The book, Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, written by Alexander Osterwalder and & Yves Pigneur defines the term business model as:

A business model describes the rationale of how an organization, creates, delivers, and captures value.

This is a very good definition, however I think it is important to understand the difference between a business model and a business plan.

A business organizes its assets and activities into a system that it uses to deliver value to the customer. This system may vary widely from business to business depending on the industry it is in and the approach it is taking. For example, a restaurant has a different business model that a tire shop. This is easy to see. Amazon has a different business model than your local retail seller of books. This might be more difficult to see as they both sell books.

To help explain this difference, I’ve included a graphic from the above mentioned book that nicely organizes a business model into separate areas.

When you look at categories like cost structure, channels, and key activities it becomes clearer how Amazon is different than your local bricks and mortar retail book seller.

Note that the business model gives a thumbnail sketch of how the business will be organized and what it will be doing. It does not provide a plan for how this system will work or how it will be implemented. That’s where the business plan comes in.

What does all this mean for you, the person wanting to start a small business? If you are starting with a business model that has been existence for while and other people are successfully running businesses using it, you can proceed to the business planning stage. If you are starting a business with a business model that is significantly different that what has been tried before or if a particular business model has a short rack record, you should spend time developing your business model. This will often involve conducting a feasibility study to test your business concept.

For 80%-90% of you out there who are looking to start small businesses, a proven business model exists for what you are doing and you can proceed to the business planning stage. The rest of you have a longer road to travel.