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Demystifying Business Models For Fun and Profit: how to know whether your business will sink or swim

By on 04/11/2012

Last week, Abby Kerr tweeted that, while she’s seen all manner of business blowhards (myself included) wax poetic about motivation, marketing, and productivity, she’s seen very little about actual business development: generating a business model and the like.

So I took that as a personal challenge.

Thanks, Abby.

It’s true. You won’t find much out in the open on business model generation. And what you do find might not mean much to you because it’s either meant for someone in an entirely different industry or it’s so thick in MBA parlance that you could serve it up on a plate.

So let me start at the beginning. And I promise, I’ll reveal some secret sauce at the end of this post that will have you saying, “Huh. So that’s how it works!”

Why should you even care?

Sure, developing a business model can be the drivel that MBAs talk about when they’re trying to sound important. But there is more to it than that.

Do you wonder how to get everything done during the day? Do you wonder if you’ll ever make enough money to justify the business you’ve started? Do you think the answers to your business problems always come down to more traffic, more clicks, more subscribers?

You, my friend, need to understand your business model.

What is a business model?

A business model is the system in which ideas, people, and products come together to generate revenue. In more technical terms, it’s the system in which your value proposition, customer segments, products, cost structure, and channels produce profit.

Your business model isn’t your product, your price, your people, or your value propositions. It’s all of it, working together.

Laying it all out can help you find opportunities for growth, discover what’s not working as it should, and strengthen your own understanding of just how your business works.

This isn’t a “when I have time” kind of exercise. This is now or never.

What kind of business model should you have?

Business owners often make the mistake of thinking that there are several set business models that they can choose from. And true, you could probably put some different business models under the warming lights and dish yourself out the one that looks least frightening at the time.

Unfortunately, that type of business would be about as satisfying as dinner from Old Country Buffet.

There is no perfect business model for life coaches, or knitters, or business consultants, or therapists. I wish there was. Sure there are similarities, best practices, and things that just make sense. But that doesn’t mean it’s set in stone.

In truth, your business model is completely up to you, your strengths, your skills, your customers, and your “I absolutely won’t” list. You do have one of those, right?

Where do you start?

First, you lay out all the puzzle pieces. Business models have a lot of working parts as I mentioned above.

Below, I’m laying out the core pieces. These pieces will help you determine if your idea of how to run your business is viable. As you seek to optimize your business, you’ll need to incorporate the other pieces.

When you’re ready to do that, check out Business Model Generation by Alexander Osterwalder.

You’ll want to grab some pen & paper – or open a mind mapping tool before we get started.

Products & Services

Let’s just start here, not because it’s the most important part but because it’s the most straightforward. What do you sell? What’s on the shelf? What could someone buy right now?

For example, in my business, someone could buy The Art of Earning, Email Marketing Kick Start, group coaching, or one-on-one coaching. Those are the offers on the table. They are all generating revenue, at different rates, regularly.

What do you have on the shelf? Physical products? Digital products? Services? Events? Gigs?

Write down each and put the price next to them.

People

Just who are you selling this stuff too? Who are your potential customers and where are they located? Within your “people” you might have several segments (i.e. beginner, intermediate, and advanced) who have slightly different, but distinct, needs.

For example, at Scoutie Girl, we have DIYers who are looking for inspiration & ideas, we have creative business owners who are looking for information & insight, and we have aspirational creatives who read to experience what they don’t have personal access to on a daily basis.

Write down each customer segment you have. If you know approximately how many exist within that segment, write that down too.

Channels

How are you communicating with your people? Since business in the 21st century is largely based on relationship & connection, it’s insanely important to understand just how many channels you have at your disposal when considering your business plan.

In this case, I have a bunch of channels. The blog, Twitter, Facebook, Google+, speaking, and email marketing are a few. Each of my channels hit different types of people, in different ways.

Write down all the customer communication channels you have available to you.

Activities

This is what you have to do to keep your business running, communicate with customers, and deliver value. Here I would think in terms of thriving and not just administrative tasks all businesses have in common.

For example, for Megan‘s jewelry line, her activities might include designing & developing new pieces, selling at trade shows, pursuing press mentions, researching art & design at museums, and following up with boutique & gallery owners who place orders.

Write down all the activities you need to be doing to make your business thrive.

Costs

This is how much money it takes to run your business, create what you make or offer, and find new customers or clients. It can be vastly different for different types of businesses so it’s important to know what your costs are.

In my case, my costs include email marketing services, web hosting, conference call lines, travel, and PayPal fees, among other things.

Write down everything you spend money on now (or check your tax return!).

It’s all written down. What’s next?

First, seek to better understand the business model you already have.

  • What connections could you draw from section to section? Which channels line up with which customer segments? Which activities coordinate with which products? If you’re a visual person, draw out how your business looks to you based on the information you’ve just written down. If you’re more verbal, write down key statements that tie important pieces of information together.
  • What appears unnecessary? As your business grows & changes, it’s inevitable that you’ll have parts of your business that just aren’t serving you. Write down what you could remove from your model to simplify your business strategy.
  • What’s missing? Inevitably, there are holes in your business model. Is there an underserved customer segment? Are you underutilizing a particularly effective channel? Is there an opportunity to make a connection between a product & an activity? Write down all the opportunities you see in your model.

Next, figure out if what you have is viable.

The first thing you recorded was all the products & services you have available and how much they cost.

  • Ideally, how many of each could you produce in a week? Keep in mind most freelancers, coaches, and makers can only produce “work” about 20 hours per week. The rest of the 40 hour work week is spent in support of your business (marketing, admin, learning, etc…).
  • Ideally, what would your product spread be? In other words, how many of each would you like to sell in a week out of what you can produce (i.e. 10 hours of coaching, 10 hours on an ecourse OR 20 necklaces, 50 earrings, and 30 bracelets).
  • Multiple the cost of each item in your product spread by the number of sales you’d like to achieve. This is the number that is your ideal income based on what you can create and how you’d like to sell it.

Now, when you take into consideration the costs to run your business, is this a number you can live with? Does it feel abundant? Does it feel scary? Does it sound ridiculously low?

Some conclusions you might draw…

You could draw many conclusions from this number.

If the number is very high… and you’re feeling like you’ve just won the lotto… How can you make those numbers reality? Can you reach more customers? Can you attract more appropriate clients? Can you better use the channels you have available to you? Can you move your product spread closer to what you’d like and further from what it is now?

If the number is very low… and you’re feeling like you’re ready to quit… How could you adjust your product spread to create better revenue? Can you raise your prices? Can you create more products by outsourcing? Could you develop a more profit-friendly product or service to boost your bottom line?

If the number just isn’t very exciting… and you’re feeling a bit bored… Can you incorporate one of those missed opportunities into your model? Can you create clearer value propositions & offers? Can you seek strategic partnerships to sweeten the deal?

The Secret Sauce

The truth is that you really don’t know how the businesses you see online (or even in your local community) operate. It’s tempting to try to replicate what you see on the surface. But you miss what’s really going on behind-the-scenes.

Behind-the-scenes is where the magic happens.

Our websites, our storefronts, our social media streams are only facades. Not in a negative way, but in an enticing, get-ya-in-the-door way. The newsletters, the inexpensive products, the retail shops – it’s all to capture the initial lead.

Often, there’s nice revenue being generated there. But it’s not enough to create a thriving business.

What makes the business thrive is how channels, activities, and customer segments are massaged over time to ready customers for a bigger, more profitable offer. You sell earrings to get the full collection purchased later on. You sell at craft shows to prime an audience & catch the attention of wholesale buyers. You deliver an ebook to prep customers to work with you one-on-one. You work in groups to ready a select few for a mastermind program.

I know, I know. You think that’s manipulative? It can be. But it’s not in most cases. In most cases, this is the model that’s required to actually build the most value into the business for both the business owners and the customer.

Everyone comes out on top when a business model is built to deliver higher & higher levels of value over time in more profitable ways.

Odds are, you’ve been focused on the front end because that’s what you’re aware of. You’ve been writing books, creating one-off art pieces, even working one-on-one with clients. But have you identified what could make your business truly profitable on the back end? Could you deliver more & better to your customers over time?

I think you can. I know you can.

Please, let me know the results of your analysis in the comments below. I’m dying to know what you do with this information.

***

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66 responses to “Demystifying Business Models For Fun and Profit: how to know whether your business will sink or swim”

  1. Patricia
    Patricia 04/11/2012 at 8:46 am | | Reply

    Wow Tara! As a creative business adviser I have worked with the Business Model Canvas for nearly 2 years as I love how it works creatively and allows for great brainstorming. But your piece here is one of the best practical blog posts I have read about BMC. Congratulations, inspiring to me and others.

    1. tara gentile
      tara gentile 04/11/2012 at 9:34 am | | Reply

      Hi Patricia! Thank you SO much. I love the BMC, as well, but finding it a bit overwhelming for beginners! I really wanted to give people the chunks they needed to form some basic insights into their businesses.

      As I was writing the post, I started to think it was just going to sound like nonsense. But I’m glad I pushed through and so appreciate hearing that it’s successful!

  2. Helen
    Helen 04/11/2012 at 11:13 am | | Reply

    Tara,
    Thank you so much for writing this post, it is so refreshing to read a practical (meaty) business post with concrete, logical ideas and actions. I’m slap bang in the middle of restructuring everything around my business to make it fit my life better, and to allow me to offer more to my customers, and I will certainly go back and look at my new plan through this lens. Thank you!

  3. Michelle Wilkes
    Michelle Wilkes 04/11/2012 at 11:20 am | | Reply

    Exactly what I needed. This has my name all over it. Intuitively all this info is in my head. It takes a well written “call to action” from you to JUST DO IT!! Thank you SO Much.

  4. Sandi Amorim
    Sandi Amorim 04/11/2012 at 11:22 am | | Reply

    Years ago (in the olden days before social media) I ran a business building program where creating a business model was part of the work. We touched on a lot of what you’ve written but by the time we’d wrapped up that program I felt like something was missing. Didn’t know what at the time, but reading this what jumps out at me is the part on Channels. And the secret sauce ain’t bad either ;-)

  5. Laura DIane
    Laura DIane 04/11/2012 at 12:42 pm | | Reply

    Tara, this was the most concise, easy-to-understand, and exciting post I’ve seen on this subject. Actually, I gleaned more from the post than I have from multiple full length books on the subject. Thank you for your wisdom and your generosity in sharing so much.

  6. Abby Kerr
    Abby Kerr 04/11/2012 at 3:25 pm | | Reply

    Hi, Tara! –

    Thank you for putting this post together. This is an *excellent* intro to Business Model Generation, a book that I think every serious entrepreneur should get their hands on at some point. You’ve made the 9 elements on the canvas very approachable and have asked some really great clarifying questions, too. I *really* like your point that there aren’t pre-fab biz models we can just stick our ideas into and go, go, go. I find it incredibly useful and smart, though, to look at the patterns of successful businesses and see what can be customized and iterated for a new one.

    Found this great video {2:19 long} via @LeslieForman the other day, too, which is a good visual representation of the info you’re sharing here: http://www.youtube.com/watch?feature=player_embedded&v=QoAOzMTLP5s

    I’m curious, from your perspective, is it ever too soon for a creatively entrepreneurial type to start building a biz model? Or do you recommend the dive-right-in and start experimentingi/iterating approach, and let the biz model emerge organically from there? I seem to have gone about both of my businesses using the 2nd route, and it’s now over two years into my current biz {the 2nd one} that I’m actually clear on my biz model. The benefit of this is that I’m super clear on what hasn’t worked well for me at different times, and why.

    Thanks for your perspective and for teaching this fascinating resource!

    – Aby

    Just to clarify,

    1. Abby Kerr
      Abby Kerr 04/11/2012 at 3:31 pm | | Reply

      Oops! Please excuse the misspelling of my OWN name in my signature — as well as the ‘Just to clarify . . . ‘ beneath. ;)

  7. kriket broadhurst
    kriket broadhurst 04/12/2012 at 3:09 am | | Reply

    Wow Tara, what a comprehensive, user friendly & practical blog post. You never cease to amaze with your take on things, thanks

  8. Jenn
    Jenn 04/12/2012 at 12:51 pm | | Reply

    Great Post! I have been considering these things as I wrap up my first year in business. This post if extremely helpful in planning my big picture!

  9. Naomi Niles
    Naomi Niles 04/12/2012 at 3:08 pm | | Reply

    Great rundown, Tara! I pick up Business Model Generation probably at least once a week for one reason or another. I’ve actually got like 4 canvases taped on my office walls for one thing or another, lol!

  10. Steve Rice
    Steve Rice 04/12/2012 at 3:52 pm | | Reply

    That’s really helpful advice, Tara. I haven’t actually sat down and laid all the “pieces on the table” so this is a really great bit of insight.

    I’m kinda looking forward to what I come up with.

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    Don’t Build Your Business for a Lucky Break | The Mogul Mom 04/17/2012 at 3:48 pm |

    [...] a business model that allows you to be profitable at the size you’re at now and then make plans for both [...]

  12. Ethel
    Ethel 04/18/2012 at 12:32 pm | | Reply

    Hi Tara! I’ve only recently subscribed to your newsletter. This post is really wonderful and very insightful. Thank you, thank you for keeping it real and explaining it in a very practical and actionable way! So inspired to sit down and work on this asap. More power!!

  13. Mark McGuinness
    Mark McGuinness 04/18/2012 at 1:06 pm | | Reply

    “this is the model that’s required to actually build the most value into the business for both the business owners and the customer.”

    To me, this is the heart of what makes business models so exciting. You’re looking to design a system for generating maximum value to everyone who comes in contact with it.

    If that’s not creativity, I don’t know what is.

  14. Joe Breunig
    Joe Breunig 04/20/2012 at 4:22 pm | | Reply

    Wow! Another delicious helping of wisdom to feed the entrepreneurial spirit. It’s so important to understand that the “business model” is the underlying structure off which all business activity hangs. Perhaps you would provide a heaping of dessert with your thoughts regarding the “Business Plan” developments.

    -Joe Breunig
    Reaching Towards His Unbounded Glory

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