What is a Business Model?
When you start your company one major question you need to answer is how to organize your startup. Usually, the first reaction and response to this question is an organization chart. This is not what you need at this stage of your business and you need to think in terms of what your business is going to do, how you going to deliver your service or product to your customer, marketing strategies, partners, etc.
In other words, the best way to think about how you want to organize your startup is by a business model. OK, but what exactly is a Business Model?
A Business Model is how a company creates value for itself by delivering products or services for its customers.
To present all the bits and pieces in a business model, we will use a structure called “Business Model Canvas”.
Business Model Canvas explained
The Business Model Canvas comprises of 9 boxes. Each of these boxes represents an activity, goal or relationships, or resources your startup needs to execute or fulfill in order to create value. In these boxes, you will describe the different pieces of your startup.
Value proposition defines what you are building and for who. This is not about your idea what the product is, it is about solving a problem (a need or want) for customers. Value proposition defines the pain, the need, or want you are solving for a very specific set of customers.
Make sure you are describing what the customers will get out of your service or product and how you plan to improve their lives. Be careful not to turn this into talk about your technology. This is a common mistake that many startups make. Customers don’t care about your technology. It is only the means to deliver your solutions, but it should never be the center of your business model and your value proposition. The technology is just part of the value proposition, at best. It may be an important part, but still only a part of it.
Who are your customers and why would they buy from you. You need to figure out the geographic, demographics, social characteristics of your customers.
We reviewed one method (the SPA method) to help you define your customer segments. Please review the post “How To Determine Your Customer Segments Using The SPA Method” for a detailed description.
Just remember that any methodology and research you do is just a hypothesis, nothing more. You will learn and need to adjust, once you start selling your product. The more you know about your customers the closer your hypothesis will be to the truth and the higher the chance of success for your product or service upon market introduction.
How does your product (think “Value Proposition” box) gets in the hands of your customers?
In additional to the traditional physical channels we now have multiple virtual channels to think about and develop. You need to answer for your startup how you are going to be selling your services and products and how you are going to deliver it. Then you need to define the relationships between different channels, priority, and sequence of execution in developing these channels.
This box should help you answer the questions
- how do I GET customers
- how do I KEEP them
- how do I GROW my customers
This is where you develop your strategy of acquiring your customers (web, mobile, vs. physical). Then you need to think about how you keep them being your customers – login, incentives, features, and promotions to keep them engaged and wanting to come back and interact with your startup. This is where you create your strategies to upsell, offer more so they spend more money, and stay with you.
Reducing the churn is an extremely important goal and the key-value that shows how healthy your startup is. Of course, you need to embed mechanisms to grow your customers, it is all in the same strategy.
How do you actually make money by selling your product and services to the customer segments you defined earlier in Customer Segments section.
This requires to describe the revenue model. How do you capture the value you are offering to your customers? How much should you ask? Which model suits best your value proposition – monthly subscription, one-time pay, freemium model, a mix of more than one?
As with any of the previous components of the Business Model Canvas, these are just hypothesis. You need to understand that as a startup the goal is to find the right business model. You will need to experiment and be creative.
What are the key resources your startup needs to make the business model possible and work? What assets are critical for you to operate and be able to deliver your product and service to your customers via the defined distribution channels, in order to capture the wealth and accumulate it.
Examples are finance, cars for delivery, machines for manufacturing, patents and other intellectual properties, people with very specific skills, customer lists, etc. You need to be very specific about what the key resources are to get your startup running and keep it running.
In this box, you need to define your key partners and suppliers to make this business model work.
When working with and looking for partners, you need to understand very well what you are looking to acquire from them. What kind of services, skillset, access to customers or IP you need to add to your startup in the form of a partnership to enable your business model.
Another aspect when working with partners is to understand what key activities they perform for your startup. The better this aspect of your partnership is defined, the more valuable it will be.
This is a very strategic decision for a startup and when such a decision is made, the team needs to have a clear understanding of the timeframe for the partnership. At the beginning of your startup, you have needs that will be completely different a year or two later.
This is the place you define strategic alliances between non-competitors, joint ventures, suppliers and buyers relationships.
What are the most important things the startup must do to make the business model work?
These are different activities if you are manufacturing something, or offering consulting services for example. Defining what you need to do will determine where you need to focus your efforts to build, educate and do whatever needed to satisfy your customers’ needs.
Finally, you need to define the groups of costs and expenses to operate.
In addition to very obvious costs like rent and supplies, you need to prioritize. What are your most important costs? This is the costs you cannot reduce or replace, and are key to your startup operations. You will definitely want to define your most expensive resources and key activities.
This box will be extremely useful when you prepare your startup to get funded because it will give you a clear picture of what funds you need and how these funds will be used.
The Business Model Canvas is an extremely useful tool for a startup to describe its business model. The nine different pieces of a business model put together in the canvas can help you as a founder to be more clear about the most important decisions you need to make, where your immediate focus should be and give you a plan of execution. It also captures the more strategic view and long term plans for potential partnerships, customer acquisitions, retention plans, etc.
The simplest way to create your Business Model Canvas is to print it on a large surface so your team can review and brainstorm jointly. This can be a fun exercise and also a very good conversational point. Ask your advisors to review your Business Model Canvas and listen for feedback. Having it created before you approach your advisors can make conversations much more useful and targeted. Business Model Canvas is one of the very important starting points for each startup.
A good tool, which I have used, and can help you create your Business Model Canvas is Canvanizer.