What does a small business owner need to know about business models?

Plymouth Business Model P5 Business Coupé 1938
Plymouth Business Model P5 Business Coupé 1938 (Photo credit: Wikipedia)

I’ve always been sceptical about business theories because things like a business model are really just a representation of reality not reality itself. Harold Geneen who knew how to run businesses successfully said, “You cannot run a business, or anything else, on a theory”.

The thing is you can theorise as much as you want about what is going to be successful in the marketplace and with your customers but you only really know when you test your theory your business model in the reality of the marketplace.

Many small business owners have a simple business model: buy products from other companies, mark them up and sell them. They might throw in some service or aftermarket support for additional revenue but that’s often all.

It’s different for the start-up owner. They need to try out many different approaches before committing too many resources to business ideas that might fail. Hans Peter Bech, a business consultant, says “failure is an integrated element of prototyping. Most early models will fail. That’s exactly why we prototype. Failing is learning. Our first business models are based on assumptions and guesses. As they fail, we will learn something that we incorporate in our next iteration.”

The most widely known book on business models is “Business Model Generation” by Alexander Osterwalder and Yves Pigneur. This book was published in 2010 and the Business Model Canvas and other formats have spread throughout the world. What’s helpful about the Business Model Generation is that it’s told in easy-to-understand illustrations.

The most well-known representation of a business model includes:

– value proposition
– customer relationships
– customers
– revenue
– channels
– key resources
– costs
– key partners
– the activities

If you look at this business model depiction you will see that it is broken up into two main areas: the back office processing where you “manufacture” value and the front office where you “deliver” and “communicate” value to potential customers. The one thing that other representations of the business model include is the environment. You can’t launch any product or service in a vacuum. It needs to meet with reality. The business model environment would include the economic conditions, market forces, the trends and forces in the particular industries that you enter.

For the start-up the business model is a blueprint that is tested all the time against the reality of the market and customer perceptions and demand. Start-ups probably need to return to their business model at least weekly. Bech provides a handy rule of thumb for business model blueprint checking: check monthly for a young company, quarterly for a mature business and probably twice a year for a business in its prime.

A business model may make sense on paper but it needs to be tested against reality. As Geneen said, “Facts from paper are not the same as facts from people. The reliability of the people giving you the facts is as important as the facts themselves.” Your customers will give you the facts in the purchases that they make of your product or service and the feedback they tell you about using your product or service. This provides the best “facts” to build and refine your business model.

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