Defining Your Business Model (and Profit Model)

Models

To run a successful business, you need 3 essential models:

Business model — what you do
Profit model — how you make money
Revenue model — how you charge for it

Sounds simple and you probably have a sense for these in your head.

If you're managing a large team, trying to grow, or climbing toward profitability; then keeping your models in your head won't scale. You know... that concept of rowing in the same direction?

Here's a breakdown of each model

1) Business model

Think of your business model as the narrative or story behind your company. It's the elevator pitch you give at parties. Simply put: What does your business do? How does it work? What's the operational flow of what you make, sell, or do?

A good business model answers Peter Drucker’s age-old questions: Who is the customer? And what does the customer value?

There are so many types of business out there —

Razor and razor-blade model (Gillette, Keurig)
Product or service bundles (Microsoft)
Subscription (Netflix, Spotify, Costco)
Franchisor/franchisee (McDonald's)
Marketplace (Amazon, eBay)
Direct-to-consumer (Nike)
Freemium (Dropbox)
Network (Facebook)

The best business models elegantly bridge the gap between a customer's problem and how the business solves it.

2) Profit model

If the business model explains the narrative or story around your business, then the profit model translates that story into numbers. I liken it to the "back of the napkin" math showing how your business makes money.

Here's a quick example for a product-based company:

These could be dollars or percentages we're looking at. It's a high level view of what the business should look like on a pro-forma basis. I would store this profit model outline and periodically compare it to how the business is actually performing over time.

3) Revenue model

Why is this distinct from a profit model?

Your profit model outlines how the business (as a whole) makes money. The revenue model is how you charge for it — per unit, retainer, usage-based fees, subscription, bulk discounts, etc. — this is a post entirely on its own so I'll leave you with this quote as you ponder your revenue model:

You don’t have to reinvent the wheel; just attach it to a new wagon. — Mark McCormack

Why should this matter to you?

Focus and clarity. A clear and concise set of models will help you focus on what's important in your business. And it's not just your ability to focus, it allows your employees, vendors, customers, partners, and potentially lenders/investors to better understand what you're all about too.

Key takeaway — Take a moment to write down your business model (your target customer and the problem you're solving for them, what makes you unique, how you make/sell/do). Sketch out a rough outline of your profit model with an eye toward a 10-15% profit margin.

Drop us a note if you want to talk through your business model or need help sketching out your profit model.

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