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Business Plan or Business Model? Or Both?

Startup Business Tiles Let’s say we want to start a business, and we’re looking for advice.  we Google “start a business” to get some initial input… and get 3,750,000 results.  But we’re not deterred.  We click on the first site,  The Small Business Administration’s  “Follow These 10 Steps to Starting a Business”.  As the page loads we see that Step One tells us to write a business plan.

Fast forward 24 hours.

We’re having lunch with a friend who’s taking a break after having sold her second business for “somewhere in seven figures.”  Midway through dessert we ask her for help writing our business plan.

“I’m happy to help, but honestly, I’ve never written one.”

What’s going on here?

“I might be able to help more if you sketched me the value proposition for your business model.”  She pushes a napkin across the table at us.

Welcome to the divide between traditional business formation and 21st century lean startups.

In this post we’ll talk about why business modeling is popular, but traditional business plans are still relevant… the facts, the myths, and the underlying business truth.  Then, we’ll talk about when and how it makes sense to use both models and plans, and how to do it.

Ready? OK, get a mug of coffee… we’ll be here when you get back.

Frequently Asked Questions, Facts and Myths

Let’s jump right in.

In one sentence, what’s a business plan? A business plan is a document or presentation that describes the market, the product/service and the company you will build, with projections of your funding, expenses, and profits along the way.

What’s a business model? A business model is group of statement-like lessons you’ve learned about your product/service, who will buy it, why they’ll buy it, and how you’ll make money selling it.

Business models and business plans have the same information, don’t they?  Well… yes and no.  They both talk about the market, the product or service offering, startup costs and revenues; but the do it in different ways, using different language, for different purposes.  Plus, business plans contain information like organization charts and pro forma financial statements that business models don’t include.

Aren’t business models just a new format for business plans?  Differences in information content aside, models and plans look very different because they do very different things.  A business model is essentially a minimal, stylized record of our attempt to find the people and the product that will, repeatedly, make money.  It’s a group of statements that reflect what we’ve learned, probably through considerable trial and error.  A business plan is a narrative document or presentation that describes, in some detail, how we’ll start, finance and build a business.

Business models are modular and flexible so that they be changed easily and often.  Business plans are unified and structured because they tell a consistent story.

Business models are for entrepreneurs; they’re a diary and yardstick and a guide.  Business plans are for stakeholders; the management team, the investors, the lenders, etc.  They’re a decision aid and progress checklist.

If I’m starting a bricks-and-mortar business I write a business plan; if I’m online, I build a business model… right?  Actually, the decision revolves more around the nature of the business.  Both bricks-and-mortar and online businesses can be proven or speculative, small scale or large scale.  When we’re grappling with the speculative and the small scale (at least to start), we gravitate towards building a business model.  If we’re building a proven, large scale business we’re probably going to write a business plan.

Will I save time if I use a template application to write my business plan or build my business model?  There are certainly plenty of application sellers trying to convince us of this one.  The truth is, in certain situations, it makes a lot of sense to buy and download a tool.  An application makes a lot of sense when you’re developing a model or a plan with a distributed team.  When developing the pro forma financial statements for our financial statements it sure helps to use a spreadsheet template.  For those of use who aren’t publishing wizards, a template or tool can lend a polish to our pride and joy.  However, the application sellers usually don’t tell you how difficult it is to customize their product; they also don’t tell you how much work might go into formatting for that distinctive appearance that sets our plan or model apart from its cookie-cutter competition.

Should I hire an expert?  No, you shouldn’t.  Here’s why.  If someone else writes our resume, it doesn’t look or sound like us  That’s also true of business plans and models.  Fundamentally, though, venture capitalists and lenders are betting on us, as much as on our product.  The faster they learn about us, the sooner they make a decision to support us.  The business model and/or business plan should help, not obfuscate that relationship-building process.  Here’s the exception;  we may certainly get paid help to edit or evaluate our work.  The feedback will probably be bruising and ego-busting, but it sure beats a steady chorus of “no” from lots of people we’ll only get one chance to impress.

Alright.  So what do I need to know? Let’s find out what’s in a business, plan, and why.  What will a finished business plan look like?  Then lets find out what’s in a business model.  What does a mature business model look like?  Then, let’s find out whether we need to write a plan, develop a model… or do both.  Since there’s no one-size-fits-all approach, I’m giving you the information to make your own decision:

  • Business Plans: A Traditional Tool That Works
  • Business Models: 21st Century Evolution
  • Both?  Maybe, But Don’t Overlap

Here we go.

Business Plan: A Traditional Tool That Works

Biz Plan Graphic

“A business plan precisely defines your business, identifies your goals and serves as your firm’s resume.  Its basic components include a current and pro forma balance sheet, an income statement and a cash flow analysis.  It helps you allocate resources properly, handle unforeseen complications, and make the right decisions.  Because it provides specific and organized information about your company and how you will repay borrowed money, a good business plan is a crucial part of any loan package.  Additionally, it can tell your sales personnel, suppliers and others about your operations and goals.”

Small Business Administration

Here’s a descriptive outline of a business plan, and if it looks like the outline for a document or presentation, that’s because almost all business plans are published that way.  (The linked section headers open to the Small Business Administration’s description of the contents of the section.)

Executive Summary The executive summary is a snapshot of your business plan as a whole and touches on your company profile and goals. Read these tips about what to include.

Company Description The company description provides information on what you do, what differentiates your business from others, and the markets your business serves.

Market Analysis Before launching the business, it is essential to research the business industry, market and competitors.

Service or Product Line What do you sell? How does it benefit your customers? What is the product lifecycle? Get tips on how to tell the story about your product or service.

Marketing & Sales How do you plan to market our business? What is our sales strategy? Read more about how to include this information in the plan.

Organization & Management Every business is structured differently. Find out the best organization and management structure for the business.

Funding Request If we’re seeking funding for our business, find out about the necessary information to include in the plan.

Financial Projections When asking for funding, provide financial projections to back up the request. Find out what information is needed to include in the financial projections.

Appendix An appendix is optional, but a useful place to include information such as resumes, permits and leases. Find additional information you should include in your appendix.

By the time we get finished filling answering all the questions posed in each section, we’ll probably have a document that’s anywhere from 15 to 30 pages long, not including the spreadsheets containing the financial projections.  (Each year’s projections include at least a profit and loss statement, a year-end balance sheet, and a sources/uses of funds statement.  That’s at least 9 pages for a three-year projection.)

We can take away two things from the above.  First, anyone promising to write a business plan in a day, or even a week, is overpromising.  Second, once we’re close to the end of all that work, we really won’t look forward to changing it.

That’s why business plans tend to be static, documenting things we know about the business.  But what if we don’t (yet) know some of fundamental pieces of our business?  We need to find out, and business modeling helps us do that.

Business Model: 21st Century Evolution

“A business model is nothing else than a representation of how an organization makes (or intends to make) money. This can be nicely described through the 9 building blocks illustrated in the graphic below, which we call “business model canvas”.”

Alexander Osterwalder

Alex Osterwalder rolled out his business model concept in 2008; since then it’s been widely adopted as a new approach to starting a business when you’re (a) choosing a market and (b) describing your product.   It’s obviously much different than a business plan; at its center is the value proposition.

What’s a value proposition?

“A… statement that summarizes why a consumer should buy a product or use a service.  This statement should convince a potential consumer that one particular product or service will add more value or better solve a problem than other similar offerings.”

Investopedia

Let’s take a look at a couple of great examples of compelling value propositions, courtesy of a great 2012 post at ConversionXL.

Evernote's Value Proposition

Evernote’s Value Proposition

Two words, three bitesize amplifications, all in one graphic.

Here’s another.

Square's Value Proposition

Square’s Value Proposition

Five words tell you what you can do.  One picture makes it obvious how you do it.

Yes, but what where to you start, and what do you do?

After taking some solid advice from Steve Blank, Ash Maurya developed his lean canvas to strip out everything but the essentials of defining the new business.   He’s collapsed all those boxes and arrows into a single “page” of nine boxes; we fill in information in each of the boxes to create the model.

I like Ash’s approach because he focuses, laser like, on the most essential questions every entrepreneur should force themselves to answer.  In a great post Ash tells how he evolved the business model and why.  Here’s Ash’s lean canvas:

Lean Canvas

Lean Canvas

Here’s a short description of the nine elements of Ash’s lean canvas.

Problem  (I want to…) This is a simple version of the question our customers ask themselves just before they go looking for our product or service.  The question is specific and practical because that’s the kind of question that motivates us all to part with our money.  Or, the question is exciting and captivating, because that’s an emotion we’re willing to spend money on.

Solution  (I need a…) Again, from our customer’s mouth: What will solve my problem and/or scratch my growing itch?  There are two schools of thought.  First, the customer knows exactly what they want (mostly true).  Second, customers don’t know what they want until they’re surprised and delighted by something (more true than market researchers would like to believe).  Either, way, the only true measure of our solution is our customers’ reaction to it.

Unique Value Proposition  What makes this solution different, and worth buying? Is it most convenient, cheapest, most effective, most stylish, etc.  Here’s the hard part: our view, as entrepreneurs, doesn’t count.  It’s the buyer’s judgement that counts.  That’s what we need to describe in this box.  How? We’d better jen up some prototype solution and get it in front of customers.  When they buy, we ask “why” and there’s our answer.  If they don’t buy… we either (a) supposed a non-problem, (b) guesstimated the wrong solution, or (c) guesstimated an (inadequate) part of a right solution.

Unfair Advantage  Why can’t this product or service be copied or bought?  This is a tough one… so tough, in fact, that it may the last lean canvas element we can fill in.  That’s alright.  The better the answer, the easier it will be to overcome the “me too” competition that always challenges successful products and services.

Key Metrics How will we measure the goodness (or lack thereof) of our solution?  (If we can’t measure how well we’re doing, how will we know when our product is good enough to release?)

Customer Segments Not, “who is our customer”, but  “how do our customers describe themselves?”  When we talk about ourselves we tend to be specific and we often include something that we feel makes us special.  It’s that specificity and specialness that we want to capture.

Channels  How will we reach our customers, to introduce ourselves, explain our product or service, answer questions, and eventually make it easier for our customers to buy?  Then, how will we keep those customers coming back… for advice, upgrades, other new items, etc.?

Cost Structure How much will it cost to deliver our solution(s) to our customer(s)?

Revenue Streams How many customers will buy?  What will they pay?  How will they pay, and how often?

Since there’s not much space, our descriptions will be phrases, or short sentences.   You can get Ash’s Lean Canvas here, to work digitally and distributed.  Or you can do it the old-fashioned, paper, tactile way, with a stack of 3×5 cards and a mechanical pencil with a big eraser.  (I don’t know why, but I’m just more creative the old-fashioned way… I need to engage my hands to engage my brain.)

Either way, a business model should be dynamic and exploratory.  Make some assumptions, rough out an idea, and then test it on some customers.

To keep things in perspective, read Steve Blank’s description of the pivot.  Every startup should be ready to change its mind after encountering business reality; that’s why we’re doing and redoing and redoing a business model.

Both?  Maybe, But Don’t Overlap.

Clearly, business plans and business models aren’t the same thing. Let’s make a direct comparison by cross-referencing the information contained in each one.

Information Matrix

Information Matrix

There’s some overlap, as shown by the “X”  marks.  Most of the information in the business model ends up in a few sections of the business plan.  Further, the business plan doesn’t include any information about metrics.  Finally, because the business plan is a progressively revealing document (the executive summary summarizes, expended upon in the company description, each area further detailed in its own section),  information from one element of the business model is included in several business plan sections.  (With duplication and elaboration like this, it’s no wonder that few people enjoy revising their business plans!)

We mentioned, in the FAQ above, that business models and business plans have different purposes and different audiences.  Here’s a summary diagram of the differences.

Startup to Business

In fact, there’s relatively little crossover between the activities of a start-up, where business models are most helpful, and business execution, where business plans come into their own.  There’s no value in try to build a business model and write a business plan at the same time.  I recommend that we don’t think about a business plan until we’re rather confident that we’ve found the unique value proposition.  Before then, we want to keep our focus firmly on the value proposition, without distractions.

However, once we’re comfortable with our value proposition we can start writing our business plan.  The best approach is to start writing from the middle  of the plan outwards, and from the back end forward.  Here’s why that makes sense.

If we develop the business plan’s product-service description first, followed by the market analysis, we’re expanding on the freshest information from our business model.  We can key everything else in the business plan to support those two lynchpin sections.

Furthermore, if we deepen our model’s estimates of costs and revenues by expanding them into pro forma income statements and balance sheets, we’ve created a kind of business plan checklist.  The cost items should be reflected in our business plan descriptions of marketing and sales activities and organization and management.  The revenue items should be reflected in our product pricing and market survey discussions.

With the sections of the business plan drafted, we can summarize them in the company description, and then hit the highlights in our business plan’s executive summary.  The company description and the executive summary are the business plan sections we want to tailor for our expected readers, like lenders, venture capital investors, etc.

Summary

We need something to chart a path, keep us on the path, get us back to the path, and show everyone what’s happening.

When we’re grappling with the unusual, the speculative, and the small scale (at least to start), we gravitate towards building a business model.  If we’re building a proven, large scale business we’re probably going to write a business plan.

Business models are for entrepreneurs; they’re a diary and yardstick, as much a guide.  Business plans are for stakeholders; the management team, the investors, the lenders, etc.  They’re a decision aid and progress checklist.

The outline of a business plan looks like the outline for a document or presentation, because almost all business plans are published that way.  We’ll probably have a document that’s anywhere from 15 to 30 pages long, not including the spreadsheets containing the financial projections.

The lean canvas business model to strips out everything but the essentials of defining our next business.   There’s  a single “page” of nine boxes; we fill in information in each of the boxes to create the model.  Since there’s not much space, our descriptions will be phrases, or short sentences.   A business model should be dynamic and exploratory.  Make some assumptions, rough out an idea, and then test it.

There’s no value in trying to build a business model and write a business plan at the same time.  However, once we’re comfortable with our value proposition, then we can start writing our business plan.  The best approach is to start writing the plan from the middle out, and from the back end forward.

One More Thing…

Let’s leave this subject (for now) with one closing thought.  The model or plan isn’t the business.  Writing, diagramming, brainstorming… they’re things that happen while we’re out there creating the business.

Meet a customer.  What did we learn?  Build a little bit of product   Meet another customer.  What did we learn?  Make the product a little bit more valuable  Meet another customer.  Sell something.  What did we learn?  Repeat.

Along the way, we’ll sketch, scribble, and type as we have time and need.  But that’s not the business.

The business is the customer we just met, the product in our pocket and the cash in our hand.  We can’t go far wrong with that perspective.

Want to Read More, Right Now?

We also published a concise, insightful post about how small business plans differ from the plans that big businesses use.

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6 Comments

  1. I used to have the same problem when I first started my business. It didn’t do so well. Now I’m working with a company and making more than I did when I had my own business. Sometimes, you got to make due with what you got.

    • Chris Chadbourne says:

      I’ll guess that “what you got” is a bruised ego, perhaps an empty wallet, and two pocketfuls of lessons from the school of hard knocks. When you feel you’re ready… you might just have the experience you need to try again. Allen, I didn’t really succeed at my first or second startup. It took the third to survive and make profits… for 18 years. Why not take a look at the GoodBusinessU section of our site? Ask yourself how you rank for having business tradeskill. I’ll look forward to hearing more from you!

  2. You make some great points. Going back to your “build one business at a time” method.. it makes me think of a time when I tried to do too much with my web design business after I finished college. I specialize in one particular field but the folks at Yellow Pages persuaded me to get into printing and other tech-related fields to reach more customers. The next thing I know, I went from html coding to printing out someone’s dissertation at Office Depot with little money to gain. I jumped the gun a bit too fast, thinking I could figured things out when the time came. Then I realized I didn’t have the technology to offer the services. Next thing I know, I’m running to and front printing shop just to make an extra $20.00 or sometimes just to break even. All for what? It’s a crazy thing being young.

    • Chris Chadbourne says:

      Jimmy, more and more I’m coming around to the view that we’re not really running a businesses until we’ve figured out how to make money doing something repeatedly. That before-business period, the start-up… I think that if we’re lean, and stay that way, we give ourselves more chances to get it right. Like you, I made a lot of mistakes when I was young. It took me three tries to end up with a durable business. Along the way I learned about accounting, collecting invoices, building one business at a time, etc.

  3. Tom Freeman says:

    “I might be able to help more if you sketched me the value proposition for your business model.” She pushes a napkin across the table at us.” the concept and all that came from your mind? If it did you earned a standing ovation from me. Brilliantly written though let’s get to topic. I should create my own graphical/digital business model right? Those examples you showed were a great help too. I have seen many sites similar to them but was not quite able to decipher what they wanted? Now it is very clear. Though can i hire someone to create such a business model for my website can I? Thanks Again you were a great help!

    • Chris Chadbourne says:

      Tom, thanks for the kudos. I’m glad that little vignette was able to communicate.

      Yes, you should create your own model. I’ve been using Ash Maurya’s model at http://www.leanstack.com and I recommend it highly. It’s worth the small per-month subscription price. Here’s one benefit that I didn’t mention in the post; the Lean Canvas tool allows others to make comments about each part of your business model. It’s a great way to let others stimulate your thinking.

      There are people who can help you peel away the excess and get to the lean core of your web site (and your underlying business model). Unfortunately, so far as I have seen, the two quite separate skills don’t seem to reside in the same person. A good web designer with experience developing for ecommerce clients can be very helpful, very quickly. It takes a broader set of skills and much broader insight to comment on someone’s business model. In fact, those who can distill the underlying business model from the clutter of early planning and the rush of startup experience are quite rare.

      I think I’d start with Paul Hawken’s advice to “build one business at time.” It’s so easy to believe that we can succeed by adding value in many ways. But the truth is that it’s hard to craft a successful business that actually delivers value in one way. What started as a way to make customers happier while reducing our risk lands us squarely in startup overload. We become exhausted, careless, miss the opportunities, then miss the obvious warning signs, then find we can’t rise to the challenges…. our many-way approach crushes us under the weight of its demands. Build one business with one idea.

      Tom, I hope that helps just a little bit.

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