Businesses can’t function without making money. So when you plan yours, you’ll have to think through the different ways that it will make money. And of course, you don’t want to just make money, you’d like to be profitable as well. That means you want to bring in more revenue from products or services than you spend on your costs.
When you’re thinking this through initially, it’s important to think about your initial costs, as well as your ongoing costs. Will you have to buy equipment, furniture, display cases, or supplies in order to start your operation? Those go into your initial outlay, even before you can make any money.
Then there’s the product or service you’ll be selling. Will you have to buy that? If your products are made-to-order, one way to help you fund the initial orders is to have customers pay in advance. This is what made Michael Dell’s company unique. Most computer companies at the time would let you order what they already had created. Dell created the computer once you ordered, which gave them the cash to buy parts and assemble it before you got it.
Thinking about what your price will be is another important part of the business model. About.com has an interesting analysis of the break-even point of a business - that point where you’ve made back what you initially put into the business before making any profits – definitely worth a read.
An interesting take on business models comes from Silicon Valley venture capitalist Steve Blank, who favors business models over business plans for early stage companies. In “No Plan Survives First Contact with Customers” he notes that he believes in writing a plan (which we definitely recommend here at Wicked Start) since it forces you to think through all aspects of your business. But, he says, “a business model is designed to be rapidly changed to reflect what you find outside the building in talking to customers. It’s dynamic.” One company that spoke to him, instead of spending time on a business plan “Took their business model and got out of the building to gather feedback on their critical hypotheses (revenue model, pricing, sales, marketing, customer acquisition cost, etc.).” This team was able to obtain seed funding offerings.
So, think carefully about how you’ll approach your business model ideas – if you get a good model before you start, it can make all the difference.