What is a business model and how do I build one?

Updated 07 May 2020

Nick Green

Financial Journalist

Updated 07 May 2020

If you’re starting a business, you’ll need a business model. Your business model is your answer to the question, ‘So how are you actually going to make money?’ A business model therefore needs to be practical, consistent, sustainable and resilient. Putting one together will help you really understand the strengths and limitations of your vision and turn it into a robust, working reality. Here you can find out more about creating a business model and the benefits of doing so.

1. What is a business model?
2. Find the gap in the market
3. Do you want to be a disrupter?
4. Are you an agitator?
5. Building your business model
6. Can I use a business model template?
7. Will your business model succeed?

What is a business model?

Don’t confuse your business model with your business plan. A business model comes before your business plan, and is the basis on which your business plan will be built.

A business model needs to address the challenges that you face: ‘Who is our customer?’, ‘What do our customers want?’ and of course, ‘Will this work financially?’ In addition to these key questions, the business model will also cover elements such as competition, sustainability and the role of technology. As a whole, it will set out all the assumptions you are making when you go into business in this way. Your task is to make sure that these assumptions are solid, rather than just wishful thinking.

Your business plan will develop on these assumptions by explaining the practical actions you need to perform to achieve your aims. Find out more about writing a business plan.

Find the gap in the market

First, your business model needs a clear place to stand – in other words, you need to find a gap in the market. You can create such a space yourself by approaching customer needs and values in a fresh and different way, or by offering better value than the competition. Alternatively, it might involve bringing something totally new to the market, or simply being quicker than everyone else at providing the same service. What can you do that few others are doing yet?

Do you want to be a disrupter?

What does it mean to ‘disrupt’ a market? It means to offer something radically new that changes the game. A good example would be Netflix, which realised there was an easier way to get video content to its customers – and quickly became the dominant player.

There are many ways you might be a market disrupter. You might have solved a problem that everyone else has had to work around. You might have discovered a need that no-one realised they had. Or you might simply have created new processes that allow you to be faster, more efficient or better quality, and so provide better value for money. In order to do any of this, of course, you need to know your market like the back of your hand, so market research is essential. Look at your competitors and their current products, to see what they have missed. Also look at other disrupters in other markets, to see if they give you any ideas.

Now ask yourself these questions:

• How can I make my product / service better?
• How will this improvement affect my target customers?
• Do customers really want this improvement?
• Would this improvement give me a sustained advantage, or is it too easily copied?

You’re now better placed to start ruffling feathers and overturning the status quo.

By definition, disruption isn’t easy (or everyone would do it). Bear the following warnings in mind.

• Don’t overshoot. Are you offering more than customers really want? Are you putting in more money/effort than you can sustain?
• You’re not the only genius. Someone else could well get there first. Don’t bet everything on being unique – ensure you can succeed in the face of competition.
• Understand. Get to know your customers’ buying behaviour. Have a plan for convincing them to switch to you. This means great communication.
• Overnight success takes years of planning. You’ll need to work on your master plan for some time before unveiling it to the world.

Are you an Agitator?

Agitating is somewhat different from disruption. This is more about creating a wakeup call for a sector: re-imagining the way things are done, inspiring customers or providing a quirky new take. Innocent Drinks is a good example of an agitator: fruit smoothies were nothing new, but the brand made it feel as if they’d just been invented. Agitators are less likely to wipe out the competition, but they will inspire lots of copycats.

Every agitator needs a very strong brand, and the confidence to persuade people to embrace the change they offer. It’s about elbowing your way into the existing market, rather than completely transforming it.

Building your business model

Here are the basic steps you’ll need to take when constructing your business model.

• Identify your market. Don’t try to please or target everyone. Have a type of buyer in mind and build a picture of their needs, tastes, challenges and demographics.
• Keep it practical. Establish a clear picture of exactly what you need to do, with no hazy areas.
• Establish and maintain your business resources. What do you need to keep running smoothly, find customers and stay profitable? These are your vital business resources, for example capital, customer data, talented people, innovation etc.
• Stand out. Focus on what you are doing differently, and protect it. Keep the emphasis on how you add value.
• Forge strong partnerships. Find reliable suppliers, failsafe distributors, and advertising and marketing experts who really get what you do.
• Generate demand. People don’t know they need your stuff until you tell them. Work hard on your marketing strategy.
• Leave space for the future. Your business model should work for now, but it’s not set in stone. Allow room for innovation, adaption and development to meet new challenges and opportunities.

Can I use a business model template?

When developing your business model, it can help to work to a pre-existing template. This way you can ensure you cover all the key elements of your model and don’t miss anything important.

One of the most popular forms of business model template is known as the business model canvas.

What is the business model canvas?

The business model canvas is a template for developing new business models or analysing existing ones. Conceived by Alexander Osterwalder in 2008, it has become one of the most widely-used tools for building business models from the ground up.

The business model canvas is based around nine ‘building blocks’ that make up the whole model. These are:

• Value propositions
  What are you offering to your clients?
• Key partners
  What suppliers etc are essential to your value propositions?
• Key activities
  What do you actually have to do to deliver your value propositions?
• Key resources
  What resources (physical, human etc) will your activities require?
• Customer segments
  Who are you aiming your value propositions at?
• Customer relationships
  What relationships will you have with each customer segment?
• Channels
  Through what channels will you reach each customer segment?
• Cost structure
  What are the key costs involved in delivering your business offering?
• Revenue streams
  What exactly are the customers paying for, and how much are they paying?

Usually these building blocks are shown as interlocking boxes on a large single sheet of paper, which can be printed out for a whole team to work on at the same time – hence the term ‘canvas’. For instance, you and your management team might hold a series of brainstorming sessions in which you write notes in each box, building up a picture of what your business actually involves in practice. As the canvas grows, you will start to see how the parts relate to and depend upon each other, and you should modify the boxes as necessary.

You can download the business model canvas under free licence here.

Assessing the risks of your business model

When creating your business model there are some risks to bear in mind. Anticipating these pitfalls will increase your chances of success.

• Are you answering a question nobody asked? You may be so involved in your great idea that you haven’t wondered whether customers will actually want it. Everything must to be driven by real demand, a genuine problem or a true gap in the market.
• Does your model have built-in flaws? It’s easy to undermine your own business model with silly mistakes. Examples include costs that may exceed revenue (especially if these can fluctuate), or a lack of good channels to your chosen market. Not having the right long-term partners to help you source, develop and deliver your offering is another hazard.
• Are you ignoring threats? Never underestimate a competitor, even when you’re thriving and they are tiny. Plenty of book retailers laughed at Amazon’s attempts to enter the market. Remember that customers’ needs and whims can change dramatically over time, so your perfect-fit relationship will drift if you don’t adapt.
• Are you executing it poorly? The best model in the world is no good if your business isn’t properly structured for it. Make sure all your resources (people, technology and capital) are deployed according to the demands of the model, and don’t get distracted. A new opportunity may look tempting, but always ask: does it fit the model? Find out more about organisational structures.

An experienced accountant can help you ensure that your business model makes financial as well as practical sense, as they will be familiar with a whole range of different businesses and how they work.