Regardless of past experience and knowledge, starting a business can be challenging and, at times, feel overwhelming. There’s so much to learn—not only about how best to make and market a new product or service, but all the terminology that goes into the planning process. Terms like “business plan” and “business model” get tossed around a lot, but it’s not always clear what each term means. Is there much difference between them?
The short answer is “yes,” and for entrepreneurs and business owners, it’s critical to understand the distinction.
The Business Plan
A business plan offers a description of how your business operates, its objectives for growth and financial success, and how it aims to get there. Essentially, it articulates the why behind a business.
Key elements of a business plan include:
- Executive summary and mission statement
- Projected staffing and equipment needs
- Short- and long-term marketing strategy
- Financial statement, including anticipated startup expenses and capitalization
- Outline of management structure and operational processes
According to the U.S. Small Business Administration (SBA), a solid business plan “guides you through each stage of starting and managing your business.” It serves as a “roadmap for how to structure, run, and grow your new business.”
But this plan isn’t solely for the new owner’s use. It can be critical in the search for funding or to enlist a prospective business partner. As the SBA notes, “Your business plan is the tool you’ll use to convince people that working for you—or investing in your company—is a smart choice.”
The Business Model
A business plan serves as a detailed statement of purpose and operations. As the Business Plan Shop notes, a business model “is the mechanism through which the company generates its profits,” defines “how the company is positioned within its industry’s value chain,” and the ways in which it works “with its suppliers, clients, and partners in order to generate profits.”
What goes into a business model? According to GoForth Institute, there are five key elements:
- A description of your product (or service’s) benefits and profile of a typical customer
- The place where the business fits in the value chain
- The estimated value your offering has for the target customer
- Sources of projected revenue and “cost drivers”
- An identifiable competitive advantage
All of these elements help the startup owner understand how the new business will make money.
Where things can potentially become confusing is in the array of prospective business models an entrepreneur can choose from. Among these models are:
- Manufacturer - Selling directly to customers or through a middleman
- Distributor - Purchasing products from manufacturers and reselling to retailers or general public
- Retailer – Buying products from wholesaler or distributor and selling to the public
- eCommerce – Selling products and services online
- Franchise – Employing a parent business’s model and brand (with payment of royalties) and selling to the public
- Brick-and-mortar – An office, store, or shop where customers interact face-to-face and make purchasers directly from retailer, wholesaler, or manufacturer
There are other business models to choose from as well, such as operating a home-based business, online marketplace, or a subscription service. Everything depends upon the type of product or service you want to sell, and which model is best designed to achieve that goal.
For a budding entrepreneur or even a seasoned serial business owner, understanding the distinction between a business plan and a business model can be daunting. The good news is, if this is a challenge you’re facing, you don’t have to do it alone.
The Alternative Board (TAB) serves as a valuable resource for business planning, strategy, and sales. TAB members are veteran business leaders and owners, with the skills and experience needed to help their fellow members build their business. Learn more about how a TAB Business Advisory Board can guide the way to new growth and profits today!