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How to define your business model

By ATB Financial 1 September 2020 3 min read

You’ve nailed down your business idea, have a business plan squared away but hear you need a business model to really get ahead. Problem is you’re not quite sure what a business model is.

“Think of your business as being a person,” says Jason Bacon, Entrepreneur Strategist. “Your value proposition is the heart of the business, your vision, what drives everything. The business model is the bones, the structure, it’s the physical thing.”

Examples of business models:

  • Bricks-and-mortar retail space
  • Franchises
  • E-commerce
  • Ad-based revenue
  • Subscription/membership model

 

Why do I need a business model?

 

Most businesses operate under the 80/20 rule, where 80 per cent of their sales comes in from 20 per cent of their customers. As an entrepreneur, you build to this core, the 20 per cent demographic. Your business model helps you focus on the value you create for the right people.

Find out what your customers’ needs and desires are. Is a storefront important to them? Or do they prefer to shop online? Whichever business model you choose, it should cater to that particular customer. Because they are the ones who make your business successful.

 

The lemonade stand example

 

Your business plan is to make a profit selling lemonade during a hot summer. Your business model is a stand outside your house. But business is slow because there’s not much foot traffic.

Then you notice a construction site a block down. You move shop in front of the site to capture the workers during their breaks. They like the lemonade; you like their money. It’s a win-win change of business model.

Later on, you get to know the site manager and arrange to deliver lemonade in coolers so workers can quench their thirst throughout the day. Bonus! Another business model iteration.

 

Validate your business concept

 

The most common error new entrepreneurs make is to assume there is a need for their product or service instead of doing the market research needed to validate the need, Jason says.

“Don’t build a key then try to find a lock to open,” he advises. “The market is the lock; your business is the key. You need to find a lock you want to open and build the key to open it.”

 

Three steps to creating your business model

 

Test your concept out before going whole hog: take small steps – a tailgate at the farmers market, a piggy-back on a friend’s popular podcast - and then go bigger if it works out.

Measure how much customer interest there is in your product by tallying up the sales. Disappointing? Believe in your concept? Change your approach, i.e. your business model.

Calculate the least amount of product/service you need to keep that customer interest. This helps avoid over or under-investing your time and money.

 

Make sure what you do brings value

 

If you keep your nose to the grindstone – I need to do the books, clean that room – you’re not seeing the big picture of what’s actually driving business.
A good example of this is an electrician who brought on a bookkeeper as her business expanded. When her cash flow started suffering, she did some digging and found out why: she used to go over invoices, line by line, with her clients at the end of each job. The result of this in-person reckoning was 70 percent of the clients would e-transfer the money right away.

“The moral of the story is: know what you’re spending your time on and whether it creates value for your customer and you,” Jason says.

 

Team up to go farther

 

Entrepreneurship can be one of the loneliest journeys in the world. But you don’t have to take that journey alone. Build a core team of advisors you feel comfortable asking questions to, and make sure it includes a lawyer, an accountant, an insurance agent and a banker.

Check out The ATB Entrepreneur’s Guide to Starting a Business for some great tips and insights from successful entrepreneurs and our very own experts. In the end, the business is your baby, and you are the person who will see it through, whichever business model you go with.

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