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What is a Business Model?

What is a Business Model?

When you're thinking of starting a business, you'll inevitably be asked "What's your business model?" This may sound formal and scary, but it's not a trick question or one that requires you to have an advanced degree.

When someone asks you what your business model is, they're basically just asking how you plan to make a profit. There are many factors that go into that question, though. The following are a few questions you should consider:

  • Who's your target market? In other words, you need to consider who is most likely to buy from you or who you want to sell to.
  • What customer problem do you solve? This can be a real problem, iike a crashed car that requires repairs, or a perceived problem like "I have nothing to wear that I like."
  • What value do you deliver? At it's most basic level, your customer must see that your product or service is worth the cost to them. This is known as your value proposition, but it's important to remember that the value is actually defined by the customer, not you.
  • How will you get and keep customers? Is
  • How is the product or service you will offer different from others? The difference can be in features, price, service, etc.
  • How will you generate revenue? At the end of the day, if you don't sell something you won't be in business.
  • What's your profit margin? Profit margin is the amount of each dollar in sales you'll keep after paying expenses, expressed in a percentage. If the total cost of a product you sell for $100 is $79, your profit margin is 21%. Remember that in calculating total cost you'll need to consider the amount of overhead included in your product cost.

There is no one-size-fits-all in business models and you should develop a plan that works best for you. You may create a product and sell it directly to customers, sell wholesale to retailers, sell through distributors, sell online (e-commerce), license your product for others to sell, or invest in a franchise. Find out more about 5 common business models.

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