What is a Business Model?

multiracial businesswomen with laptop talking about work

A business model is a repeatable process for how your business makes a profit.  It seems simple enough conceptually but, defining your business model is extremely important when building a company.  It may be easier to think about with an example.  

Let’s say you want to open a pizza shop in your hometown.  You recently traveled to Chicago and think that people in your hometown would love deep-dish pizza.  If someone asked you to describe your business model…what would you say?  “I sell delicious pizza to hungry customers” or “I charge people money to eat at my restaurant.”  Those are not wrong answers, but a business model defines the how in a more detailed way.

Are you going to deliver pizza?  Will your pizza shop have a dine-in restaurant or just a pickup window and delivery service?  Will you sell pizza by the slice?  Maybe you are going to be creative and offer your customers a pizza subscription for a monthly fee.  Maybe you want to open up next to a brewery that doesn’t sell food.  When you start to really think about how you will make a profit, you will begin to realize that a number of questions will need to be answered.

Steve Blank, one of the leading minds behind lean startups and business model development, emphasizes that these models must be repeatable and scalable.  In our pizza business example, we wouldn’t want to use a business model that requires the chef to make the pizza from scratch every day.  There has to be a repeatable process for anyone to bake a delicious deep-dish pizza.  While growing your own tomatoes may make a better pizza, it isn’t a scalable model to sell pizza year-round and at multiple locations.

Key Point: Thinking about how you will a profit before jumping into your business will prevent you from wasting time and money.  Having a developed business model will also help you answer questions from external stakeholders (investors, banks, business partners, etc.) and give you credibility.

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