Read This Before You Decide: What Do You Need To Know To Create A Business Model?

A business model lays out the idea for a business, along with the step-by-step plan for making the business profitable. To put together a good business model, you need to know the value proposition for the business, projected startup costs and sources of financing, the target customer base for the business, marketing strategy, competition, and projections of revenues and expenses.

A business model is simply the plan for creating a successful business, a guide for creating a specific entity for generating ongoing profits. It explains what products or services the business plans to manufacture and market and how it plans to market them. Business models lay out a plan of action for profitably operating the business in a specific marketplace. The business model for a restaurant is significantly different from the business model for an online business.

The first element for creating a business model is coming up with the idea for the business, what the business will offer consumers in the marketplace. The initial step in creating a business model is identifying the company's unique value proposition. A value proposition is a straightforward statement of what a company offers in the form of goods or services that is of value to potential customers or clients, ideally in a way that differentiates the company from its competitors.

A business model also includes a projection of necessary startup costs and projections for future revenues and expenses. One of the most common mistakes leading to the failure of business startups is a failure to project the necessary expenses to fund the business to the point of profitability, the point in time when its revenues exceed its expenses. Necessary business startup costs vary widely depending on the nature of the business. If startup costs are substantial, they may require funding beyond what the business owners can provide. If outside financing will be necessary for the business, then the business model must identify what the source of financing for the business will be and the plan for obtaining that financing.

A business model lays out a clear picture of the company's target market or customer base, the population segment expected to provide the bulk of the company's business. For example, opening a fashion boutique store in an area primarily populated by lower-income retirees would probably not be a good idea for a business. Along with identifying its customer base, a business needs to assess its competition in the marketplace, and the business model will show its plan for successfully competing with other companies. If possible, the business model should include any possible plans for partnering with other existing businesses. An example of this would be an advertising business that aims to establish an arrangement for referrals to and from a printing company.

A business model also includes the company's marketing strategy, stating how the business plans to go to market in terms of advertising and sales efforts. If the business requires a sales force, then the business model needs to project the expenses of hiring, training and funding that sales force. Advertising methods and costs need to be included as well.

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source: investopedia.com