… we will make money from this idea by …
The business model section tells the investor how it plans to make money from the product. It is a brief statement of the underlying mechanism used to generate revenue and profit. The full detail will come later in the financial projection section of the business plan.
To explain the mechanism for making money the business needs to show the investor where revenue comes from and what the expenses of generating that revenue are.
Business Model Framework
A business model describes the way in which a business intends to make money.
The business model framework should encompass the entire business including the following:
- Who the customers are.
- How the business will satisfy customer needs.
- How products will be delivered to customers.
- What type of relationship the business has with the customer.
- Where the revenue will come from.
- What assets and resources are needed to build the business.
- What the business has to do to make the business work.
- Who are the key suppliers and partners.
- What is the cost structure of the business.
Numerous models have been developed such as:
- Online business
- Website business
- Saas business
- Franchise business
- Internet business
- Ecommerce business
- Bricks and clicks business
- Direct sales business
- Freemium business
- Distribution business
- Subscription business
Business Model Presentation
The business model section should:
- Explain whether the revenue is transaction based (the customer pays a one off fee for the product) or recurring (the customer pays an ongoing fee on a regular basis).
- Describe the mechanism for generating the revenue, is it for example a product sale, usage fee, subscription, renting, or advertising based.
- Explain the pricing mechanism, is it for example, list price, volume dependent, negotiable, or auction based.
The underlying microeconomics should also be explained in basic terms. For example, for a subscription based service, the revenue will be given by multiplying the number of customers by the average monthly fee.
In terms of the expenses, explain the cost structure of the business model, are they fixed or variable, are there any economies of scale.
The business model section presentation will depend on the nature of the business, its revenue streams and cost structure. The example below is for a licence based business operating model, and sets out a brief description together with the underlying basic maths behind the first years revenue forecast.
The business operating model section is a brief outline of the revenues and costs underlying the business plan. It sets out to tell the investor how the business idea will generate income. The inclusion of the simple maths behind the revenue stream allows the business to demonstrate the scalability of the business. The object is to summarize the major revenue streams and associated costs, this is not the place to go into too much detail as this will be covered as part of the financial projections.
This is part of the financial projections and Contents of a Business Plan Guide, a series of posts on what each section of a simple business plan should include. The next post in this series sets out a summary of the business plan financial information over the next five years.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.