Recently, a very wise person (our very own Alison LaRocca) stated, “Business models are the new strategic plan.” I agree—but even more than a strategic plan, a business model is how your whole enterprise will function now and in the future. It clearly encapsulates everything you do, from fund-raising to delivering services in your community.I often discuss business models in our work because—when done well—they are holistic and clear. They not only guide strategic direction and choices but help you to have productive conversations with potential supporters, align your staff, and provide clarity for those you serve.
But what exactly is a business model? And why should you care?
Check out these answers to the most frequent questions we get on business models and why you need to use them with your organization.
Who Should Have a Business Model?
You should! ... all right, that answer was perhaps a bit too simple. Let’s try this: all organizations should have a business model.
You may have one business model that encompasses everything you do, or you may have different models for each division or part of your organization. But to be clear, every part of your organization should be covered by a business model.
We’ve often heard nonprofit leaders refer to a business model as applying only to their “earned income enterprises,” such as the Girl Scouts of America’s cookie sales. Yes, the Girl Scouts need a business model to sell cookies, but they also need one to help girls develop into healthy, self-confident adults. So, the basic rule is, “If you’re doing it, it should have (or be part of) a business model.”
What Is a Business Model?
Now that you know you need a business model, what exactly is it? Many definitions exist out there, so let’s address the basics. A business model is a description of how you’re going to sustainably generate value for the world. Whatever you do that generates value for people, whether customers or consumers (and to know the vital difference, see our post: Not Semantics-Knowing Your Customers & Consumers ), it needs a model on how you’re going to get it done.
The model can include lots of detail or a little, but the minimum components include the following:
- The Value you’re going to provide. How will you help address customers’ and consumers’ “gains or pains”? That is, what are they going to get from you that they didn’t have before, or what barrier will you alleviate for them?
- The Resources you need to deliver your value. The definition of “resources” is very broad—everything from cash to partnerships to favorable public policy.
- Distribution Channels that you will use to deliver your value.
These are the basics. Certainly, there can be a lot more, but even if you just articulate these three points, you can say you have a model.
Why Develop a Business Model?
Having a business model isn’t a “nice to have” but rather a “must have”—with two immediate benefits for you as a leader.
First, it gives you a simple way to communicate about your operation as a whole to anyone, internally or externally. For internal communications, your business model can help align your staff by quickly equipping them to understand how everything comes together—rather than just knowing their part. Externally, the business model lends clarity to the way you describe how you help others and do it sustainably. In the least, it’s incredibly helpful for potential funders who may not be familiar with you or your field and want to learn about your organization quickly.
Second, the business model will help you show balance or see where you need it. That is, your value generation (for most of you, that’s the programs you provide to communities, families, and children) is no longer a separate enterprise from the activities that generate the resources you need (such as fund-raising or volunteer management). You can quickly see how the resources connect to programs or, more importantly, how they don’t connect. This proves a major challenge in the nonprofit world where the idea of “build it and they will come” remains so prevalent (that is, the assumption that if you get the services right, the resources will always follow).
How Do You Create a Business Model?
Again, there are many ways to create a business model, and numerous tools are available to assist in its development. My favorite is the business model canvass. A great short-video explains this tool, but here’s the synopsis: the canvass has a number of simple boxes that contain all the elements of your business model. It’s simple, which means you can pick it up quickly, but it isn’t simplistic.
Here are three ways you can use the business model canvass with your organization:
- Describe your current operation and how it works. You may be surprised by how much of what you think is clear or aligned really isn’t.
- Create a new vision—for how your organization can evolve or expand—rooted in the needs of your customers and consumers and tied to all the resources you need for success.
- Map out a proposed new service or enterprise. So many times, leaders in the nonprofit world have great ideas that never come to fruition, not because the ideas lack merit, but because the leaders lack a clear sense of how they will realistically mobilize the resources needed to achieve them.
Take a few minutes and try to fill out a business model canvas for your organization, and you will see what I mean. You can start it quickly, but actually filling it in will take time and thought. Yet, that is effort well spent; you will soon have a clear sense of how your operation works, how to convey it to others, and how you can improve it.
I would be interested in hearing how this article helped you focus on your business model, feel free to set up a time for us to discuss.