Business model and business plan are two terms that get confused quite often. People assume that both are the same, and their confusion often leads to a failure in their business or startup.
Still, they have some significant differences that are important for you to understand before investing time or money into them. In this article, we’ll explore what makes each of them unique so you can choose one that works best for your circumstances.
Differences between a business model and a business plan.
A business model is a framework for how a company will operate and should be used in conjunction with a strategic plan. A business plan, however, describes the financial aspects of your venture, including projections for revenue, expenses, and cash flow over time. It also includes your marketing plan and any other information that investors might find helpful when deciding whether or not to invest in your company.
The business plan should be the first thing you write. It will help you organize your thoughts and research so that when you start writing your business model, it’s clear how everything fits together.
What is a Business Model?
A business model represents how a company creates, delivers, and captures value by offering goods or services. A good business model will help you understand what your company does, how it operates, its financial needs, and much more.
Business models continuously evolve based on changes in the environment (for example, customer preferences) and within the company (new products, services). It’s important to note that no two businesses have the same models.
They are used in various industries—from technology startups to coffee shops—to help entrepreneurs define their competitive advantage and determine the type of investors they need for their business. There’s no perfect way to structure your business model; instead, several different techniques can be used depending on your industry and desired outcome.
Here are some examples of different types of business models:
- Freemium Business Model – They offer a free version of their product or service, hoping that the user will want to upgrade in the future.
- Peer-to-Peer Business Model – The company is a liaison between businesses and potential customers.
- Direct-to-Consumer Model – This is where the business sells it’s products and services directly to the consumer without utilizing any third-party retailers, wholesalers, or any other middlemen.
There are many other types of business models that are extremely effective. Check out our list of business models with examples for a more in-depth look.
What is a Business Plan?
A business plan is a formal document that describes your business and its objectives and how it will operate. It can be used as a roadmap for your company’s future, helping you think through the details of your business. A good one will help you to think about how you will achieve those objectives by outlining both short-term and long-term strategies for growth, including any risks or pitfalls along the way.
According to sba.gov, a well-written business plan includes:
- Executive summary – explains what you want to do and why, as well as what makes your idea unique. This should be only one page long so it can be scanned by busy people who need an overview of what’s in the document before they get started reading more deeply into it (for example, investors).
- Company description – A more thorough introduction explaining who you are, where you’re going with this venture, and why this is a good time for both the industry or niche market and for someone like yourself (the entrepreneur) to start up in this area of expertise/interests/commitment level, etc.
- Market analysis – To succeed in your market, you’ll need to understand the industry outlook and target market. Look for trends and themes as well as how successful competitors are addressing them—and then find a way to do it better.
- Organization and Management – Describe the corporate structure of your company and name the key executives.
- Service or product line – Explain how your product or service fits within the market and what makes it a compelling choice for consumers. Share any relevant patents or copyrights your company holds.
- Marketing and sales – In this section, you’ll describe how you’ll attract and retain customers—and what that process will look like.
- Funding request – You should clearly define your funding requirements, including how much money you need over what period. Indicate whether you’ll accept debt or equity financing and the conditions that will apply to this investment if it’s offered (e.g., repayment schedules). Be sure to explain how these funds will be put to use.
- Financial projections – Provide a five-year financial forecast. Include a projected income statement, balance sheet, and cash flow.
- Appendix – Include any supporting documents or other materials explicitly requested in your Appendix. Common items include credit histories, resumes, product pictures, and reference letters.
Your business plan and your business model are two different things. Understanding their differences will help you avoid mistakes and make better decisions as you build.