Business Model vs. Business Plan: Key Differences Explained

“Failing to plan is planning to fail," as the old saying goes. This sentiment rings especially true in the modern business world.

For entrepreneurs, effective business planning can be the difference between a dream and a reality. And this reality hinges on two important blueprints: business models and business plans.

But what differentiates them, and when should you focus on each?

In this article, we will explore the key differences in the business model vs business plan debate and help you clarify these concepts.

A good business model answers key questions like:

• What problem are you solving?
• What is your target market?
• How much money do you need?

• What will you sell, and how will you make money?

Pricing and costs are the key factors that affect profitability.

Beyond the financials, some business models consider the broader social or cultural impact a company will have. Think of it as the exchange of value beyond just money–it's about the difference you'll make in your community or industry.

Here are some basic types of business models:

• Advertising: Show ads from other companies to specific groups of people. Think of platforms like LinkedIn and YouTube.
• Affiliate: Get a small commission for promoting other people's products. You've probably seen this on Amazon or through programs like ClickBank or Share-a-Sale.
• Franchise: Take a successful business model and let others open their own branches. You get a share of their profits. McDonald's and The UPS Store are prime examples.
• Bundling: Packaging multiple products or services together at a discounted price. (Common in telecoms.)
• Fee-for-service: Selling skills or expertise at an hourly rate or project-based fee. Consulting firms like McKinsey & Company and even freelance writers fall into this category.
• Freemium: Gives a basic version of something away for free, but you pay for the better version with more features. LinkedIn and Slack are the most common examples.
• Manufacturer: Takes raw materials and turns them into products people can buy. This is how we get cars, furniture, and even our phones.
• Pay-as-you-go: You only pay for what you use. Internet phone plans are the perfect example, where you buy internet data.

In short, a business plan is your roadmap to growth.

Business plans typically come in two main styles: traditional and lean startup. The U.S. Small Business Administration notes that traditional business plans are the more commonly used format.

• Traditional business plans are like a detailed document for your business. They cover everything from your marketing strategy to your financial projections.
• Lean startup plans are more like a sketch–focusing on the core essentials. They highlight the key elements, like the problem you're solving, your target customers, and your unique value proposition.

Components of a business plan vs. business model

The components of your business model are the foundation of your business. They define your business operations and strategy for company success.

Here are some of the key ones you'll want to include when creating your business model:

• Customer segment
• Value proposition
• Revenue streams
• Channels
• Customer relationships
• Key activities
• Key resources
• Key partners
• Cost structure

While a clear business model explains how your business works, a business plan is like your company's resume.

It’s a detailed document often shared with investors, lenders, and other stakeholders to give them a clear view of the company's potential for success.

Because of this, business plans tend to include more detailed sections, such as:

• Executive summary
• Company description
• Products and services
• Market analysis
• Customer analysis
• Competitor analysis
• Marketing and sales plan
• Operations plan
• Financial plan
• Appendix

Business model vs. business plan: what’s the difference?

Both business model and business plan are important for your business. However, they play unique roles at various stages of your business journey.

Let's break down those key differences:

When to use a business model vs. a business plan

A business model is best for early-stage startups or entrepreneurs who want to check or improve their ideas. It's a flexible organizational structure for outlining how your company will create and capture value for customers.

You can use a business model when you're:

• Testing the viability of a new business idea.
• Pitching the business concept to investors or partners.
• Evaluating revenue streams and cost structures.
• Making adjustments to an existing business or pivoting strategies.

A business plan is commonly used once a business idea has been approved or for businesses that are looking to grow or secure funding. It includes more detailed steps and formal strategies.

When to use a business plan:

• Seeking investment or loans.
• Managing long-term growth and scaling.
• Setting clear objectives and milestones for internal teams.
• Presenting a comprehensive roadmap to stakeholders.

For the best results, we recommend using both the business model and business plan together. Start with the business model to sketch out the essentials of your business and quickly test your ideas.

Once those ideas are approved, create a business plan to prep your execution strategy. This ensures that your detailed plan is rooted in a solid, tested foundation.

Conclusion

There's no single right way to choose between a business plan and a business model–it all depends on your specific goals.

Remember, planning is a continuous process. You can't just make a plan once and expect it to work forever!

To keep your business model and plan up-to-date, try a tool like Bizplanr. It uses AI to help you quickly create professional business plans, including essential financial projections, and makes it easier to move from idea to execution.