How to Create a Business Model

A business model is a description of how a business intends to operate, how it makes money or delivers value, and what it does and does not do. A business model can change throughout the life of business or can be applied to a specific product, or to a nonprofit. It is a more general and concise statement than the business plan, but is still often used to explain the business and its activities to investors, banks or employees. Standard business models are often referred to in shorthand, such as "subscription" or "low-cost leader."

Instructions

1. Determine the nature of your business or in what industry you intend to operate. For example, you might be interested in baking cookies, providing administrative services to the legal industry or manufacturing sports equipment.

2. Investigate your competitors. Determine how they make money, who their customers are, how they charge those customers and their prices, and their cost structure. Often your competitors will have multiple customers on multiple products. A business may include a high-level business model that captures its corporate approach to doing business, with separate business models for each division of the company. For example, Deloitte's business model includes growth by acquisition of related companies. Each of those companies may have its own business model, which may center around being a low-cost leader, direct-to-consumer sales, tied products, or spending heavily in research and development to release products on the cutting edge of design and consumer appeal.

3. Evaluate your own expertise and interest. If you have a passion for a particular customer segment or a particular method of doing business, such as always using the latest technology or providing the best customer service money can buy, build this into your business model.

4. Calculate your costs. This includes the costs of manufacturing your product or delivering your service, all overhead costs associated with your industry and business size, and the additional costs created by following your business model. For instance, in order to build customer loyalty you may choose to invest in a great deal in marketing, employee training and higher salaries for your customer service staff than is average for your industry.

5. Perform a feasibility analysis. Determine whether it's possible deliver the products or services you intend to offer in the manner you wish. Calculate your estimated profits to determine if they cover your costs plus your profit margin. Ascertain that specific, proven customers for this product or service exist. Research to determine if there are enough customers in your target market to allow you to be profitable with only a small market share. If your business model requires you to be the market leader, determine whether or not that is feasible. Clarify how you are different from your competitors.

6. Write out your business model. This should be a short phrase, such as "franchise" or "razors and blades." Then describe how your particular company will achieve this business model. It should consist of one paragraph and should include your customers, your product or service, how you intend to deliver, your strategy for growth, and the qualitative aspects of doing business that your company intends to emphasize.

References

• Reinventing Your Business Model
• Steps to a Sound Business Model
• Growth Through Acquisition

Resources

• Read this Article in Spanish