An example of a business model using this format is shown in Figure 6.4. This is for an IT services business to be set up by two people.
- Review the business model using the evaluation criteria in the previous section.
- What problems or weaknesses can you identify in the business model?
- What suggestions would you make for improving it?
What problems did you identify? Here is a selection:
- Customer group and business opportunity: how competitive is the sales proposition given the reducing cost of IT services to the small- business market?
- Sales income: the pricing appears high for the same reason. It assumes all 200 customers will pay for full 12 months, yet in reality they would sign up at different points during the year.
- Variable costs: who is doing the marketing? Is the spend to attract each customer realistic? Are variable costs really as low as'£50 per customer?
- Fixed costs: why borrow £l00k to spend on IT systems which will depreciate quicldy when more flexible options include leasing or renting space on a server? Are other fixed costs realistic?
- As a result, sales, gross and net profit figures are over-optimistic and need to be reconsidered before a sound basis for growth in years two and three can be envisaged.
Clearly this is a flawed business model which needs revision from the basic assumptions onwards. However too many businesses are started using poor business models which have never been written down and do not work well. This can lead to the failure of the business, so it makes sense to chart, evaluate and improve the business model as a starting point.