The Art of the Business Model

A good business model forces you to answer two simple questions: “Who has your money in their pockets?” And “How are you going to get it into your pocket?”

These questions may lack subtlety, but making money isn’t a subtle process. More elegantly stated, the first question involves identifying your customer and the need that she feels. The second question creates a sales mechanism to ensure that your revenues exceed your costs.

You’ll tweak your business model constantly–in fact, it’s scary if you don’t change your model or do some major tweaking along the way. Here are some additional tips to help you during the process:

Target a specific niche – The more precisely you can describe your customer, the better. Many entrepreneurs are afraid of too narrow and specific a focus because it won’t lead to worldwide dominance. However, most successful companies started off targeting a market or two and growing (often unexpectedly) to a large size by addressing other markets.

Keep it simple – If you can’t describe your business model in ten words or less, you don’t have a business model. Avoid whatever business jargon is hip (strategic, mission-critical, world-class, synergistic, first-mover, scalable, enterprise-class, etc.). Business language does not make a business model. Think of eBay’s business model: charge a listing fee plus a commission. End of discussion. (inspired by Michael Shermer, Why People Believe Weird Things)

Copy others – Commerce has been around a long time, so by now people have pretty much invented every possible business model. You can innovate in technology, marketing, and distribution, but attempting to come up with a new business model is a lousy bet. Try to relate your business model to one that’s already successful and understood. You have plenty of other battles to fight.

Make it expansive – Business models involving creating a bigger pie rather than grabbing more of the same pie work better for startups. This is because customers expect to discover products that are innovative and cool and are less interested in me-too, better sameness from startups.