Business Model Development

Business development begins with a goal whatever it is. An enterprise, an established company with an on-going business, executes a business model. A startup searches for one. A startup's mission is to find and build a business model including a product or a service that grows into an established company. That's searching for a market-product fit.

The Lean Approach

In the past, the traditional steps of building a business have been as follows:

1. Write a detailed business plan. The business plan is full of assumptions and the plan's purpose is to justify them and anticipate the future.
2. Raise funds, mostly by pitching investors.
3. Build a team to execute the business plan.
4. Build the product or service
5. Introduce the product to the market
6. Charge money for the product or service

However, most startups fail. 75% of startups fail according to Oxford and Harvard. Others report more. For the information sector, 37% of startups survive to the fifth year. Here are some interesting articles. Report: 75% of Venture-backed Start-ups Fail, which talks in brief about the ratio. Startup Statistics: The Numbers You Need to Know talks about more in-depth startups statistics. 5 of the Most Surprising Statistics About Startups which mentions 5 statistics about startups and how to numbers can play to your favour. And here the last one, although 90% may be accurate or not, the article mentions interesting things about successful startups 90% Of Startups Fail: Here's What You Need To Know About The 10%.

So why do so many startups fail? The short answer is high risk. The traditional cycle does not address these risks in short time span. A better way is to verify the business assumptions as early as possible and invest the minimum amount of time and money on the wrong direction. So instead of developing a product that has a high probability of failure, one can verify the assumptions that will make it succeed before investing too much money and effort. If you find flaws and that assumptions are not realistic, correct them and launch a product having a better chance of success. The main goal is to manage the risk, lower the risk. This could be done by chunking out the process to small measurable milestones.

Startups are full of assumptions that need to be tested. The real test is the market and your customer or user. More often than not, without paying customers, you don't have a business. Will people use your product/service? Will customers pay for it? You can assume or you literally can ask them.

The lean cycle is Build, Measure, Learn. You do this in iterations for as many times as it takes for you to have customers. Fail fast, learn fast. The business model search is then changed as follows:

Traditional

• Upfront elaborate planning
• Intuition and mere assumptions
• Upfront elaborate development of the assumed product/service

Lean

• Experiment
• Learn from Customer feedback
• Build a minimal viable product, MVP, to test the waters with instead of a whole product

Developing the Business Model

So what are you supposed to test? An MVP at once? Better to test your assumptions before anything. Your assumptions could be captured using the Business Model Canvas initially proposed by Alexander Osterwalder. The business model canvas is a tool to develop or document a business model. The canvas can be downloaded from many places. Strategyzer is the official website of the model's authors. Their book Business Model Generation is a very useful read. Here is how the Canvas looks like

Usually one starts at value proposition. Creating joy or alleviating pain. The left-hand side is then about how to create this value and what items and activities you need to spend money on for this value to be created. The righ-hand side is about how to reach customers and/or users, which relationship your business will have with them as well as revenue streams.

Value Proposition

This the value you will add to users using your product/service and customers paying for it. The more staggering the need, the more confident the business should be. It is the pain you are alleviating, the gain your adding and the joy you are creating.

Customer Segments

Think about who your customers are very well. Who they are, what they do, how old they are, which professions they carry on, where they live, their education, gender, what satisfies them and what puts them off. Think about their lives and their needs.

After you come up with all segments you think of, pick one that is most important and accessible. Focus on it and pay attention to the dynamics it has with the other elements of the canvas. Then iterate over the others and amend the model as you go on.

Channels

How will you reach your users and customer? Is it through the Web? On mobile? Physical delivery? What do they prefer and make them comfortable and confident? What channels integrate well with there ways of lives and ways of doing business? Think of the cost for each channel as well.

Customer Relationships

How to acquire users/customers and build brand and loyalty? How to engage your users/customers and grow your customer base? You do not want to acquire users/customers just to lose them and acquire them again. You need to retain them. Retention cost is usually less than acquisition cost.

Key Activities

What are the activities you need to carry out so you deliver value to your customers and users? Is it R&D? Manufacturing? Marketing? List all the key activities to your business.

Key Resources

The resources your business needs to deliver value. What are the resources that you have which your competitors need to have as well to copy what you do. These are the resources that make your business unique. Do you have a patent? Trade secret? String copyrighted unique content? A team with unique skills? Amount of work barrier? Strong user base? Pricing scheme?

Partnerships

You have to use your resources strategically. It might not always be the best idea to do all stuff yourself. Weigh things against time, cost and value.

Revenue Streams

What will your customers pay for? Premium model? Freemium model? Licence? Subscription? Lease or rent? Bundled services? Campaigns? Unit of sale? Which stream is most important? Which is more accessible? Which streams are sustainable?

Cost Structures

What are the items your spend money on? Salaries, deployment, rent, utilities, outsourcing, etc.

When part of the business model changes, it usually affects other parts of the model. Upon every change and in every iteration, you have to go through all elements of the model.

Canvas Limitations

More often than not, a tool or model does not cover the whole thing. There are limitations inherent into the canvas business model. The canvas model is focused on value creation. It dismisses external factors outside the company, such as

• Competition
• Substitution
• Supplier's bargaining power
• Regulations and governmental issues

Volg Kraaijenbrink in his article lists the following as shortcomings of the canvas business model:

• Excludes organisation’s strategic purpose.
• Excludes notion of competition.
• Mixes levels of abstraction.
• Does not set priorities.
• Visualisations are too complicated
• The term strategic is not well-defined in the canvas model.

I tend to agree with points 1, 2, 4 and 6, however, I do not think of them as shortcomings but rather important things not covered by a certain tool. The canvas may be used to have an almost complete image of the business model all at once. It does not contain very detailed descriptions. For the details as well as other aspects of the business model or the business as a whole, for example, those mentioned above, one would use other tools.

The canvas business model covers neither all aspects of the company nor the business model. However, it covers a very important aspect of the business very well, value creation. It is a powerful model when used to its purpose.

Using the Canvas

With what is mentioned above in mind, the result of a final iteration of a business canvas is to test it in the market. Build the simplest possible version of your product and launch it fast. Before you build anything find early adaptors and establish that they intend to use and/or pay for your product/service. Talk to your users and/or customers. Take their feedback into your business model and modify it. Modify the product/service and re-iterate until you have a product that is being used and/or sold. After this, re-iterate through the canvas to improve and expand your business.

Before you talk to people, you need to think the conversation over and with whom you are going to talk. You are not pitching your product now, you are establishing facts. The following might be good starting points:

• Know what you need to know. You need to know information directly beneficial to your business.
• Do not start the conversation by talking about your product or the idea or motive behind it. You need to ask about how this product can be useful to people.
• Do not try to convince or argue with people to believe in your product.
• Talk about people's interests, lives and needs. Remember, you need facts, not second thoughts, not improvements and not emotions.
• Your product is supposedly solving a problem. Ask about how people currently solve it. What products do they use? What features do they like? What features don't they like? What features and functionalities they believe should be added. What features and/or functionality they regard useless. Ask about how they believe a product they use could be made better.
• Choose people you have easy access to and with whom you can have a causal conversation without much arrangements or introductions.
• Listen more than you talk.

The process of experimentation, talking with people, learning and applying what you learn must be a continuous process. The more efficient you become at it, the more progress you are likely to make with your business. Especially, pay attention not to keep talking with people for hours without an end.

When you talk to people beware of false-positives. You need to verify the data you get from users before getting carried away with going forward with misleading information. Bad data includes compliments, generic comments just out of not embarrassing you or not understanding what you are talking about in the first place, giving you ideas for your product such as features, they did not like it rather they are trying to help you. Also, common things you can get from simple research or from anywhere else over a sandwich on the sofa are not going to be very useful. Remember your task, to make sure that people will use your product or pay money for it.

It is fine that your initial idea is totally wrong, you need to adapt your thing to the users/customers. It often happens.

It is an alert when they people you target are not aware of the problem you are trying to solve. It is much easier for a business to start and grow when there is an existing need and evident gain. if there is not immediate problem that your users/customer try to solve, it may well mean they won’t use or pay for your product. Sometimes you need to educate your customers, because sometimes they are not aware. However, this is a tough turn to take and is a highly risky one. Think how many video playing services were there before YouTube but they were just too early. The commodity connection’s bandwidth maybe didn’t even support great broadcast experience although it was obviously a great thing to do.

When you want to set up a business model the business model canvas helps organise your thoughts and break up your thoughts into a hypothesis that you can test. You talk to people to test the hypothesis and gather data. You learn from that, update the hypothesis and iterate until you have a satisfying business model with a product or service to take to the market. You iterate to improve it.

Beware that talking to customers and users is really important but it does not have to always be like this. Steve Jobs did not go talking to his customers about the iPhone most probably. But he knew what was doing pretty well, knew the problem, knew the solution and saw the future. He implemented it. He had a vision based on facts regardless. And that's the point.

So what if your hypothesis does not reflect what people want or need? What if they think you do nonsense or you do something needed but you do it all wrong? Well, go back to the business model, change individual components until you have a market fit. You have to be responsive to change. Adaptable and flexible. That’s the edge of a startup. Startups can change directions rapidly and make radical decision. These are two things that are harder for an enterprise to do.