What is a Business Model?

A Business Model is a conceptual structure that supports the viability of a product or company and
explains how the company operates, makes money, and how it intends to achieve its goals. All the
business processes and policies that a company adopts and follows are part of the business model.

According to management guru Peter Drucker:

a business model is supposed to answer who your customer is, what value you can create/add for the
customer and how you can do that at reasonable costs.

Thus a business model is a description of the rationale of how a company creates, delivers and captures
value for itself as well as the customer.
The widespread use of business models came into existence with the advent of the personal computer
which let people test and model the different components of a business. Successful business models
before that were mostly created by accident and not by design. It’s different for business plans and
business strategies though.

Every business model intrinsically has three parts –

everything related to designing and manufacturing the product
everything related to selling the product, from finding the right customers to distributing the product
everything related to how the customer will pay and how the company will make money

A new business in development has to have a business model, if only in order to attract investment, help
it recruit talent, and motivate management and staff. Established businesses have to revisit and update
their business plans often or they'll fail to anticipate trends and challenges ahead. Investors need to
review and evaluate the business plans of companies that interest them.

How a bus model works

A business model is a high-level plan for profitably operating a particular 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 business model for a new enterprise should also cover projected startup costs and sources of
financing, the target customer base for the business, marketing strategy, a review of the competition,
and projections of revenues and expenses.

A common mistake in creating a business model is underestimating 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 revenues exceed expenses.

A business model may also define opportunities for partnering with other established businesses. An
example would be an advertising business that could benefit from an arrangement for referrals to and
from a printing company.
DIFFERENT BET PLAN AND MODEL

Business Plan
The business plan describes why you are in business. It explains who you are, what your ideas are and
how that all comes together.
A business plan should be able to make a complete stranger (aka bank/investor) understand why your
business is going to be successful (aka make money).
The business plan is describing the entire company and its strategy.

Business Model
The Business Model has a different approach. It can be part of the business plan. The business model
actually describes how you are going to generate revenue with your business. The business model
doesn't have to be describing the entire business. It can vary well describe one or more
products/services, that are delivered by the company, and their respective business models.
A popular way to describe the business model is the Business Model Canvas (BMC). Actually this BMC
became so popular that some people think it is the only thing you need (an A4 business plan), but I don't
actually think that's correct. A business plan can help aspiring entrepreneurs to clearly think about what
they are getting into.