In my self-employment community, the Free Agent Collective (FAC), we often talk about our “sausage factories”. It’s a term that refers to how a business works—the systems or processes a company has in place for making that business work. More formally, it is called a business model.
And it’s something you have to pay attention to in order for your business to be profitable. In fact, it is the KEY thing you need to make sure you get right.
So in this week’s article, I’m going to go over the basics of business models.
What exactly is a business model?
A business model is the series of steps or processes that a business goes through in order to run and make a profit. That includes ALL processes.
- How does it find clients?
- What type of clients does it work with?
- What services does it offer?
- How does it get those services done?
- What prices does it set?
- How does it collect its fees?
- Etc.
If you had an actual sausage factory, the main steps in that system might look something like this.
- We buy meat from XYZ Farms;
- XYZ Farms pays for shipping costs to our factory;
- We freeze meat on arrival at our facility;
- We unfreeze X amount of meat each morning;
- We mix in our own in-house spice mixture with the meat;
- We make 1,000 sausages per day;
- We sell our sausages directly to grocery stores, not to clients.
But there are also several other parts to the model such as:
- The details of the purchase contract with XYZ Farms;
- The details of the selling contract with various grocery stores;
- How potential new grocery outlets are found and vetted;
- Salaries paid to employees;
- Salaries paid to owners;
- Marketing processes;
- Sales forecasts;
- Plans for growth;
- Etc.
As I said earlier, we frequently talk about business models in the Free Agent Collective. Why? Because they are crucial to business success: in order to make a continuing profit, you need to set up a business model that works.
Sample Business Models
There isn’t just one business model that works for any given business. There can be many different ones. Let’s take a look at two examples to illustrate the point, both for website creators.
Harry and Samantha are cousins, and both are website creators. Each has their own unique business model. Let’s look at some of the main points of each.
HARRY
Type of client he works with
Small businesses with 20-50 employees
How he finds clients
He specifically targets new companies of between 20-50 employees. He finds them through networking, newspapers, conferences, and word of mouth. These companies are large enough to want to pay to have a professional website created for them, but they are small enough to worry about how much it will cost. Henry’s selling point is that he charges about 20% less than his main competitor, if the client is willing to sign a year-long support service contract. He does not take on clients who only want to pay monthly, as he finds he puts in too much work for a company that might end up leaving in a few months.
Fee structure
All-in-one package for a set fee.
Work structure
He does all the up-front work himself (meetings, designing the site) but has a part-time contractor who does the actual website creation. He checks the final website to make sure it is up to his standards. By outsourcing to a qualified contractor, he frees up more of his time to prospect for new clients.
SAMANTHA
Type of client she works with
Small businesses with less than 20 employees.
How she finds clients
Samantha gets almost all her clients from Harry. When he has potential clients with less than 20 employees, he refers them to Samantha.
Fee structure
To encourage clients to hire her, Samantha lets them pay monthly, and they can leave anytime. She also has a referral discount incentive: Harry tells each client he refers that if they tell Samantha he referred them, they will get 10% off her services.
Work structure
Samantha does all of the work herself. She has 5 sample website design layouts that clients can choose from. This keeps development time to a minimum, as the website framework is already done. This lets Samantha offer her services at a lower rate than her competitors.
So, Harry and Samantha have two different models, but each works well for them and how they like to work.
And that’s the idea—you want to find a business model that works for you. In order to do that, you have to pay attention to each of the main parts of model. We’ll talk about what those are in next week’s article.
