The term business model refers to a company’s plan for making a profit. It identifies the products or services the business plans to sell, its identified target market, and any anticipated expenses. Business models are important for both new and established businesses. They help new, developing companies attract investment, recruit talent, and motivate management and staff.

Established businesses should regularly update their business model or they’ll fail to anticipate trends and challenges ahead. Business models also help investors evaluate companies that interest them and employees understand the future of a company they may aspire to join.

 

What is a business model canvas and what is its use?

A business model is a high-level plan for profitably operating a business in a specific marketplace. A primary component of the business model is the value proposition. This is a description of the goods or services that a company offers and why they are desirable to customers or clients, ideally stated in a way that differentiates the product or service from its competitors.

A new enterprise’s business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy, a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company.

Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands.

When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company’s business model. Admittedly, the business model may not tell you everything about a company’s prospects. But the investor who understands the business model can make better sense of the financial data.

 

Evaluating Successful Business Models

A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable. Counting costs to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses.

One way analysts and investors evaluate the success of a business model is by looking at the company’s gross profit. Gross profit is a company’s total revenue minus the cost of goods sold (COGS). Comparing a company’s gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model. Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income. That is gross profit minus operating expenses and is an indication of just how much real profit the business is generating.

The two primary levers of a company’s business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many analysts consider gross profit to be more important in evaluating a business plan. A good gross profit suggests a sound business plan. If expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves.

When evaluating a company as a possible investment, find out exactly how it makes its money (not just what it sells but how it sells it). That’s the company’s business model.

 

Why do we use it?

• To quickly draw a picture of what the idea entails.
• It allows us to get an understanding of your business and to go through the process of making connections between what your idea is and how to make it into a business.
• It looks at what kinds of customer decisions influence the use of your systems.
• It allows everyone to get a clear idea of what the business will likely be.

 

 

What is the difference between a business model canvas and a business plan?

What is a Business plan?

A business plan is simply a written description of your business future. It contains your business mission, vision, goals, aspiration, market, value proposition and few others. It doesn’t have to be a long boring document. If one page answers all the questions we have listed below, then it good enough.

Difference Between a business plan and a business model canvas

A business plan is more like a writing document that’s shown in detail the mission, vision, goals of a startup or company while a business canvas is a simple pictorial representation of questions that assist you in clarifying your idea. You create a business model, then a business plan.

What to know before creating a business model

Before creating a business model you should have the following questions already answered. I mean like done and dusted. But if you don’t then it’s time for you and your time to start brainstorming and putting the pieces together so as to have a great business.

• Who are my key partners, where’s my help coming from
• What do you intend doing
• Who do you intend helping or selling to/customer segmentation
• what will your business cost
• what do you need to kick start your business
• how do you intend to reach your distribution channel
• how do you intend to interact with your customers?

 

What to know before writing a business plan

The fact that you know that a business plan is important means you are ready to ask and answer some soul-searching questions. As you go about writing your plan, do consider asking the following questions about your business/startup

• What problem am I solving and the opportunity therein
• What are my companies underlying magic and uniqueness
• The big question, “what is my business model”. This is where you will identify sources of revenue, intending customer base, products, and details of financing.
• What is my “Go To Market Plan”. Here you would ask yourself how you intend to reach your customers.
• Competitive analysis. Here you will review your competitor’s strategy and see how you measure up with them
• Who are your management team? Write about them and see if they fit your business plan
• You almost done but now without writing your financial projection and key matrices that you will measure your growth.
• Lastly, this is where you praise yourself. Write about your current status and accomplishment.

Note: Some of these questions might take a while to answer, take all the time you need to go over it again and again.

Should you choose a business canvas over a business plan, just make sure you have a roadmap that leads your business in the right direction.

 

How to design a business model canvas?

Step 1: Naming the purpose of the business
Without a clear purpose, how will we know if a model is good or not?
This can be whatever you like, such as:
To earn a passive income from home
To prevent the destruction of Indonesian rainforests
To improve the financial stability of our parent organisation
To provide stable livelihoods for young people at risk of being homeless
To improve the job hunting process

 

Step 2: Customers and Value Propositions
There’s no particular order you have to follow on a canvas, although I’ve found this to be the best place to start.
Your business is centred around your customers, the people who you believe will be motivated enough to try your new product/service in order to receive some sort of compelling benefit.

 

Step 3: Channels and Customer Relationships
Now that we have a clear picture of who we’re serving and how we’ll delight them, we get to design three things: how we acquire them, how we keep them, and how we interact with them.

 

Step 4: Key Resources, Key Activities and Key Partners
These three boxes describe how the business will work “behind the scenes” – all of the operational components that make the Value Propositions a reality.
We want to list all of the vital ingredients, important processes and invaluable allies that enable our business to exist.

Key Resources are the people, places, machines, patents and intangible assets that are used every week.
This is not a complete inventory, but a list of the resources that, if lost, would prevent the business from functioning.

Key Activities are the processes and tasks that must be completed in order for our customers to be served.
e.g. If you were to go on Holiday, what would your replacement need to do in order for things to continue to run smoothly?
These might include sales calls, workshop delivery, meal preparation or writing reports.

Key Partners are the people and organisations that take some of the responsibility off your shoulders.
They might supply raw materials or finished goods, send customers your way, or act as a sponsor/enabler.

 

Step 5: Cost Structure and Revenue Streams
The bottom line of the canvas represents the bottom line of your business:
Money in, money out, hopefully some money left over.
We want to understand the ways in which money moves through the business.
That means understanding the quantities (how our costs/prices are set) and frequencies (how often we get repeat customers/bills).

 

Step 6: Linking The Boxes +Tidying Up
Our boxes aren’t nine independent checklists, that wouldn’t help your idea.
Instead the canvas keeps our ideas accountable; if we make a promise somewhere on the right, it will also need to be listed in one of the boxes on the left.

If we make claims about our happy customers, that should shine through in our Revenue Streams.
If we expect to keep personal relationships with each customer, that will become a part of our Key Activities and Cost Structure.

 

Step 7: Telling The Story
Presenting a full canvas to a new person is not a good idea – there’s too much to take in.
Instead, it’s best to fill in each box as you explain the idea.
This makes the business much easier to understand, and creates a much richer appreciation of the model at the end.

 

Step 8: Assumptions Testing
Just because you wrote something clever on a canvas doesn’t make it a reality.
For this reason, we start by assuming that all of the words on the page are assumptions, and our next job is to verify them – starting with the most crucial.

 

Step 9: Designing New Versions
Good ideas survive competition, so it’s important that we don’t fall in love with the first idea.
After your testing, you’ll start thinking up new adjustments that are worth exploring.

 

What are the advantages of using a business model?

• A good business models gives the company a competitive edge in the industry.
• A strong business model provides the company good reputation in the market place encouraging the investors to remain invested in the company.
• Making the business model strong leads to an ongoing business profit leading to increase in cash reserve and new investments.
• Proven business model brings a financial stability in the organization.