Business model vs business plan
Ever wondered about the difference between a business model and a business plan?
Luckily for you, this guide explores these terms in greater depth and explain why they're both vital for your success.
So whether you're dreaming of opening a cozy bakery or launching a cutting-edge tech startup, join us as we simplify the world of business planning and modeling—making it accessible for everyone.
What is a business plan?
A business plan is a document providing detailed information about your business and its objectives for the years to come (usually 3-5 years).
To keep it short and simple, a business plan consists of two parts:
- A financial forecast which provides information about the expected growth and profitability of your business, your potential funding requirements, and cash flow projections.
- A written part which provides the context and details needed to assess the relevance of the forecast: company overview, description of products and services, market analysis, strategy, operations, etc.
Need a convincing business plan?
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What is a business model?
Now, let's dive into the concept of a business model.
Simply put, the business model is the mechanism through which the company generates delivers, and captures value. It's the blueprint for how your business functions and generates revenues.
Picture it as the engine that drives your enterprise forward. Consider a small-scale bakery as an example: their business model encompasses everything from sourcing ingredients and baking goods to pricing products and attracting customers.
Understanding this model is like understanding the inner workings of a clock – each gear and cog plays a vital role in keeping the mechanism running smoothly.
The components of a business model encompass the value proposition, customer segments, revenue streams, cost structure, key resources, activities, partnerships, and distribution channels.
Let's take a look at the differences and similarities between the two concepts in a bit more detail.
Different purposes and roles for the business model than for the business plan
The business model is the mechanism through which the company generates its profits, while the business plan is a document presenting the company's strategy and expected financial performance for the years to come.
As you can see, the business model is at the center of the business plan.
The business model describes how the company is positioned within its industry's value chain, and how it organises its relations with its suppliers, clients, and partners in order to generate profits.
The business plan translates this positioning in a series of strategic actions and quantifies their financial impact.
They serve different roles but work in conjunction to help business owners chart a way forward.
Need inspiration for your business plan?
The Business Plan Shop has dozens of business plan templates that you can use to get a clear idea of what a complete business plan looks like.
Different lifecycle between business plan and business model
The lifecycle of a business plan and a business model varies in terms of their development and evolution. While a business model tends to undergo fewer revisions and changes over time, a business plan is often subject to frequent updates and adaptations.
Think of your business model as the backbone of your enterprise, providing a stable framework that remains relatively consistent throughout its lifespan.
In the infancy stages of your business, focusing on developing a robust business model is paramount. This allows you to clarify your value proposition, identify your target market, and establish a sustainable revenue model. It's akin to laying the groundwork before constructing a building – without a solid foundation, your business may struggle to thrive.
In contrast, your business plan functions more like a roadmap, continually evolving to reflect shifts in market conditions, industry trends, and internal objectives.
As your business evolves and grows, the role of the business plan becomes increasingly crucial. It serves as a dynamic tool for outlining your strategies, setting goals, and navigating potential challenges.
For instance, a manufacturing startup may initially prioritize refining its production process and supply chain management (addressed in the business model), then transition to developing a detailed business plan to secure funding for expansion and scale-up.
Understanding the appropriate timing and lifecycle for each tool help entrepreneurs can effectively steer their businesses towards long-term success.
For example, a hospitality startup may establish its business model early on, outlining its core services, target demographics, and revenue streams.
As the business grows, the initial business plan may undergo multiple iterations to accommodate expansions, changes in customer preferences, and emerging competitive threats.
Understanding this difference in lifecycle ensures that entrepreneurs can effectively manage the evolution of their businesses while staying aligned with their long-term goals.
Let’s now take a look at the different formats that can be used to present a business plan and a business model.
Different formats used to present a business model vs. a business plan
When it comes to presenting your business model versus your business plan, the formats can vary significantly.
A business model is often depicted visually, using diagrams, charts, and infographics to illustrate key components such as value propositions, customer segments, and revenue streams.
This visual representation makes it easier for stakeholders to grasp the fundamental aspects of your business model at a glance.
On the other hand, a business plan follows a more structured format, comprising sections such as executive summary, market analysis, operational plan, and financial projections.
While it may include visual elements such as graphs or tables, the emphasis is on providing detailed written descriptions and analyses of each aspect of the business.
For instance, a construction company's business model might be depicted through a visual flowchart, showcasing its construction process, target clients, and revenue sources. In contrast, its business plan would include written sections detailing its marketing strategy, project management approach, and financial forecasts.
Now that we've covered their distinctions, let's discuss the potential pitfalls of inadequately defined business models and plans.
Need a solid financial forecast?
The Business Plan Shop does the maths for you. Simply enter your revenues, costs and investments. Click save and our online tool builds a three-way forecast for you instantly.
Different consequences for having a poorly defined business model or business plan
Understanding the consequences of having a poorly defined business model or business plan is critical for entrepreneurs.
In this section, we'll explore how deficiencies in these foundational elements can significantly impact the success and viability of your venture.
A poorly defined business model means your business is highly likely to fail
A poorly defined business model can spell disaster for your business, increasing the likelihood of failure.
Without a clear understanding of how your company creates, delivers, and captures value, you may struggle to attract customers, generate revenues, and sustain operations.
For example, imagine a small retail store that fails to differentiate itself from larger competitors or identify its target market.
Without a compelling value proposition or defined customer segments, the business may struggle to attract customers and achieve profitability, ultimately leading to closure.
A poorly defined business plan affects your chances of receiving funding
Similarly, a poorly defined business plan can hinder your ability to secure funding from investors or financial institutions.
Investors rely on business plans to evaluate the viability and potential returns of a business opportunity. A lack of detail, clarity, or strategic insight in your business plan can raise red flags and deter potential investors from providing the necessary capital.
For instance, consider a manufacturing startup that presents a vague or incomplete business plan to potential investors.
Without clear financial projections, market analysis, and operational strategies, investors may view the venture as too risky or uncertain, resulting in a missed opportunity for funding.
Understanding these consequences underscores the importance of investing time and effort into developing robust business models and comprehensive business plans. By addressing any deficiencies early on and ensuring alignment between your vision and strategic execution, you can mitigate risks and increase your chances of entrepreneurial success.
With these considerations in mind, let's address the question: Do entrepreneurs truly need both a business model and a business plan?
Do I need both a business model and a business plan?
For many entrepreneurs, the question of whether both a business model and a business plan are necessary can be perplexing. In this section, we'll delve into the importance of having both elements and how they contribute to the success of your venture.
As we have seen, a business model and a business plan serve distinct yet complementary purposes in the entrepreneurial journey.
Think of the business model as the fundamental framework that outlines how your business operates, generates sales, and delivers value to customers. It's like the blueprint that guides the construction of your business.
On the other hand, the business plan delves deeper into the operational details and strategic initiatives required to execute your business model effectively. It serves as a roadmap that outlines your goals, strategies, and tactics for achieving success.
While it may be tempting to focus solely on one aspect over the other, having both a business model and a business plan is crucial for holistic strategic planning and execution.
The business model lays the foundation for your business, clarifying its purpose and value proposition, while the business plan provides the actionable steps and milestones needed to bring your vision to life.
Together, they form a cohesive framework that guides your entrepreneurial journey, from ideation to implementation, and ultimately, to success.
Whether you're seeking funding, attracting investors, or simply navigating the complexities of entrepreneurship, having both elements in place ensures that you're equipped to overcome challenges and capitalize on opportunities effectively.
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
How changes to your business model would be reflected in your business plan
Let's take a look at why business models and business plans are so closely linked together and how changes in one affect the other.
Ensuring coherence between the business model and business plan
Maintaining coherence between your business model and your business plan is necessary.
For example, if a retail store decides to shift from a traditional brick-and-mortar model to an e-commerce model, this change of business model would need to be reflected in the business plan.
With a brick-and-mortar model, the business pays a rent in exchange for a steady footfall bringing customers in store. With an e-commerce model, the business needs to invest heavily in marketing or pay commissions to marketplaces such as Etsy or Amazon in order to generate sales.
These two business models have different cost structures, logistics, and levels of scalability which need to be reflected in the business plan's financial projection.
Example of a business plan
Below is an example of what a business plan might look like. The image shows a stylish cover page alongside a table of contents which lists all of the sections that a normal business plan contains.
This example was taken from one of our business plan templates.
Need inspiration for your business plan?
The Business Plan Shop has dozens of business plan templates that you can use to get a clear idea of what a complete business plan looks like.
What tool can I use to write my business plan?
In this section, we will be reviewing the three main options for writing a business plan efficiently:
- Using specialized software,
- Outsourcing the drafting to a business plan writer
- Using Word and Excel
Using an online business plan software to write your business plan
Using online business planning software is the most efficient and modern way to create a business plan.
There are several advantages to using specialized software:
- You can easily create your financial forecast by letting the software take care of the financial calculations for you without errors
- You are guided through the writing process by detailed instructions and examples for each part of the plan
- You can access a library of dozens of complete business plan samples and templates for inspiration
- You get a professional business plan, formatted and ready to be sent to your bank or investors
- You can easily track your actual financial performance against your financial forecast
- You can create scenarios to stress test your forecast's main assumptions
- You can easily update your forecast as time goes by to maintain visibility on future cash flows
- You have a friendly support team on standby to assist you when you are stuck
If you're interested in using this type of solution, you can try The Business Plan Shop for free by signing up here.
Hiring a business plan writer to write your business plan
Outsourcing your business plan to a business plan writer can also be a viable option.
These writers possess valuable experience in crafting business plans and creating accurate financial forecasts. Additionally, enlisting their services can save you precious time, enabling you to concentrate on the day-to-day operations of your business.
It's important to be mindful, though, that hiring business plan writers comes with a cost. You'll be paying not just for their time but also for the software they use, and their profit margin.
Based on experience, a complete business plan usually requires a budget of at least £1.5k ($2.0k) excluding tax, and more if revisions are needed after initial meetings with lenders or investors - changes often arise following these discussions.
When seeking investment, be cautious about spending too much on consulting fees. Investors prefer their funds to contribute directly to business growth. Thus, the amount you spend on business plan writing services and other consulting services should be negligible compared to the amount you raise.
Another aspect to consider is that while you'll receive the output of the business plan, you usually won't own the actual document. It will be saved in the consultant's business plan software, which will make updating the plan challenging without retaining the consultant on a retainer.
Given these factors, it's essential to carefully weight the pros and cons of outsourcing your business plan to a business plan writer and decide what best suits your business's unique needs.
Why not create your business plan using Word or Excel?
Using Microsoft Excel and Word (or their Google, Apple, or open-source equivalents) to write a business plan is a terrible idea.
Why?
For starters, creating an accurate and error-free financial forecast on Excel (or any spreadsheet) is very technical and requires both a strong grasp of accounting principles and solid skills in financial modelling.
As a result, it is unlikely anyone will trust your numbers unless - like us at The Business Plan Shop - you hold a degree in finance and accounting and have significant financial modelling experience in your past.
The second reason is that it is inefficient. Building forecasts on spreadsheets was the only option in the 1990s and early 2000s, nowadays technology has advanced and software can do it much faster and much more accurately.
And with the rise of AI, software is also becoming smarter at helping us detect mistakes in our forecasts and helping us analyse the numbers to make better decisions.
Also, using software makes it easy to compare actuals vs. forecasts and maintain our forecasts up to date to maintain visibility on future cash flows - as we discussed earlier in this guide - whereas this is a pain to do with a spreadsheet.
That's for the forecast, but what about the written part of my business plan?
This part is less error-prone, but here also software brings tremendous gains in productivity:
- Word processors don't include instructions and examples for each part of your business plan
- Word processors don't update your numbers automatically when they change in your forecast
- Word processors don't handle the formatting for you
- ...
Overall, while Word or Excel may be viable options for creating a business plan for some entrepreneurs, it is by far not the best or most efficient solution.
Need a solid financial forecast?
The Business Plan Shop does the maths for you. Simply enter your revenues, costs and investments. Click save and our online tool builds a three-way forecast for you instantly.
Examples of business models
Let's now look at some examples of the most common business models:
Let's dive into these examples in greater detail.
The business model of production
The most basic example of a business model whereby the company sells the products and services it produces.
In order for that business model to be viable, the company needs to generate enough sales to cover its production, distribution, and storage costs.
The advertising business model
Here the goal is to generate revenues by selling advertising space.
On the Internet this model can be segmented based on the type of advertising:
- CPM (cost per thousand): the advertiser pays the publisher a fixed amount per 1,000 impressions.
- CPC (cost per click): the advertiser pays the publisher every time someone clicks on the ad. The amount paid can be fixed or established through an auction process.
- CPA (cost per action): the advertiser pays every time a specific action is executed. An action can be a sale or a lead for example. The amount can be fixed or set as a percentage of the action value.
This business model is already slightly more complex than the production one given that the company first need to invest in order to create a large audience before it can attract advertisers.
Business model based on commission (or distribution)
In this model, the company acts as an intermediary between the seller and the buyer and takes a cut of every sale it helps generate.
This business model is generally less risky than the two previous ones (and therefore less profitable) as the level of investment required can be minimal.
The subscription business model
This model involves the business receiving revenues from its subscribers at regular intervals.
This business model has one clear advantage: the company knows in advance how much revenues it is going to generate.
The flip side is that it often takes several months to recover the subscriber acquisition costs leading to a lower cash generation at the beginning of the cycle.
The freemium business model
The company offers two versions of its product:
- A free version with a limited set of features whose goals are either to raise awareness about the product or to create a network effect.
- And a paid version, comprising more features and benefits, from which it can generate enough margin to cover the cost of the free users.
The keys to success with this business model are to be able to generate a huge network effect (for example: LinkedIn) and/or to convert a sufficient number of free users into paid customers (for example: Trello).
The accessories business model
The company offers one product for free or at a price close to its production cost and generates a profit by selling related accessories.
The classic example of this business model is the sale of razor blades: razors are generally inexpensive, but you have to continually buy expensive blades to be able to use them.
This list of business models is far from being exhaustive, and if you have questions regarding a business model in particular feel free to contact us.
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
What tools can I use to find my business model?
The business model of most activities is straightforward - for example if you own a restaurant (production model) or a real estate agency (commission model) - but sometimes there are multiple ways of monetizing a product or service and you need to be able to brainstorm to find the best business model.
A typical example of companies faced with multiple business model options is software publishers. Software can be monetized using the advertising, subscription, or freemium model. The choice of business model will have an impact on the go-to-market strategy and funding requirements expressed in the business plan.
A good tool to brainstorm multiple business models with your team is the business model canvas.
With the business model canvas, you start with your customer segments (who you are selling to) and then from this you can infer:
- Your customer relationships (are you selling via an automated self-service system, or offering a bespoke service where you get to know each of Your customers?)
- Your revenue streams (how you monetize each customer segment)
- Your distribution channels (how you reach those customers based on the type of relationships)
- Your value propositions (what messaging is used in each distribution channel)
- Your key activities, resources and partners (what do you need to make the go-to market model work in terms of staff, equipment, suppliers, etc.)
- Your cost structure (how much do these resources and activities cost)
Finally, you need to check that the business model works (costs < revenues).
The business model canvas is a very simple, yet powerful, brainstorming tool. If you're interested in trying it out, you can download a blank canvas here.
Business plan and business model: recommended readings
To get more information about business models we recommend reading:
- https://hbr.org/topic/subject/business-models
- Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers from Alexander Osterwalder.
- The articles on business model from the Harvard Business Review.
Key takeaways
We covered a lot in this guide, what you need to remember is as follows:
- A business model and a business plan have different roles but are both crucial for laying a solid foundation for your venture.
- The business model explains how your business makes money, whereas the business plan shows how much money your business model is likely to generate over the next three to five years and how much funding is required.
- Regularly reviewing and updating both your business model and business plan ensures alignment with your evolving business objectives and market dynamics.
- The Business Model Canvas is the tool of choice to work on your business model, whereas The Business Plan Shop is the tool of choice to work on your business plan.
For more information on business planning, you can have a look at our series on how to write a business plan. You can also download our free business plan template.
Also on The Business Plan Shop
- Business model canvas vs Business plan
- What is a business plan and how to create one?
- How investors analyse a business plan
- How to write a business plan to get a bank loan?