Business Models are Mechanisms for Doing Business 

Business models explain the how and the source a company's revenue. It also explains the how much these sources pay and how often. So it's not enough to say that a company sells PCs or burgers. You need to be able to explain the structure of how the dollars are earned. 

Does the business include franchises or company-owned outlets? Does the company own the outlet real estate, or does it lease the space? Does the company generate most of its money through direct sales, or does it sell via retailers?

The business model also details how the product is delivered. Does the company sell one of its component products at cost to sell more profitable add-on components.  Or, does the company's product require that the money is received upfront, rather than from a stream of add-on sales.

As industries change, companies can't always afford to stick to the same business model. Think about Kodak and the fast-changing camera business. Traditional film cameras generate a lot of money for the company, since users have to buy roll after roll of film to take pictures and then spend even more getting the pictures developed. But new digital cameras do away with film sales and processing fees. So, in response, Kodak has had to create a new business model. The company has established digital printing centers, where users can have their digital camera pictures printed on genuine Kodak paper. The business model that was once based on film sales and processing has become a model based primarily on photograph printing.

A company's business model isn't always obvious. Consider General Motors. You might think GM makes its money selling cars and trucks. In fact, more than 60% of GM's earnings in 2003 came from finance payments, not auto sales.

Business models can also be downright counterintuitive. Conventional wisdom says that a retailer that crams stores close to one another will cannibalize own-store sales. But coffee retailer Starbucks has a business model that rests on just that: having coffee shops within blocks of each other. It turns out that market saturation drives up consumption, creates virtual wall-to-wall billboards for Starbucks, and cuts back on customer lines at more popular outlets. It also keeps competitors off the street.

Assessing the Business Model
So how do you know whether a business model is any good?  When business models don't work, it's because they don't make sense and/or the numbers just don't add up to profits.

Because it includes companies that have suffered heavy losses and even bankruptcy, the airline industry is a good place to find business models that stopped making sense. For years, major carriers like American, Delta and Continental built their businesses around a "hub-and-spoke" system, in which all flights routed through a handful of big city airports. By ensuring that seats were filled, the business model produced big profits for airlines.

The old method of doing business that was once a source of strength for the major carriers became a burden. It turned out that competitive carriers like Southwest and JetBlue could shuttle planes between smaller centers at a lower cost - in part because of lower labor costs, but also because they avoided some of the operational inefficiencies that occur in the hub-and-spoke structure. As competitive carriers drew away more customers, the old carriers were left to support their large, extended networks with fewer passengers - a condition made even worse when traffic began to fall in 2001. To fill seats, the airlines had to offer more and deeper discounts. No longer able to produce profits, the hub-and-spoke model no longer made sense.

Consider the U.S. automakers. To compete against foreign manufacturers, Ford, Chrysler and General Motors offered customers such deep discounts and interest-free financing that they effectively sold vehicles for less than it cost to make them. That dynamic squeezed all the profits out of Ford's U.S. operations and threatened to do the same for Chrysler and GM. To remain viable, the big automakers had to revamp the way they did business.

Conclusion
The Business model for a start up is critical. It must demonstrate a realistic method for generating revenue and  profits.  Profitability is the real determiner of whether or not the business model makes sense.   A business that is burdened with high operating costs because of a cumbersome business model will not long endure

There will always be costs associated with doing business.  The way the company does business is a function of the business model.  The objective is to operate in such a way as to be as efficient as possible while delivering value to the customer.  How we get customers and relate to customers is also part of the business model.  The customer is the mechanism by which we are paid.  The customer is the goose that lays the golden egg.  Your business plan should always have the customer in mind, because the ease with which the customer is able to do business with us is a function of the business plan

A good business plan will make the mechanisms of doing business as simple as possible.  The easier it is to do business, the more money you will make.

Think profitability.