Entrepreneurship, Second Edition

4.1. The Business Model

Every firm's business model consists of two components: a revenue model and a cost model. The revenue model breaks down all the sources of revenue that your business will generate. For instance, if you own a restaurant, your basic revenue model will separate food and beverage into two main sources of revenue. You can take that further and break down the revenue model by meals (breakfast, lunch, and dinner), categories of food (Italian, American, etc.), or even food item (pizzas, hamburgers, etc.). The more detailed your categories, the more information you can glean about how certain aspects of your business are performing.

This chapter is written by Andrew Zacharakis.

The cost model identifies how you are spending your resources to make money. It includes your cost of goods sold (COGS) and your operating expenses. Basically, the business model is represented by your company's income statement. Understanding the business model enables entrepreneurs to make decisions that lead to greater revenue for lower costs.

Many of the world-changing businesses that have formed over the last 10 years have struggled to find a viable business model. For example, Twitter, a social networking and micro-blogging service founded in March 2006, has yet to determine how to generate revenue. Twitter CEO Evan Williams has spoken several times about the lack of a business model: "We will make money, and I can't say exactly how because. ... we can't predict how the businesses we're ...