When it comes to starting a business, there are a few key decisions you have to make. Two of those decisions are:
- The business model you choose.
- The business structure you elect.
Both choices will impact your business to a great degree and for a long time to come. Therefore it’s good to give thorough consideration to both before making a decision.
Today, I want to talk about the importance of the business model.
Before I do that let’s look at what a business model is. My online search returns the following definition from Wikipedia.org:
“…the term business model is used for a broad range of informal and formal descriptions to represent core aspects of a business, including purpose, business process, target customers, offerings, strategies, infrastructure, organizational structures, sourcing, trading practices, and operational processes and policies including culture…”
There’s a lot included here with this definition. So let’s take a closer look at what it means.
First of all, the business model is a broad concept. It includes a number of distinctions and factors that determine “the look and feel” of your business. Some of the key factors determined by your business model include:
- What value you will deliver to your customers?
- The products and/or services you will provide to your customers.
- The group of customers (target market) you will focus on.
- The competitive advantage of your business.
- The type of organization you will create to accomplish the above.
- How you will you generate a profit for your organization… Your revenue model.
From the list it’s clear that the business model is broad by nature. It includes many different aspects of your business.
But let me point something out here.
Often, people talk about the business model and the revenue model as if they are one and the same. But not so!
Even though often the two terms are used interchangeably, there is a difference between a business model and a revenue model.
Consider the revenue model as a subset of your business model. It outlines how you plan to generate revenue streams for your business.
Having a clear picture of both your business model and your revenue model is crucial to the success of your business.
The Business Model:
Let’s look at an example…assuming you are starting a clinical practice. The business model for your new practice might outline some of the following:
- All services you plan to offer to your patients, i.e. primary care services, flu clinics, procedures, etc.
- Clearly defining who you will be working with (your market), i.e. I will offer my services primarily to diabetics…
- Identification of your competitive advantage, i.e. my office is the only office within a 20 mile radius specializing in…
- The type of organization: my office will be staffed with…
The Revenue Model:
Is a subset of the business model and outlines the various streams of revenue you plan to generate for your office.
Even though there is some overlap, here is what some of the revenue model details might look like:
- Hilo Primary Care offers services to patients on a cash basis.
- Hilo Primary Care accepts insurance reimbursement.
- Hilo Primary Care accepts both cash and insurance reimbursements.
- Office will have in-house lab services available to patients.
- Office will conduct flu clinics.
- Office will perform cosmetic procedures.
- Office will have cosmetic products for sale.
Why is your Business Model so Important?
A clear business model gives direction to your business. It helps you stay focused and on task!
Without a clear business model, it’s all too easy to get off track. It’s easy to lose focus of what’s important to the success of your business.
This is so important that it is worth repeating…
Having a clear picture of both your business and your revenue model is crucial for the success of the business!
Back at the beginning of this article I talked about two decisions you have to make.
Deciding on your business model was the first of the two decisions. The other decision to be made is your business structure.
To help you decide between the various structures for business, let’s continue with our discussion next week.
Have you identified your business and revenue models, or has it been a struggle?
By Johanna Hofmann, MBA, author of “Smart Business Planning for Clinicians” and regular contributor to the NPBusiness blog.