A business plan is a document presenting the business strategy and expected financial performance for the years to come. The business model is usually part of the business plan as it is the mechanism through which the business generates profit.
The Business Plan
The business plan covers the value proposition, target market, competitive advantage, SWOT analysis (strengths, weaknesses, opportunities and threats), key performance indicators, 12 / 36 / 60 month goals, and a high level revenue and profit forecast etc.
The Business Model
On the other hand, the business model relates to the method of revenue generation. There are six basic business models, and an infinite number of variations. The main six are:
The business sells the products and services it produces. The business must sell enough of those products or services to cover production, distribution and overhead costs so it can make a profit. This the most common business model for SMEs.
The business generates revenues by selling advertising space, and so must create a large audience before it can attract advertisers. For example, an influencer may create a significant on-line following which will then attract advertisers of goods and services selling to the same target market. Facebook is another example of this business model.
The commission business is where an intermediary between the seller and the buyer takes a cut out of every sale made. For example, commission sales agents, real estate agents, and middlemen between wholesalers and retailers etc.
The business earns revenue from subscribers at regular intervals. The business normally runs at a loss until it has sufficient volume of subscribers to cover production, support and overhead costs. The subscription model, especially Software As A Service (SAAS), has become very popular in recent years. For example Xero, Spotify, Netflix etc
The business offers two versions of its products – a free version with limited features and a paid version with more functionality. The goal is to get users using the free version and then upgrade them to the paid version. For example, LastPass and LinkedIn.
The business offers one product or service for free or at cost price and generates profit on the sale of accessories. A classic example is the sale of razor and blades – the razors are often sold for next to nothing, but the razor blades are repeat sales consumers need to make to use the product.
Review Your Business Model
Businesses can successfully utilise several different business models simultaneously. For example, your IT provider may offer a subscription service that allows them to proactively manage your IT remotely (increasing their profit margin and recurring income stream), but they sell consulting services and hardware on a production basis.
The right business model for your business depends on your product/service, business goals, and how quickly you want to expand and scale.
Conversely, if you know how big and fast you want to grow you will select your business model accordingly, and then reverse engineer your product or service.
“Innovative companies are not afraid to continually evolve their business model.”