Starting a new business can be very exciting. The thought of working for yourself and creating something new—not to mention making a lot of money—is a prospect many people toy with but may never actually realize. That's because it can be a very challenging and daunting task, too. It takes a lot of time, effort, and money to start a business from the ground up. There are a lot of sleepless nights and you'll probably have to go out and look for money to get your business up and running. And there are a lot of other things you have to consider before you open up your doors to the public, whether you're a designer, retailer, or a restauranteur. If you're not afraid of taking the plunge and you want to open your own restaurant, you'll have to come up with a business plan before you even begin your footwork. Read on to find out the basics about business models and what you'll have to include in yours.

Key Takeaways

  • A business model is a plan for the creation of a profitable business.
  • The model lays out a company's products and services, its marketing plan, and financial projections.
  • A restaurant's business model must include the menu and its unique value proposition—what it offers to customers that others don't.
  • Other key factors include its target market, the competition, its marketing strategy, and its financial projections.

Business Models 101

A business model is a plan for the creation of a profitable business. It lays out the products and services the company plans to offer consumers in the marketplace, its marketing plan, and financial projections. All of these should ultimately show ongoing profitability. Companies also include the costs they expect to incur to run their businesses in their plans as well.

Business models are—and should be—tailored specifically to the type of company. The model for a restaurant, for instance, will be different from that of a software company. A restaurant's business model needs to contain some basic elements specific to the restaurant business. The most obvious element is the menu. Other key factors that make up a restaurant's business plan include its unique value proposition, its target customer base or target market, an assessment of competing restaurants, a marketing strategy, and financial projections.

Business models should be tailored specifically to the type of company, so a restaurant's business model will be different from that of a software company

Unique Value Proposition

A good restaurant business model contains a clear statement of the restaurant's unique value proposition. The value proposition is a statement of what it offers customers that is not available at other dining establishments in the area. While a unique value proposition is essential for any business, this is especially true for a restaurant that must compete on a daily basis to attract patrons over other restaurants. There are many potential options for a value proposition for a restaurant including menu choices, affordability, service, and atmosphere.

A basic part of any restaurant business model is the proposed menu. Menu choices may be the focus of a restaurant's value proposition if the restaurant intends to offer ethnic cuisine that is not available at any other restaurant in the area. In any event, a restaurant's menu has a significant impact on its ability to attract customers. The selection and pricing of menu items is an essential element in a restaurant's financial projections regarding anticipated costs, revenues, and profitability.

Target Market

The target market is an important part of the business model because it identifies a business's potential customers. A company can't be successful if it doesn't recognize the people to whom it will appeal. And this includes restaurants.

Many companies spend a lot of time studying and identifying their potential customer base. It's not enough to say they'll cater to everyone—they must be able to narrow down key demographics like age, income, lifestyle, and other key factors that will connect customers with the business. Not doing so can cost the restaurant a lot of time and, more importantly, a lot of money.

Testing this market is very important before a company launches and before a new product or service is offered on a grand scale. That's why many restaurant chains like McDonald's and Burger King test new offerings in a select area before rolling them out on a national scale. If the product proves to be successful, it's worthy enough to be put into other locations. If not, the financial impact is very minimal, and the business can put the brakes on the launch.

The Competition and Marketing

An established restauranteur or one who's just starting out must identify and study their competition before opening a business. There are several key things potential restaurant owners can learn from anyone directly competing in the same space. Understanding how the competition operates can help:

The marketing strategy is the restaurant's plan to reach its target market and, therefore, its financial goals. This includes advertising, promotions, and other incentives to attract and retain customers. Restaurant marketing may also include revenue-generating activities like offering additional services such as catering.

Startup Costs and Projections

Any business model must include both an estimate of necessary startup costs and projections for future revenues and expenses. Again, this may be a particularly important element in a restaurant business model. While some restaurants open with great fanfare and have regular customers from day one, others take some time to attract a regular clientele.

There are a host of expenses associated with operating a restaurant. They include the cost of food as well as supplies such as napkins and silverware, furnishings, employee payroll, and advertising. Startup costs vary widely depending on the type of restaurant. Amounts and sources of external financing should be clearly laid out in a restaurant's business model. Beyond this, there should be a clear analysis of expected ongoing costs, revenues, and profit margin that shows how the restaurant expects to sustain profitability.