What is a Business Model?


A business model describes the way your company makes money. It includes the products and services that you provide to your customers and the way you make a profit at the end of the day by earning more than you spend. Your business model may be the single most important factor in your success or failure as a business. It distills your operations, describing them in clear and relevant terms to help you see whether or not you can earn a sustainable living in the long term.

How to Create a Business Model

To create a business model, first decide what you are going to sell, and who your primary customers will be. The decision about your company's offerings should include not only which products and services you plan to provide, but whether you will sell them at a wholesale or retail level, and how you will get them into your customers' hands, such as through a brick and mortar outlet or via online sales. Pricing is an essential part of a business model as well. The amount you charge should cover your expenses, appeal to your customers and include some extra so you can earn a profit. A well-constructed business model should also cover how much you'll need to sell to break even, and how much you plan to spend on your most important operating costs such as materials, labor and rent.

What is a Business Model Example?

Direct sales is an example of a business model that's especially fitting for a small, one-person company. Let's say you enjoy making jam. Selling directly to customers at area farmers' markets will allow you to charge retail prices and cut out the middleman. You'll save the expense of outfitting and running a retail store, and you'll have ongoing opportunities develop strong relationships with your suppliers who will also be farmers' market vendors. To set prices for a direct retail sales business model, calculate how much you'll pay for ingredients, jars and labels, and then multiplying that figure by three to match the foodservice industry's goal of 33 percent materials cost.

The Importance of a Business Model

A business model is a foundation that sets the stage for future success. If you put the time and energy into thinking through the details of your business model when you first start your company, you'll have a clear idea of what you want to achieve and how you want to achieve it. You'll have an explicit definition of success and a path to follow as your business grows. Business models can change, even regularly, but taking the time to chart and clarify can increase your odds of success, and save you from unnecessary missteps.


About the Author

Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.