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A business model is less than a full business plan. It captures the essence of your business and how you will make money. It consists of decisions in six key areas, and the decisions in each of these six areas must be consistent with one another. We have created a simple “menu-based” approach for you to capture the business model for your venture. By “menubased” we mean that you are given a menu of choices or options in each the six key areas of the business model.

Defining the Basic Components of Your Business Model

At its essence, a well-formulated business model must address six key questions: the entrepreneur’s value proposition, the target customer, internal processes and competencies, sources of differentiation in the marketplace, how the firm makes money, and the growth and time objectives of the entrepreneur. Let us examine each of these components in more detail.

1. How will your business create value? This first question is concerned with the value offering of the firm. The focus in on what is being sold, and how it is produced and distributed. This includes the mix of products/services being sold, the relative depth and breadth of this mix, and the extent to which products/services are standardized or customized. In addition, the value proposition is defined by whether the firm makes the product or service, outsources product manufacture or service delivery, licenses others to make and sell, acquires the product and re-sells it, or acquires the product and then modifies and re-sells it. What is the organization’s capacity or volume it can handle or produce? Are there any key organizations or individuals the business partners with or collaborates with to create value? What equipment does the entrepreneur have, and are their constraints on capacity or the ability to meet demand? Finally, the value proposition is affected by whether the product or service is provided directly by the firm or through an intermediary.

2. For whom will the firm create value? This question focuses on the nature and scope of the market in which the firm will compete. Of importance is whether the firm will principally sell to consumers (b-to-c), businesses (b-to-b), or both. The geographic scope of the market should also be specified, such as local, regional, national or international. What is the market definition (e.g., geographically)? Are there key niches or segments being focused upon? Ventures also vary in the extent to which their success is driven by a focus on discrete transactions to a range of customers, or by ongoing relationships with particular customers.

3. What is the firm’s internal source of advantage? What do you do best? The term core competency is used to capture an internal capability or set of skills that enables the firm to provide a particular benefit to customers. Hence, Federal Express delivers a benefit of on-time delivery based on its competency at logistics management. While a firm might attempt to build operations around any number of competencies, sources of advantage can be organized into seven general areas. These include the firm’s production/operating system, capabilities in technology development and innovation, selling/marketing expertise, information management/mining/packaging prowess, competence in financial management/arbitrage, mastery of supply chain management, and skills at managing networks and leveraging resources.

4. How will your business differentiate itself from competitors? Explain how you are different. Depending on how they are applied, core competencies can enable the firm to differentiate itself, or produce something perceived to be unique in the marketplace. The challenge of differentiation is to identify salient points of difference that can be maintained over time. Given the ability of companies to quickly imitate one another, the entrepreneur seeks bases for differentiation that are more than cosmetic or transitory. Sustainable strategic positions tend to be designed around one of the following five bases of differentiation: operational excellence, product quality/selection/availability/features, innovation leadership, low cost, or intimate customer relationships/experiences.

5. How will your business make money? How do we monetize the value proposition? A core element of the firm’s business model is its profit or economic model. The profit model provides a consistent vehicle for earning profits. It has four sub-components. The first of these is whether the firm will be able to charge high, medium or low margins (difference between price and the cost of making and selling the product). The second sub-component is volumes, and whether the firm is organized for high, medium or low volumes in terms of both the market opportunity and internal capacity constraints. The third consideration is the firm’s operating leverage, or the extent to which the underlying cost structure is dominated by fixed costs, or is driven more by variable costs. While fixed costs represent risk when first starting out, they can be paid off over time by contributing to increased capacity. Finally, the economic model considers how we capture revenue—the number of revenue drivers and whether the revenue sources are fixed or flexible. An example of the former would be a company that sells ten items based on a fixed price list. Alternatively, a firm that sells a number of value-added services at varying prices depending on the customer segment and market conditions has more flexible revenue sources. This latter factor is the source of many of the creative revenue models found in dot.com businesses.

6. What are your time, scope and size ambitions for the business? How big a business does the entrepreneur aspire to create? Here, the business model must capture the entrepreneur’s objectives and ambitions. As such, the entrepreneur views the business in terms of a growth model. Five such models can be used to characterize most ventures: subsistence, lifestyle, managed growth, aggressive growth and speculative. With the subsistence model, the goal is to survive and meet basic financial obligations. When employing a lifestyle model, the entrepreneur invests to the point that the business is able to generate on ongoing healthy income stream for the owner and there is money to reinvest in the business. A managed growth model finds reinvestment in an attempt to expand the business and its operations at a fairly consistent and ongoing rate (adding new locations, entering new markets, introducing new revenue drivers). With aggressive growth, one is attempting to rapidly scale the business on a national or global level. The speculative model is employed where the entrepreneur’s time frame is shorter, and the objective is typically to demonstrate the potential of the venture and then sell it. These six components of the business model that are addressed and the specific decision variables within each component, are summarized in the table below. For three of these components, the entrepreneur or analyst must select one factor from a set. For the other three components, one factor must be selected from each set of factors making up a given sub-component.