Business Model-- A Definition

So you want to start a new business? Before you do anything else, you need to select the right type of opportunity and then you need to work on the Business Model.

What is a Business Model and how is it different from a Business Plan? I never read a Business Plan that doesn't also have a one page Business Model. Business Plans have become standard issue and often contain so much formulaic material that they aren't as helpful as they might be to investors, advisors or even the people who work in the business day to day. The Business Model, on the other hand, is the 'engine' of the business and is the most important piece of IP that any business actually owns.

Ideas can be cheap-- no matter how smart you are, there are right now 35 million Americans in their basements dreaming up the same idea that you have. The difference between dreamers and entrepreneurs is the Business Model-- the place where the rubber meets the road; the place where money sticks to your hands.

Business Models can be subtle like Oingo (the Applied Semantics name spinner sold to the Registrar community for a few cents per hit) or straight ahead like Dell's (make nothing before you have an order in hand, get paid before you make anything-- get custom outputs from standard inputs). Each Business Model requires some magic-- some 'Pixie Dust'.

If you get the Business Model right, then the harder you work, the more money you make (Google is an example here). If you get it wrong, then the harder you work, the more money you lose (Napster is an example here).

The Business Model is a one page description of how the business actually works; it usually includes a flow chart that shows the relationships between key players-- your start-up, your customers and your suppliers. The key to the Business Model is to: "Suivez L'argent"-- follow the money: how a business actually acquires money and uses it. When you follow the money, presumably, if there isn't any (as in the Napster model), you'll discover this early and stop.

The Business Model also usually includes several points about how these relationships amongst key players will be developed (e.g., how to market your business). If marketing requires or product development requires elephant sized resources before your product or service is ready for prime time, then this is known up front and changes your approach from a bootstrap one to a VC play.

Here is a business model for a web development company developed by one of my clients as an example: http://www.dramatispersonae.org/BusinessModelView.PDF.

I never read a business plan without a Business Model.

Copyright. Dr. Bruce M. Firestone, Ottawa, Canada. September 2002.

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