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Business Model Nitty-Gritty

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Business experts view the development of a strong business model as an essential component of business planning and I would agree.  The business model ranks near the top of the list of business planning responsibilities.  I teach business plan writing for an SBA affiliated organization and I’ll place the business model fourth in line,  after one gauges demand for the product/service,  defines the primary customer and evaluates the competitive landscape.

The business model is the roadmap within the roadmap that is your business plan.  It is the blueprint for the process by which a company will make and sustain a profit.  It is therefore necessary to do thorough market research and put the pieces together carefully.  If you expect to make any real money,  you had better get your business model right.  Unfortunately,  too many aspiring entrepreneurs do not roll up their sleeves and hash out the gory details that are the building blocks of a viable business model.

The business model shows you how to make your business work efficiently.  The first big question the business model asks you to examine is,  how will you and the clients connect?  Will they find you via your website?  If so,  how will they know that your website exists?  What should you do to drive them to your site and what do you want them to find and do when they get there?  The type of website that you design and your call to action are business model issues.

Or maybe you will connect with clients and prospects via referral.  Who, then, will refer to you and what will motivate that behavior?  Do you have,  or can you create,  referral relationships that will feed you a steady supply of prospective clients? 

For example,  if you are a florist,  do you have relationships with wedding and other event planners? Perhaps you worked in a busy floral shop and know a few people who will send brides and others to you.  Or do you think you can depend on networking to connect you with enough prospects to get the ball rolling on sales?  Who knows,  maybe you are that lucky.

Where business will actually be conducted is another business model issue.  Will customers visit you at your floral shop,  or will you operate as a Freelancer and go to them, toting a binder or iPad that shows examples of arrangements you can create?

For those who sell other types of products,  will you sell from a physical location,  will you place items into the  stores of others on consignment,  or will all be sold via your website?

Providers of intangible services must first know how clients expect to engage in the type of transaction offered and whether you should open an office  (accounting or law),  or go to the client’s location  (PR services or business consulting).  Your business model will explain it all and tell the reader (and you) why it makes good business sense to sell in the way you’ve chosen.  As your business grows,  the business model will change accordingly,  to accomodate increased demands on resources and client expectations.

Remember also to address customer service issues,  like your return/replacement policy,  in the event that a few customers are not satisfied with a product,  or if something breaks while being shipped.  If you will sell from your website,  the shipping process will be addressed in your business model.

So the business model impacts many facets of your business plan and its fine points deserve careful consideration before you take the plunge and start spending time and money on a concept that you cannot make work.  Next week,  we’ll take a look at questions to ask yourself and some guideposts to assist you as you develop a business model for a new enterprise,  or revamp the one you’re in now.

Thanks for reading,

Kim

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Starting A Business? Consider Your Marketing Strategy Part III

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Even if you will not seek financing for your business and the marketing plan is for your eyes only, you will thank yourself many times over if you take the time to thoroughly research and account for all aspects of marketing, especially sales expectations for your products and/or services.  Make sure that you  understand  exactly how you will  make sales contact with prospective customers.  In your plan, note whether your business will sell primarily  B2B,  B2C  or  B2G.

THE SALES STRATEGY–PROJECTIONS

Sales is the tactical manifestation of marketing.  The theories of marketing are brought down to earth to make contact with the customer and will be validated (or invalidated) by the sales revenue generated.

When planning a new business venture it will be necessary to make sales projections (also called forecasting), ideally for 36 months into the future, to give yourself an idea of the revenue potential of your business.  It’s sort of like fortunetelling, but there are resources available to help you make a reasonable estimate.

Marketresearch.com gives current industry profiles and other data, covering 16,000 lines of business in 300+ markets. You’ll need to become a registered user;  some (but not all) info is free.  Another excellent source for business data is Boston Public Library’s Kirstein Branch. You can access certain info online at bpl.org and most is free.

Example:  in your business, you are the only sales person during the first year.  If sales are promising, you may decide to hire 1-2 sales people in year two and maybe another 1-2 more sales reps in year three.

There is data that gives the average sales revenue per full time sales representative in nearly every industry. That data will allow you to chart your expected gross income for the year, based on the number of people selling for you.

However, bear in mind that a new business is unlikely to achieve the benchmark figures during the first 3-5 years of operation.  Remember also that gross revenue is not net revenue—there are expenses associated with selling like salaries, product brochures and office supplies.

Competitive intelligence data can help confirm the accuracy of your sales projections.  However,  Freelancers and those competing with privately held companies will not be able to ascertain how much revenue is historically generated yearly by those competitors since the data is not public.

What I’ve discussed here is known as the Comparative Method of projecting sales.  It is generally more useful to project for new businesses using this method. There is also the Build-up Method, where the entrepreneur identifies all likely revenue streams and then estimates the dollar volume that can be extracted from each source in a given month (or quarter).  The Build-up Method tends to work best for businesses that have been up and running for a few years and therefore have a sales history and documented revenue streams.

Finally, consider the impact of  sales trends for your industry (meaning consumer demand) and the relative strength of the local and regional economies on your products/services.   Sales projections will never be 100% accurate.  It will be wise to keep your forecasts conservative.

THE SALES STRATEGY–CUSTOMER CONTACT

How the business owner makes contact with prospective customers will be governed by a number of factors, one of the biggest being is this an online business or is it in real time?

If  you expect to sell online, be sure to have a website with a good shopping cart set up and secure credit card processing.  Your website will function like an ambassador and an employee,  so create  it with respect. The site must communicate your brand very well, must download quickly every time and must be user friendly.  A content management system will allow you to keep the site updated yourself.

Driving traffic to the site will be your #1 job and search engine optimization will be critical.  As was suggested in a  comment to last week’s posting, internet discussion groups are a very useful way to connect with customers and create buzz.  They are a great way to drive traffic to your website.

Catalogues do double duty, allowing customers to order by telephone or the website. They are expensive to produce (product photography is costly) and print, but they still catch the customer’s eye and are widely used by the likes of LL Bean and Staples. To the customer a good catalogue is a keeper, so you don’t have to print more than once a year.  Get a toll free phone number for customer convenience.

Next, decide whether the best way to sell to customers will be face to face or by telephone.  What is traditional for your business, meaning what do competitors do? Of course, you can create your own style.  Your sales may occur primarily by telephone, but a visit to prospects to introduce yourself to decision makers and gatekeepers can be a wonderful way to separate yourself from the pack and develop relationships.

Other selling methods include bid submission (e.g. the trades or selling to the government), referral arrangements and inclusion on preferred vendor lists (e.g. caterers and florists  at a function space).  For some businesses, two or more customer contact methods will be used to generate sales.

Next week we’ll start talking about money.

Kim