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What is a Business Model?

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I stumbled on a great post the other day from Steve Blank, veteran entrepreneur and professor of entrepreneurship, on creating a business model versus writing a business plan.  He believes that before writing a business plan for your start-up you should test the business model.

What is a Business Model?

A business model is essentially the structure of your business that determines whether or not your business is profitable.  If you start a business selling factory widgets the business model will show the operational execution of producing, selling, and distributing these widgets.  The business model will also include some financial analysis that examines cash flow and profitability.

In the wedding and events industries, we aren’t selling widgets.  With the exception of a few fields (invitations, favors and so on) we are most likely offering a service.  The business model is a lot simpler.  (A flowchart wouldn’t get you too far.)  Generally, I like to examine the financial aspects when examining a business model.  Operational elements play a role, but often cash flow planning and profitability analysis will be the major factors in identifying the viability of your business model.

Should we test the Business Model first?

I whole-heartedly agree with Steve Blank.  If you have yet to open the doors to your business, before you sit down to write a 32 page business plan, determine whether or not you can make money from this business.  When I’m approached by a start-up to have help writing a business plan, the first thing I want to know is if they’ve thought about how to create a profitable business.  Granted, at this stage, we are modeling our business based on our best assumptions.  Let’s get these assumptions into a spreadsheet and determine the viability of this business.

I like to walk new business owners through the process of identifying cash flow for the first year.  How exactly is this business going to be funded?  What are the initial costs to get the business off the ground?  What revenue streams do you plan to have?  How will you promote and market your business to attract people to buy from you?  Are those revenue streams sufficient to meet your expenses?  Have you factored in payroll?  Have you considered your own income, whether it be a salary or an equity distribution?  And so on…

What about the Business Plan?

Once you have a business model in place, then it’s time to expand on all the elements and write your business plan.  The business plan helps you flesh out the details of your model.  Where I don’t agree with Steve Blank is that he calls business plans “stagnant” and business models “dynamic”.  I think that if you let your business plan go stagnant, then your business will go stagnant.  Your business plan is NEVER done.  Your plans and goals must continue to evolve.  Once you write your plan, you won’t have to re-write it entirely.  But, you’ll certainly want to revisit it and revise it.

What are your thoughts on business modeling?

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October 19, 2010 - 11:19 pm

Krishna Pisupat - Great elaboration on what a business model is. I had the same question while going through Steve Blank’s post – What is a business model? Your blog explained it to me in a greater detail.

Though I am not sure if the business models can be dynamic or they are just static, I like to comment on your comment about Steve’s statement. He did say that business plan is static. As we all agree, business plans run on tens of pages and discuss every nuance of the business. I think he meant, in real world, many entrepreneurs won’t bother to keep them updated time to time. Given the long hours one may have to work during that phase, I believe it’s hard to keep updating that document. Of course, you hit the market time to time to get the customer feedback. However, you may end up converting that feedback into implementation rather than bothering to update a document. As he has worked with many entrepreneurs, may be it is his experience with them. That’s my take on his statement.

Apart from that comment, I like your initiative to explain the concept of a business model. And also it’s nice to learn about what you are doing through Sage Wedding Pros, helping entrepreneurs in a specific, may be, niche area. I think your idea is novel.

Thanks and Regards,
Krishna Pisupat

October 23, 2010 - 8:05 pm

Sharon Alexander - Love!!

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