The Questions Every Startup Business Model Must Answer

The Questions Every Startup Business Model Must Answer

The most important — but often most frequently overlooked — part of starting a business is the business model. Your business model is what answers the question, “how are you going to make money?”

It may seem obvious, but entrepreneurs often spend a few minutes thinking about the business model and then a few years implementing the details. A business model, for example, is what underlies every business plan. The business plan describes how the business owner will make the business model into reality: how much funding it will take, what kind of marketing will be necessary, how many staff, etc.

Avoiding the Traps

As the old saying goes, “there are lies, damned lies, and statistics.” As business plans make heavy use of statistics and forecasts, there’s a common tendency for eager entrepreneurs to paper over holes in their business model using statistics in the business plan. While this may work for procuring funding, the holes in the business model still remain once it’s translated to the real world.

In other words, entrepreneurs will find themselves dealing with problems in the business model sooner or later. Sooner, if they recognize the problems during the planning stages, or later, if they wait until the problems show up in the “brick and mortar” phase of operations. Needless to say, it’s much faster and easier to take care of problems during the planning stages.

Check Your Assumptions

To avoid trouble later, business models should be given at least as much thought and consideration as the business plan. Ask yourself, “what assumptions am I making?” — are you assuming your product or service will be popular? Or that you’ll be able to sell it at a certain price? That you’ll be able to sell enough advertising to support operations? Remember, unless you’ve researched the market and found evidence that the demand you believe is there really is there, you’re simply guessing.

The “Fail Fast” Way

The alternative to careful research and planning is a “fail fast” business model. While it used to be that starting a new business took months and required elaborate preparation, technology makes it possible to get website hosting, put up a website, buy advertising, and “see if it will fly.” This methodology allows you to test out an idea for under a thousand dollars and a weekend’s worth of effort. If the initial test is promising, you can proceed with developing a more elaborate business — secure in the knowledge that it will work.

Evaluating Your Model, Before You Get to Work

As you research and test, you’ll almost certainly find your business model changing. Very rarely does the initial plan survive first contact with reality. Instead, you’ll find certain things are easier than you expected, while others you counted on in your mind are difficult or impossible. Therefore, the first question you should ask yourself before you put in any work is, “How flexible is my model?”

If your business model relies on a dozen factors being exactly right, chances are your initial research will lead you to abandon it entirely. On the other hand, if your model is simple and adaptable regardless of the situation, it will probably work out no matter what crops up.

Similarly, you should keep in mind that business is about delivering value to the customer. Believe it or not, if you’re simply focused on making money, you may find it very hard to do. As a business, your job is to create, deliver, and capture value. This “value” can be social, economic, or cultural — it’s defined almost entirely in the mind of the customer.

If your business is not creating value in some way or another, you can have the best delivery and value-capture mechanisms and you won’t earn anything. On the other hand, businesses that create a lot of value can often survive poor execution of delivery and value-capture.

Value capture is the part you, as a business owner, have the most interest in getting right — value capture is the way you get paid. Your customers, on the other hand, pay you in proportion to how well you do the first part, creating value for them.

Conclusion

Developing a good business model isn’t hard, but it’s easy to overlook in the initial enthusiasm of starting a company. Instead of using your first idea as the business model and spending all your energy on implementation, you will usually have much more success focusing on getting the initial idea right before you put in all the work.

About Alex Pejak

Alex Pejak is an economist currently working on a few projects in Australia, including one for EZi Hosting. She is interested in topics related to market research and career development.