Four Reasons for a Business Model

This week at Techstars during my office hours sessions, I was asked questions by several teams which each time led to the same place: please draw a business model diagram for me. Everyone could, or said they could, but in each case it was clearly not a practiced exercise.

A business model is not a business plan, although the two are often confused. How can you tell the difference? A business model fits on one piece of paper (or one flip chart page or one white board), is referred to regularly, and has all sorts of uses. A business plan is a big pile of paper that even the author doesn’t read all the way through, and certainly no-one else does.

A business model

A business plan

My favorite approach to a business model is (as previously mentioned) the Business Model Canvas. There are other approaches, but, to qualify, it must fit on one piece of paper, and must be a diagram of some kind.

Here are my four reasons to have a one-page business model picture

  • Completeness: you can make sure you have addressed all aspects of the business model. This is not exhaustive completeness – it should be quite high level and avoid getting into the weeds – but you get to see if you have any glaring holes.
  • Consistency: you can see whether all aspects of the business model are consistent with each other. For example, does the assumption about partners line up with the assumption about channels?
  • Clarity: you can see whether (and ensure that) all your colleagues are clear about what you are doing and why. If asked to draw the model independently, would they draw the same thing? The model becomes a concrete focus for discussion about how it all fits together and brings out any misunderstandings or disagreements about what you are doing.
  • Communication: you can draw and redraw the model as you tell the story of your business to mentors, advisers, potential recruits, and potential investors. It can focus a staff meeting, board discussion or investor presentation. You can much more easily remember a diagram (and recreate it from first principles) than you can remember a page of text.

If you have started to think about a business you have started to diagram things out. That’s where to start. Take an hour. Certainly stop after 90 minutes. Leave it on a white board. Share it with colleagues and advisors. Let them add post-it notes with questions. Go back to it with at least a couple of people around each time – let the brainstorming drive good thinking.

Don’t sweat the small stuff – even on the nine-sections of the Business Model Canvas, you only need six or seven elements to get going. Every company has “sales and marketing” as a Key Activity, and every tech company has “develop the tech platform” as well (and then “tech platform” shows up on the Key Resources panel, too). Don’t worry about that kind of completeness. Do worry about a value proposition for each customer segment, differentiated key assets and key partners, and revenue and cost components that characterize the economic drivers of the business. Advanced uses of a business model diagram include layering on key assumptions, generating explicit hypotheses, and building out tests of those assumptions.

On a very related note, Steve Blank recently wrote a great post on misunderstanding a business model methodology (and how to fix it). Heidi Allstop of Spill shared this great resource with me for those interested in an online canvas tool.

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