In our blog series “6 Steps To Turn Your Business Idea Into Success” we focus on how to avoid the mistakes of the others by validating them. The previous step was all about building your solution in a way that it is adressing your customers’ major pains and needs. It was followed by the second validation step, Problem Solution Fit.
Now it’s time to draft your business model. It’s a major step that many people get wrong, which is why we dedicate this blog post to it. It’s important to make sure that the different elements fit together and that your business model tells a story.
Your business model needs to answer the following questions:
- How are you reaching your customers and building a sustainable relationship?
- How are your creating the value you propose?
- How are you generating revenue and what are your major cost drivers?
This step is implemented in our Innovation Platform, as shown below, to make drafting your business model as smooth as possible. Let’s take a car-sharing service provider, for example:
A business model describes how your business works and how an organization delivers, creates and captures value to customers. As opposed to classical products, you should concentrate on process and service innovation – more and more companies focus on an innovating around the business model.
Our Innovation Platform, as shown on the screenshots, implements the business model canvas which is a great tool to sketch and model how your business works. It makes you focus on the most important aspects of your business, which also gives you more room for creativity. The business model canvas has become one of the most used templates in the industry, which makes it easy to find examples and communicate what you do with external people.
Start to draft your business model by defining how to deliver value
This is about defining you customer segments, the respective value proposition and the customer channels you will use to deliver this value, as well as how you will initiate, grow and maintain customer relationships:
Build on your leanings from the steps before: Grab your customer segments, the value proposition and readjust if necessary.
The value proposition is not about single benefits. It is the core value you propose to your customers. It can be about: newness, performance, customization, design, brand/status, price, cost-reduction, risk reduction, accessibility, and/or convenience/usability. In our car-sharing example, the value propositions could be the service’s simplicity, one-the-spot available transportation that saves time and effort.
Elaborate on your customer channels: How will your solution be accessible to your customers? A customer channel describes how your product reaches your customers. Make sure that you choose the right customer channel for the right customer group.
There are different types of channels: direct (e.g. your sales force, web sales, own stores) and indirect (e.g. partners stores, wholesalers).
Note that the right channel is usually the primary point of contact between you and your customers. Ask yourself how does this channel:
- raise awareness about your products and services?
- help your customers evaluate your value proposition?
- enable your customers to purchase your products and services?
- become integrated into your customers’ routines?
- deliver your value proposition?
- support after sales customer service?
Elaborate on your customer relationship by thinking about how to create and maintain a relationship with your customers. Customer relationships describe the company’s interaction with your customers in order to acquire them, keep them loyal and drive further sales.
There are different intensity levels of relationships: dedicated personal assistance (e.g. private banking), automated services (e.g. large scale websites) and self-service, user-generated, and/or communities.
- How do you interact with the customer up to the point of sale (i.e., customer acquisition)?
- How do you add value in the aftersales period (i.e., customer retention)
- What do you need to do to sell additional products and/or services (upselling)?
Define how you create the value you are proposing
This is about how to create the value that you are offering to your customers through activities, resources and partners.
Elaborate your key activities by asking yourself:
- What key activities are required to generate your value proposition, distribution channel, customer relationships and revenue stream?
- What are the important assets under your company’s control that are necessary to sustain and support your business? Examples of key activities are: managing the supply chain if logistics is critical to you (e.g. Dell), training and selecting human capital if you need to have the brightest employees (e.g. consulting companies such as Accenture) and/or community management if your community is a core asset (e.g. Wikipedia or Threadless).
Elaborate on your key resources by asking yourself:
- What key resources do you require to generate your value proposition, distribution channel, customer relationships and revenue stream?
- What are the resources you really need to build up by yourself in order to be competitive?
- What are the ones you can outsource to others?Different types of key resources are: intellectual (e.g. IPRs), physical (e.g. machines), human (e.g. Nr. 1 expert), and/or financial (e.g. high liquidity) resources. Our car-sharing provider’s key resources are car maintainance, fueling and cleaning, as well as customer management.
Elaborate on your key partners, who help you to offer the value you propose, by asking yourself:
- Who are your crucial partners for your business to work? Key partners help to reduce risk, achieve economies of scale and extend your capabilities. The fewer resources you have, the more you will need to rely on key partners in order to turn your business idea into success.
- What are the things you can’t do but are necessary for your businessThere are different forms of partnerships: strategic alliances between non-competitors, cooperation between competitors, joint ventures and buyer-supplier relationships. The key partners in our car-sharing examples are local governments and customers, e.g. for additional fueling and cleaning the car to receive free minutes.
Note: Many companies fail to understand what they should do and/or have in-house, as well as what they should outsource or get done by others. The more you focus, the higher the probability that you will be excellent at what you do.
Define how to capture value
This is about how to capture value for your company. There is a variety of different costs. Try to focus on how to trim the fat (i.e. try to reduce fixed costs as much as possible) and maximize gross margin.
Define the major cost drivers behind your business (cost structure) and the major ways you intend to make revenue (revenue stream). Make sure to focus on the key cost drivers in your business model, as this will help you understand the dynamics of your business model and enable you to optimize accordingly.
Elaborate on your cost structure by asking yourself:
- What are the major costs inherent to your business model?
- Which key resources and/or key activities are the major cost drivers
- What are the major ways you plan to generate revenue?Generating revenue at an early stage is critical if you are to validate your business idea and, in turn, stabilize your business. In our example, this could be membership management and local customer validation offices.
Elaborate on your revenue streams by asking yourself:
- What value are your customers willing to pay for?
- What and how are they currently paying for competitors’ products/services?
- What are their pricing tactics? This could be a one time sign-up fee or a usage fee (per minute, hour, day).
There are 7 major ways to generate revenue. Note that a major distinction is whether customer payments are recurring vs. one-time payments.
- asset sales (i.e. selling ownership rights to a physical product)
- usage fee (i.e. use of a particular service)
- subscription fees (i.e. selling continuous access to a product or service)
- ending/renting/leasing (i.e. temporarily rights to use a particular asset for a fixed period)
- licensing (i.e. giving permission to use protected intellectual property),
- brokerage fees (i.e. intermediation services)
- advertising (i.e. advertising a particular product, service, or brand).
Congratulations! After completing these steps to draft your business model, you’re good to go to analyze your competitors in the next step.
We wish you all the best for your project, if you have any questions, please shoot us a message: firstname.lastname@example.org
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