Entrepreneurs might come up with a big idea for a business: a product or service that customers are willing to pay for. It might be a new invention or an existing product delivered to a completely new market. However, for a concept — and the underlying business — to be successful, entrepreneurs should take the time to create both a business plan and a business model.
Unfortunately, the two terms are often used interchangeably, but they are quite different from one another. Each is dependent on the other, so it’s helpful to understand the use of a business model vs. a business plan.
Business Plan vs. Business Model
A business plan is a document describing all aspects of a business. It includes high-level strategies; descriptions of the products and services to be developed and delivered; and all associated marketing, finance, accounting and operational parameters. Generally, the business plan is focused on the market in which the business will operate, including price points, sales channels and competition. However, the business plan should also include financials, as these are important to enable the realization of the business, no matter how genius the product or service might be.
A business model, on the other hand, is the business’ strategy and plan for making a profit. If the business plan is a road map that describes how much profit the business intends to generate, the business model is the explanation for how that money will be made. There are several different kinds of business models. The simplest of business models have customers pay a company directly for a product. However, other business models will have customers receive a product or service for free while others — say, advertisers — are the ones paying the bills.
What Should Be in a Business Plan?
Business plans vary according to industry, company size, experience of the founders and other factors. However, there is a generally accepted list of items that should appear in a business plan. These can include:
- Executive summary.
- Description of products and services.
- Background of founders and principals.
- Market and competitive analysis.
- Product development plans.
- Sales and marketing strategies.
- Operational, IT and human capital plans.
- Finance and accounting systems.
What Are Some Examples of Business Models?
Let’s have a look at some popular business models. This list is far from exhaustive, and some companies employ multiple business models simultaneously to generate revenue.
The least complex of business models is simply a company selling its products and services directly to customers and receiving payment for doing so. Obviously, the company needs to generate enough sales to cover its production and distribution costs in order to generate a profit.
Selling advertising space has become quite a popular business model, thanks to the proliferation of Internet-based and other digital media channels. To extract a profit, a company needs to invest in developing a portfolio of media properties and building its audience in order to attract advertisers willing to pay for advertising and sponsorship.
Commission or distribution
This business model is used by companies that simply want to act as an intermediary between buyers and sellers, collecting a commission along the way. A company usually does not produce its own products or services, but might add incremental fees for consulting, installation or training, and charge customers extra due to the value-add.
This is a business model made famous, thanks to Internet-based businesses. In a freemium business model, the vast majority of users pay nothing for the use of a product or service; however, a relatively tiny number of users do, thereby enabling the company to generate a profit.
Software companies generally employ a freemium business model, where upwards of 95 percent of users might use the company’s free version of its product. The small percentage of customers who pay generate enough cash flow to finance the company’s operations and realize a profit. Of course, companies with freemium business models are constantly trying to encourage their free users to upgrade to paid plans, and the paid plan should have features and benefits that encourage those free users to do so.
Accessories or replenishment
This business model is familiar to anyone who has purchased a printer and ink cartridges or a coffee maker and pre-made coffee capsules. Generally, the equipment is sold at a reasonable price, but the company makes money by encouraging customers to keep replenishing with supplies in order to continue using the equipment. The profit is in the consumable supplies, not in the original equipment.
While a business plan and business model are two separate documents, the truth is that the business plan cannot live without the business model. It’s also important to note that both can be living documents as the business grows and new challenges and opportunities present themselves. New customers, products, services, delivery channels and operations can alter a plan and even a business model.
A business might have started thinking it will make money one way (i.e., licenses for software), but as it turns out, it finds that customers might be willing to pay more for something else (i.e., hourly training or consulting). Both the business model and the business plan must have room to grow and adapt.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.
The Business Plan Shop – Business Model vs. Business Plan