“What I tell founders is not to sweat the business model too much at first. The most important task at first is to build something people want. If you don’t do that, it won’t matter how clever your business model is.” – Paul Graham
There is no shortage of definitions and explanations for business models. Wikipedia defines it as “[describing] the rationale of how an organization creates, delivers, and captures value (economic, social, cultural, or other forms of value).”. Steve Blank has developed a system of 9 boxes to help you capture a business model. As a starting entrepreneur you’ll probably have lots of conversations with partners, investors, and advisors around what your business model is going to be. Mostly you’ll do this because you’ll constantly be asked to explain what your business model is, but you probably won’t really understand why.
The concept of a business model is a very broad one; all aspects of your company and how it operates are part of it. In the Selfish Gene by Richard Dawkins he propses that even external behaviours like how a bird builds a nest are part of the genome of that bird. Similarly even external behaviours like how you answer the telephone are utlimately part of your business model. If we deconstruct the phrase, this becomes a bit more clear. Literally what we’re talking about here is a ‘model’ of your ‘business’.
In order to be complete that model should reflect and encompass everything that affects how your business runs, otherwise it is not an accurate model. We often use the term business model to describe these elements independent of having actually built a model; “I wonder what this store’s business model is?”. For example, how you answer your phone isn’t part of your business model until you actually build it into some form of model. For the purposes of this discussion, however, I will take similar license.
So now we know that a business model is all encompassing, and that there are many ways to create a business model. Now we can talk about the why of creating a business model. Your business model is the justification that shows your business deserves to exist. In a capitalist economy no-one grants you the right to have a business. The right of a business to exist must be earned and proven. Just as there is little value in a mathematical proof that skips a step, there is little value to a business model that does not, as a composition of all it’s parts, work. The primary way in which a business model fails is to fail to describe a business that can sustain itself (often by running out of money). Going back to the genome analogy, it only takes one gene to be off to cause an organism to fail. Similarly it only takes one element of your business model to be off for you to find yourself without a business.
As you go through the exercise of trying to understand and develop your business model, understand that what you’re really doing is answering the questions: “Does my business deserve to exist?”, and “How can I make this business deserve to exist?” and you will likely find it to be a less onerous, and more inspiring process. Remember that the environment your business operates in is constantly changing, so consequently so will your business model. The goal here is not to create a fixed structure for your business, but to understand how it will survive. With that understanding you are better equipped to be successful now, but also to recognize where your model will need to change to be successful in the future.