A business model is basically a blueprint for how a business will create value for its customers over time. In essence, it answers many basic questions about the business problem and how you can solve it. The challenge with business models is that they are rarely tailored to a specific business or industry. Instead, most business models are general principles that can be adapted to nearly every business situation.
There are some very critical factors that you should consider when creating your business model canvas.
The first is your assumptions. Assumptions must be examined and changed to achieve the outcome you want for your company. When doing so, it’s important to be realistic and not to make unrealistic assumptions. When making assumptions, remember that they are critical to the long-term success of your business model.
For example, one of the most common business models in many industries is selling a product. The assumption behind this assumption is that the product is something that people want to buy. In many cases, this assumption is correct. However, there are many people in society who do not have the purchasing power to purchase a particular product. Even though they may want or use the product, they are not capable of buying it.
One key assumption that many people make is that they should focus on selling to qualified traffic.
This assumption is supported by the fact that search engine optimization (SEO) makes it easy to generate targeted traffic. Many people also believe that they should build a large number of websites if they want to make money. This again is not a sound assumption because building hundreds of websites is rarely profitable.
To understand how to build a business model that generates consistent profits, you need to understand one critical factor that has everything to do with establishing a sustainable business model and gross profit margins.
This factor is cash flow. If a business generates steady, even profits, then the cash flow will not suffer because there is simply no reason to keep generating small sums of cash. At some point, a business owner will need to replace lost cash with larger amounts of cash. When this happens, the cash flow will suffer.
This brings us to another critical factor that determines the viability of business models: the value proposition. In general, business plans assume that customers have one primary need, which is to purchase a particular product. However, this need is usually addressed by addressing other needs. Customers are often presented with a series of choices, including whether or not to purchase the product as a unit or to purchase individual items within that product category. These solutions give customers more freedom to evaluate and adjust their needs as they arise over time.
Therefore, to create a truly sustainable model business plans should include a series of assumptions about how products and services are sold.
One assumption should address customer development. The assumption should assume that there is significant customer development. If this assumption is not included in the business model, the product will fail to generate recurring revenue. The assumption that assumes most businesses operate on a passive market model that neither requires an active investment nor a return on investment is the income statement assumption. In this case, revenue generated from existing customer segments will be used to offset losses before new customer segments are introduced.
The most important assumption about revenue generated is the investment level needed to support the growth of the company.
Assuming that the startup uses a traditional sales approach and uses existing customer development assumptions, revenue will be primarily derived from transactional activity, rather than investment in new products or services. If lean startup models take a different approach than traditional sales, they may also experience significant revenue loss during the early stages of operation. In this case, revenue growth may have to come from future product sales or new client introductions. The assumption that business development assumptions need to be validated in the data used to create a startup’s budget is whether revenue can be derived from future activity if those assumptions prove false.