In an earlier post, Why Apply Business Models to Startups, we introduced you to the Business Model Canvas. Now we will look at the steps to complete the first iteration of your model based on initial assumptions you have about your venture and how it will work.
While there is a number of opinions where to start, we like our students to focus on Value Proposition and Customer Segments in the early brainstorming activity. Starting with the Value Proposition, you should be able to articulate the core aspects of your “offer”. We suggest that you start with the core problem you are solving, followed by a brief description of what your solution offers to the customer. What is the collection of products and services that you plan to offer to your customers? The final portion of this section should clearly articulate the benefit or value that you expect the customer to derive from your offering. Hopefully, the value proposition clearly demonstrates how your venture’s offering is unique in the marketplace and provides the customer with a benefits they can not derive elsewhere. Make sure you express your value proposition as providing benefit due to attributes such as better performance, cost efficiencies, increased accessibility, or customization.
Once you have a draft of your value proposition, you should turn your attention to the different groups of people or organizations that your solution is best suited, your target Customer Segments. This is where you need to answer who primarily experiences the problem you are trying to solve. During this first iteration of your business model, you should brainstorm all the potential groups of customers that experience the problem. Later, you will refine this list as you better understand the profile of your customer and how various groupings may differ in terms of needs, demographics, behavioral characteristics, and purchasing decisions.
As you begin to better understand the alignment between your product or service ordering and target customers who may want your solution, you can begin to outline two other customer related elements, Customer Relations and Channels. Customer Relationships describe how you plan to interact and engage your customers throughout the product lifecycle. Many startup place all their focus on acquiring new customers. Of course, new customers are critical if you want to have any success. However, as any experienced entrepreneur realizes, you must plan for all the ways that you may engage your customer, from the very first time you customer is aware that your product exists, through the selling process, until the product has ended its usefulness. Questions that you can be asking now is how will your venture address customer questions pre and post purchase? How will problems or repairs be handled? How will you let customers know about new products or updates to existing products? This element articulates the strategies you will put in place to create a positive, long-term relationship with your customer.
An important part of customer engagement is the Channels you plan to use to deliver your value proposition to the customer. Channels refer to the means by which you deliver your product and communicate with your customer throughout the product lifecycle. These touch points may range from the point of purchase, provision of customer support, and collection of customer feedback. In today’s business environment, you will probably engage your customer through several channels, sometimes referred to as the omni-channel approach.
By delivering your product and service offering to your target customer, you start to generate Revenue Streams. In this element, you can outline each possible way that income is generated by your various offerings. You can also list how customers prefer to pay for your services, cash or credit, one payment or several payments, and the like. Is a customer purchase a one time event or ongoing, such as a monthly subscription payment. You can also note in this element the length of the sales cycle, the time it takes the customer to complete the purchase from the initial point in time that they are aware that the product is available.
The remaining four business model elements address what Key Resources, Key Activities, and Key Partnerships are required in order to deliver your solution to the customer and your Cost Structure, how much these operations will cost so you can successfully execute your business model.
Key Resourcesare the assets needed to deliver the solution to your customers. Assets can be physical, financial, intellectual, or human. If you are a technology focused startup, your key assets may include human resources with specific technical skills, such as scientist or engineering experts. It may be intellectual in terms of patents or trademarks. If you plan to distribute multiple products globally, your key resources may include regional distribution centers.
In order to execute your business model effectively specific Key Activities will be required. While there are many operational actions that take place in any enterprise, these key activities are associated with the fundamental requirements for offering your value proposition to the target customer.Usually related to what are called your organizations core competencies, these activities must operate at a very high level of quality and performance in order for your business model to be repeatable and scalable. These activities can be associated with a range of operations including research an development, manufacturing, supply chain management, and industrial design.
Key Partnerships are those strategic relationships necessary to execute your business model.These types of non-customer relationships are critical for startups, as they can help lower operational costs, expand distribution channels, or help achieve competitive advantage. These strategic partnerships can be with manufacturers, suppliers, distributors, trade associations, regulatory agencies, competitors, and technology providers.
The last element, Cost Structure, refers to the main costs incurred while running your business. At this point, you should be identifying the high percentage costs, those related to the core activities and resource requirements. These expenditures can include fixed asset and variable costs as well as any major overhead costs that you anticipate to support the business model. Your cost structure must meet the operational requirements to execute your business model, but be consistent with the revenue streams projected to emanate from your customer segments. Of course, if the costs are more than the revenues, you will need to revisit various elements of your business model.
Once you have taken your first pass at identifying the nine business model elements for your venture, you can start to hone in on each element along with key interrelationships. This process starts by taking each element and articulating core assumptions you are making and designing a way to test these assumptions. While you will be making all kinds of assumptions throughout the venture creation process, core assumptions are those that must be valid for your venture to be successful. If the assumption is invalid, then your business model will not lead to a repeatable and scalable enterprise, at least in the way you are currently considering. You will use many approaches to test these core assumptions. In the early stages, the main approach will be to interview customers, vendors, suppliers, domain experts, and industry advisors.