What Is a Business Model?

True Tamplin

Written by True Tamplin, BSc, CEPFยฎ
Updated on January 11, 2021

Business Model Definition

A business model is a high-level plan for how a business will earn and maximize profits

Business models establish whether a company will offer a product or service, be online or brick and mortar, or sell to businesses vs directly to consumers, or a hybrid between several traditional business models. 

A business model is not an in-depth plan; it is a 30,000 ft view of the business which is used as a platform to build more in-depth plans upon.

A business model has 2 main focuses: a marketing plan and a financial plan.

Marketing Plan

Within a marketing plan, a company must establish their Value Proposition, Brand, and Target Market.

  • A Value Proposition is why customers should want to purchase a product or service from you instead of a competitor. For example, Uber’s value proposition is a 24/7 fleet of drivers in your area to take you from point A to point B. 
                                                    
  • A Brand is how you communicate your value proposition to your customers and what consumers think of when they hear your company’s name. While TJMaxx and Abercrombie both sell clothing, TJMaxx is a cheaper alternative while Abercrombie positions itself as premium casual wear.
  • A target market is who you are trying to sell to. A target market can be based on age, gender, marital status, location, life stage, job or a variety of other factors.

Financial Plan

A financial plan forecasts revenues while assessing variable and fixed costs.

Variable costs are costs associated with each unit of production, which is used to calculate the profit earned from each unit sold, known as “gross profit.”

Fixed costs are the necessary overhead costs to produce goods, such as a facility. 

A financial plan will evaluate how many units must be sold to cover fixed costs and become profitable. 

Business Model FAQs

The business model is a high-level plan for how a business will earn and maximize profits and establish whether a company will offer a product or service.
A business model is not an in-depth plan; it is a 30,000 ft view of the business which is used as a platform to build more in-depth plans upon by focusing on a financial plan and a marketing plan.
A business model gives a business definite specific goals that it will try to reach by the end of the time period that the model covers.
Business models establish whether a company will offer a product or service, be online or brick and mortar, or sell to businesses vs directly to consumers, or a hybrid between several traditional business models.