As a refresher, the business plan is the full detailed document split up across about a dozen sections that is your “best guess” of how you will run every aspect of your business. It’s pretty detailed. The business concept is not your tangible product or service, but the value you create. A lighting company’s product is lights and chandeliers, but their business concept is selling ambiance, mood, effecting the environment. You should be able to state your business concept in 6 words. And the first two are “We sell”.
So what is a business model? A business model asks 6 questions:
- How do you create value?
- Who do you create value for?
- What is your internal advantage?
- What is your external differentiation?
- How will you make money?
- What is your growth plan?
Let’s break those down, starting with “How do you create value?”
How do you create value?
This might sound straightforward; you sell things. But the question doesn’t ask how do dollars get in your bank account, the questions is about creating value. Within your product/service mix you will find you have breadth and depth across your product lines.
The breadth refers to the kinds of products you have. So lets say you operate a simple dive shop and you have the following products:
Each of these is a revenue driver, and independently contributes to the value you create. The next concept is depth of your product mix, these are your unique offerings within the product lines. They can high-end or low-end variations, service contracts, rentals, etc… the more creative you get with the depth, the more opportunity you have to create value. Let’s put that into our breadth model and see how it looks.
But what if you only have one product because you are a start-up based on a new gizmo? Add depth to that one product. Do so through a warranty or service contract, tech support, additional supplies or accessories to compliment it. Again, the more creative you can be, the more value you can create.
Who do you create value for?
The more you understand your customer and the buying cycle, then the better you can sell to them. Create a picture of the kinds of market segments you will be selling to, and you will knock this out of the park. Draw your ideal customer, take a picture of one, and get in their head. What steps to they take from becoming aware of your product, become interested, desiring the product, and lastly purchasing that product. Are your sales based on quick transactions or does your customer need a relationship with you or your sales force?
What is your internal advantage?
What are the capabilities your business has that are unique to you? If you had one extra dollar to spend on your company, where would you spend it? What makes you excellent? This is about you and your people. If everyone in your industry had the same resources, what internal capabilities are your strongest?
What is your external differentiation?
Differentiation compliments your internal advantage – externally. If your internal advantage is people skills, this might translate externally as a fantastic customer service department. If the internal advantage is marketing, then we should expect to see a pretty sophisticated marketing section.
How will the firm make money?
The basic question here is about volume and margins. The example in the lab was on college bars. A college bar can sell 25-cent beers all night by packing the bar to capacity and selling as many beers as they can as fast as they can. Whereas if you were to go to swanky hotel lounge, the same beer might be going for $7, and they expect you to order maybe one or two an hour. The key difference here is in high volume/ low margins vs. low volume/high margins. What are yours?
What is your growth plan?
Where is the company in 5 years? Are you expanding, selling, IPO? Sometimes this is called a speculation plan, because it is your hopes and dreams of your company’s future.
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