What is a Business Plan?
A business plan is a formal written document that outlines what the entrepreneur plans to do with the business, and how he plans to do it in an effective way. The business plan is used by both new and established businesses. It is a roadmap that helps the business find the right direction to achieve its goals and avoid any obstacles that it may face.
It contains information on all aspects of the business including marketing research, financial plan, marketing strategies, objectives, vision, etc. The business plan must be able to answer questions that the readers might have about each section.
In this article, we will discuss the key differences between a business plan and a business model. First, let’s look into the purpose of a business plan.
Purpose of the Business Plan
A business plan may be created by an entrepreneur for many purposes. The following are some of the important purposes of a business plan:
- The business plan aims to provide a map for the development of the business
- It helps the entrepreneur know what to focus on
- It helps to gain funding for the business
- The business plan aims to manage the business effectively
- The business plan maps out how the products and services provided by the business will be sold
- It helps to identify the target audience of the business
What Is a Business Model and How Does It Differ From a Business Plan?
According to Investopedia, a business model refers to a company’s plan for making a profit. It identifies the products or services the business plans to sell, its identified target market, and any anticipated expenses.
The business model is essentially an outline of how the business plans to earn profits through its products and target audience in the market. A business model will help in describing how the business will create, deliver and capture value in the market through its products and services.
- The business model explains the following things:
- The products and services that the business will sell
- How the business aims to market the products and services
- What expenses the business will incur
- How the business aims to earn the profits
- What Is the Purpose of a Business Model?
- The business model is a multiple-purpose document. The following are some of the most important purposes of a business model:
- It acts as a tool that helps in describing the business in detail
- The business model can act as a base foundation for the business plan
- The business model is created to summarize the company’s focus to share it with potential investors for the business
- The business model is meant to help the entrepreneur keep track of the progress of the business
Differences Between Business Model And Business Plan
The business model and business plan are similar in some respects. Both the documents are used by businesses during different stages of development of the business and the two of them serve very different purposes.
A business model is usually used during the beginning stages of a small business that does not need a large investment or a complex business structure. The needs of such a business are usually quite small and do not need a detailed plan to begin with.
It is also used when entrepreneurs want to test out the business in different ways before launching in a full-fledged manner. The business model is short, concise, and is to the point as required for the business.
For example, if you want to start a small coffee shop in your town in a small space, you wouldn’t need a lengthy business plan, to begin with. The needs of the business are also not huge like that of a corporate coffee chain business. Hence the business model does a pretty good job of outlining the details of the business
The business plan on the other hand is usually used for larger businesses with a more complex business structure and needs a large sum of money as an investment to run the business. It is also a very important document when looking out for investors for the business.
A business model does not provide adequate information about the business in this case, but it can be used as a foundation to build the business plan upon.
For example, if you own a coffee shop chain on a corporate level, the business structure is usually complex. You might have a lot of branches in different cities or even countries. The marketing for the target audience in different countries will be different.
The type of products and services provided in each city may be different. The vertical levels of management may also be higher. The business functions and operations may also be complex. In such a case the business model is not enough to explain all the functions in detail. Hence a business plan is used in such a case.
External Resources: Business model vs Business Plan?
One of the main external resources that a business requires is an investment for starting or growing the business. The people who could invest in the business could be private investors, financial institutions, friends, family, etc.
In order to convince the potential investor to invest in the business, he or she must be fully convinced that the business will be profitable for them. They need to understand the business completely to gain trust.
For example, if you run a perfume business and are looking out for investors to grow the business. The potential investors may have known or heard about your business but the information will not be enough to make them invest in the business.
The investors would usually want to know important information such as the following:
- What are the types of perfumes that the business sells?
- Does the business provide any special service for its customers?
- What is its unique selling proposition?
- How is the business different from other businesses in the industry?
- What types of equipment does the business need?
- What are the goals and objectives of the business?
- What are the future projections for the business?
- How profitable is the business?
The investor needs to know all the details before investing in the business.
When considering the business plan and the business model, the business plan is more detailed in nature. It usually shows the projection of the business for a minimum of 3 to 5 years. The future prospects of growth and the potential scalability of the business are what drive investors to consider investing in a business.
The investor may want to know about the business model too, but to know in-depth knowledge of the business plan does a better job. Hence a business plan is a better option to rely on when looking out for external resources such as investments.
Internal Resources: Business Plan vs. Business Model?
When considering the internal resources, a business model does a better job than a business plan. The business model helps the entrepreneur and the employees working in the different departments of the business understand what the business is about and work better towards achieving its goals.
The business model canvas and lean startup canvas are some of the business models that are used during the beginning stages of the development of a business. These are tools that are used by entrepreneurs to create different types of businesses based on their goals and needs.
💡 “It is worth clarifying the business model vs business plan. A business plan details the business opportunity in a document whereas a business model represents a one-page visual representation or a simple verbal description.” — Alan Gleeson, General Manager of Palo Alto Software, Ltd.
Components of Business Model Canvas
If you’re like most entrepreneurs, you’ve heard of the business model canvas. It’s a great tool for thinking through all the different aspects of your business. But what are the individual components of the business model canvas?
The elements of a business plan play a crucial part in all of this.
The following are the key components of a business model canvas:
1. Customer Segments
Customer segmentation is a process in which the business separates its target users or consumers into different groups based on similarities or common characteristics such as age, gender, income level, hobbies, etc.
The customer segments section of the business model canvas enlists all the different segments of people that serve as the target audience for the products and services provided by the business.
2. Value Propositions
The business provides some value to its customers through the performance of its products, the brand status of the company, the design of the product, its cost, how accessible it is, the uniqueness of the products and services provided by the business, etc.
This section of the business model canvas enlists all the typical value propositions that the business will add to its products and services that will benefit the customers in some way.
3. Distribution Channels
The distribution channel refers to the chain of businesses that are in between your business and your final customers, or in other words the distribution channel is the way your products and services will reach their customers.
The distribution channel can be a wholesaler, retailer, internet store, social media platform, etc. In such a case the products and services reach the customer in an indirect manner. Some businesses may opt to sell the products and services directly to their customers without any middle man.
The distribution channel section of the business model canvas will enlist the ways in which the customers can get a hold of the products and services provided by the business.
4. Customer Relationships
This section helps the business find the best way to communicate with its customers and maintain its relationships in an effective way. It is important for a business to maintain a healthy relationship with its customer in order to achieve financial success and stability.
5. Revenue Streams
Revenue streams are how the business can earn money by selling its products and services to its customers. This section of the business model canvas helps the business form strategies it can use to make the customers engage with its products and services in order to earn money.
6. Key Resources
The key resources of a business include all the important things that are required to operate the business in an effective manner. This includes manpower, capital, raw materials, expertise, machinery, etc.
7. Key Activities
The key activities of a business include all the activities that a business has to perform in order to gain profits. This section of the business model canvas explains all such important tasks of the business.
A business will have partnerships with many people such as suppliers, buyers, partners, etc. These partnerships are required to run the business smoothly. This section of the business model enlists all the partners of the business.
9. Cost Structure
All businesses require money to begin. The cost structure of the business model talks about the total cost of establishing the business in the market.
A business model is a high-level plan that outlines how your company will make money. It includes an overview of your products and services, as well as your target market and the channels you’ll use to reach them.
Your business model should also spell out how you’ll differentiate yourself from the competition. By contrast, a business plan is a more detailed document that covers everything from your company’s mission statement to its financial projections.