Distinguishing the Difference- Business Model vs. Business Plan

Business Model Business Plan September 02, 2020

Lauren Christiansen

Writer

Entrepreneurs have many factors to consider before they start a business. They have to decide who their target customers are, as well as how to utilize ean effective business strategy to reach them. Moreover, every new business must determine how they want to generate revenue while taking into consideration external economic and market conditions.

Business plans and business models can be utilized as road maps for opening and running a successful business. Here are the differences between business models and business plans, and why both are important.

What is a Business Model?

A business model is a design for operating a successful business within the context of external economic, social, and cultural conditions. A model strategy defines a company's revenue sources, value chain, its customer base, methods of financing, and the value in the products/services offered.

In short, a business model explains the mechanisms by which profit is generated. There are different types of business models utilized to achieve success within a particular industry or market. All business models take into consideration the following factors-

1. Sustainability

Ongoing Competitive Advantage The advantages of utilizing the company's services/products as opposed to the competition's
Innovation Factor The propensity to innovate and grow
Pitfall Avoidance The ability to avoid problems and address risk
Graceful Exit A company's ability to scale back or exit the market if key revenue objectives are not met or conditions change

2. Monetization

Sales Performance Model A set of sales and marketing processes that improve a company's ability to generate revenue
Profit Model How a company generates revenue streams

3. Organization

Market Attractiveness How the product/service is positioned within its niche market
Unique Value Proposition The value that potential customers will gain from utilizing a company's product/services

What is a Business Plan?

A business plan is a detailed, formally written document containing the strategies for achieving financial success. Business goals are included along with the methods and time frame for achieving those goals. Business owners utilize it as a road map that includes strategies and direction on how to succeed financially. Those who use business plans include the following elements-

Background information on the business
A step-by-step sales and marketing plan
Definition of the organization's structure and various internal departments
Description of how internal departments operate and what their objectives are
Defines current financial assets and strategy for finding investors
Includes specific financial strategies and goals
Describes how the organization will achieve goals/objectives
Describes who the target market is
Defines roadblocks/problems and how to overcome them

Business Plans vs. Business Models

A business model is how a company positions itself within their industry and market. It describes how the company organizes its relationships with supply chains and clients to generate profit. In short, business models are used to describe how a company chooses to make money and bring value to customers.

On the other hand, a business plan is a written document including a series of strategic actions utilized to make the business model work. It is a detailed explanation of how the company will operate, what each department will do, and how it plans to sell and market their product.

Think of a business model as a human body and a business plan as the organs. The human body cannot function properly if one or more organs shuts down. Similarly, if there is not a specific set of strategies implemented to meet revenue goals and maintain operations, a business cannot function. In other words, there cannot be a successful business model without a detailed plan to make it work.

To summarize, creating a business model is a gateway that demonstrates how a business is functioning within its industry and market. A business plan is a documented set of strategies that are necessary to make the business model work.

Examples of Business Models

Some types of business model plans include-

1. Model of Production
Businesses that create a service or product and sell it are utilizing a production model. Large or small businesses must ensure that enough profit is generated to cover the cost of production. For example, a bakery has to sell enough products to cover the costs of ingredients, equipment, rent, and advertising.

2. Advertising-Supported Revenue Model
This business model strategy focuses on advertising as the primary method for generating revenue. For example, a television network may generate revenue by selling advertising slots for businesses to run ads during commercial breaks.

3. Multi-Level Marketing Model
Multi-level marketing (MLM) models are based on commission or distribution. MLMs create their own sales force by recruiting distributors to sell their products, who then find other distributors to sign up underneath them to sell products. This process is repeated indefinitely.

The company acts as a middle man between buyer and seller, taking a cut every time a product is sold or if a distributor signs up to sell. Famous examples of MLM-based models include Mary Kay, Senegence, Amway, and Scentsy.

4. Razor Blade Model
This model generates profit by selling a low-cost product that needs to be replaced regularly. For example, the razor company, Gillette, can always rely on the fact that razors won't last forever. Because clientele will continue to come back every few months needing new razors, the brand will continue to generate profit.

5. Platform Business Model
This is a newer type of business model that creates value by facilitating exchanges online between buyers and sellers. To illustrate, Airbnb is a vacation rental online marketplace for people who want a place to stay (buyers) and people who want to rent out their property (sellers). Airbnb generates revenue by taking a percentage of the sale of each rental property.

Conclusion

In summary, a business model is a company's foundation and a business plan is a company's structure. The foundation is the company's mission and how it operates, the structure contains the various components and strategies that make the foundation possible.
Business models and business plans are dynamic in that external factors may force a company to change strategies or adapt a different revenue model. Because of their dynamic nature, models and plans need to be reviewed regularly to reassess their value and effectiveness.