Do You Have a Business Model?
Ensuring Your New or Start-up Business Makes Enough Profit
Business, as a concept, is really quite simple. An individual or organisation adds value to something before selling it on. If they sell it for more than it costs to acquire, add value, promote and distribute it, they make a profit.
The business model is how this profit is generated. It's an important concept because it makes companies look at what they actually do and ask whether it's sufficiently profitable.
It’s also an extremely useful exercise for new companies because it indicates whether the start-up business has the makings of success. If there isn't a robust business model, it cannot survive.
Let’s look at two examples.
Card Making
Mary wants to set up a card-making business. She thinks it’s a great idea and will make her a modest living, or at least generate a bit of spare cash. All her friends love the designs so it’s bound to be a success – or is it?
Mary calculates that she can buy materials in bulk for her cards at an average cost of $2.50 per card. She also estimates that on a good day she can make a card in 10 minutes and sell it for $4.00. She thinks the mark-up of $1.50 per card will make her a nice profit.
She then realises that as she can make 6 cards per hour the maximum profit she can make is $9.00 per hour. However, that’s before any time is spent selling the cards, or the cost of creating a web site to sell them or allowing for a retailer’s mark-up. In addition, she can actually only spend 3 hours per day making cards because of the time involved in administration, researching new designs, selling the cards and buying stock.
Mary’s business model indicates that the most she can ever make is $27 per day, or $135 per week. She decides that card making should remain a hobby.
Management Consultancy
John has a good job with a large firm but wants to downsize and retire. He believes he can help small companies as a management consultant.
He estimates that $2,500 per month in addition to his retirement pension would give him a nice living. His research also indicates that companies of a certain size would pay $500 per day for his expertise. John reckons that with administration, travelling time and selling, he could easily achieve 6 paid days per month which would cover $500 expenses and the $2,500 income he requires.
John decides to take the plunge.
Comparing Business Models
These two examples demonstrate that a business needs to have a realistic method of making a profit if it is to be a viable business.
If the figures don’t add up but you want to do it anyway, then you’ll need to consider the aspects that make up the business model. Some of the things to consider are;
- Cost – can you reduce your expenses?
- Time – can you devote more time to the enterprise, reduce the aministration time or produce the goods quicker?
- Price – is it set at a level that people will pay but still high enough to generate enough revenue?
Read Essential Marketing Materials if you want to identify what you’ll need for a new business or Business Analysis for advice on what to measure to ensure success.
