The Importance of a Sound Business Model

According to Guy Kawasaki, author of “The Art of the Start,” you don’t have a business model if you can’t describe it in ten words or fewer. What’s his point? Investors want to know how your business will make money. I’m sure you already know that in order for your business to survive it needs to bring in enough revenue to cover expenses and to cover overhead costs. The good news is that someone else has already figured out business models that work! So, you don’t have to try to reinvent the wheel with this one, and Guy doesn’t recommend it. Mr. Kawasaki says that the smart approach is to relate to a successful and already understood business model. How do you define your business model? Guy recommends starting with two questions: “Who has your money in their pockets?” and “How are you going to get it into your pocket?” Not sure where to find already accepted business models? Below we’ve listed a few commonly used business models:

• Bricks and clicks business model The bricks and clicks model involves an offline and an online storefront. Think of a store like Wal-Mart that offers a physical neighborhood location but also allows you to shop online and have products purchased online delivered to the store.

• Cutting out the middleman model This business model involves removing intermediaries such as brokers or wholesalers and connecting the supplier directly to the customer. An example of this would be buying Toms shoes directly from the Toms website as opposed to a local reseller.

• Direct sales model This type of business model reminds us of Avon or Scentsy. Sales are not made in a retail location but by utilizing one-to-one marketing, hosting product demonstration parties, and other similar, more personal selling techniques.

• Franchise Franchising is the practice of using another firm’s successful business model. For the franchisor, the franchise is an alternative to building ‘chain stores’ to distribute goods and avoid investment and liability over a chain. The franchisor’s success is the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.

• “Freemium” business model The “freemium” business model offers a basic service or package for free (generally an online service such as Hulu, Pandora Internet Radio, or Hootsuite). The business generally charges a fee for the “premium” service or upgraded features.