral marketing” because communication moves so swiftly on the Web. But the concept has been just as successful for low-tech businesses, such as restaurants and bars.
Comparison with Business Plan
A business model is sometimes confused with business plan. The business model should be a section of the business plan. The plan is much more detailed. It presents the strategies that will be used to implement the model, the resources needed including people and capital, and has detailed projections of the hoped for results from implementing the model.The business model is the mechanism through which the company generates its profit while the business plan is a document presenting the company’s strategy and expected financial performance for the years to come.
Business models are carefully scrutinized by prospective investors. One of the reasons investors decline to participate in a venture is that they see flaws in the model that will significantly reduce the chances for success. An Internet site that will charge membership fees as its business model may meet with resistance from investors if they think consumers will not be willing to pay a monthly fee to use the site.
A business model is not necessarily static, something created when the company is started and never changed. As the company evolves, opportunities for new revenue streams often present themselves. Radical changes in the business model are often prompted by actions of competitors entering the market with a different-, and better model that customers respond favorably to. A cell phone company that sees its competitors giving away the phone to customers who sign a two-year service contract may abandon its prior model of charging an upfront fee for the phone equipment.
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