Business Model vs. Business Plan
The most confused notions that I've ever faced with clients
The business model and the business plan are two fundamental notions in entrepreneurship and two significant steps in the venture creation process. Anyone who wants to start a business and create a company should be able to elaborate on them or have the basic knowledge to follow up with the business advisor they've engaged in helping them in their entrepreneurial journey. However, as different as they sound, they are often confusing. How can we distinguish between them? That's the question I will answer in this article.
Where does the confusion reside?
As a business mentor and lecturer, I encountered this misunderstanding from the first day I started helping entrepreneurs achieve their dreams. The confusion has several forms; some believe the business model and business plan are the same, and some believe the business model is the revenue source which is one element of it rather than the whole. Finally, some still need to learn about the existence of the business model, and they want to go straight to the business plan while the first is part of the second.
What is the difference between the two?
The business model is the heart; the business plan is the body — Rabii Outamha.
Before we dive into the differences between the business model and the business plan, let's define them first and see what purpose each one serves.
The business model is how the company generates its profit. In contrast, the business plan is a document presenting the strategy of the company and its financial implications for the years to come. Thus, the business model is at the center of the business plan. The Business Model describes precisely how your business will make money. In practice, this comes down to defining what you will sell, to which customers, for what purpose, in what way, and for what benefit. It's about describing your business in detail. The description of your business model is one of the cornerstones of your business creation project. Your business model serves as a strategy that you will have defined beforehand. Keep in mind that your business model description should allow you to answer these two questions:
- Does your offer meet real customer needs?
- Have you imagined all the possibilities to stand out from the others by innovating either by the proposed offer, its use, the means implemented, or the commercial strategy?
The Business Plan is a written document, a tool to help you build your business model. It is in the business plan that the business creator explains his economic model and details its subtleties. More concretely, the business plan is the document in which you write:
- The presentation of your project and the founding team, the core business of your future company
- Your market research and your study conclusions
- Your business strategy
- Your economic model is simulated via the financial forecast, which includes the financing plan, the forecast income statement, and the cash account.
- The legal form of your business
Before being subjects of confusion, the business model and the business plan complement each other. For example, change a virtual channel in your business model. In that case, you must modify some aspects of your business plan, such as your website's budget or marketing strategy. However, they're both iterative, scalable, and flexible to fully adapt to your market's and your strategy's evolution.
By reading the two definitions, we can see the differences between each tool's role. Still, there is a lot more to uncover about that. Therefore, I distinguish six main fundamental areas where the differences can reside:
- The business model explains the logic behind the idea, while the business plan describes the strategy to apply it.
- The business model has customer orientation, while the business plan is oriented toward the organization.
- The business model focuses on input, while the business plan focuses on output.
- The business model is about prototype building, while the business plan is about product optimization.
- The business model is about rethinking, while the business plan is about fortifying it.
- The business model seeks customer validation, while the business seeks the investors' validation.
The business model gives clarity; the business plan shows details — Rabii Outamha.
Each interlocutor does not read a business plan in the same way.
Some will start consulting the business model to learn about the project in a single reading. Then, if the reader wants more details, he can refer to your business plan, which will be much more detailed. Consequently, both tools are essential for the business; whether looking for investors, studying your project, or developing your business, you must have a transparent business model and a detailed business plan.
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