Most entrepreneurs that I have worked with that had a truly good idea didn’t normally fail due to the idea. They failed due to the fact that the Business Model that they used to execute their idea was flawed and in many cases broken. In order to be successful you need to know how to develop a Business Model for your Business.
Although a great idea is an enviable place to start, I’ve actually worked with a lot of entrepreneurs who had decent ideas but had killer Business Model strategy and flawless execution of that Business Model. That’s what made their businesses great!
A framework within which to engage customers
So a refresher. A Business Model is simply the framework that you use to engage your customers and in which you provide and deliver your Value Proposition to them.
It is ultimately how your business generates revenue and makes a profit. It’s also how your business generates interest from within the market and gets repeat customers. Effectively, it is the ‘vessel’ within which your business idea is contained and from where it operates.
On a larger scale, it is the manifestation as to ‘how’ your business takes its resources of time, money, personnel, machinery, etc. and converts them into value and then into sales. Furthermore, it is the context within which the ‘systems’ and ‘machinations’ are used to create something of value for someone where they are willing to pay money for.
As important as the Business Model is to a business, it isn’t dark magic or something mystical. In fact, it is simply something that must match up between the product or service offering and HOW the potential customer base expects or wants to engage with your business. To reiterate this point, there is NO one size fits all business model nor is there a magic bullet business model. The business model MUST fit the product and/or service being offered.
What type of Business Model will you use?
In fact, there are dozens upon dozens of generic business models. The following are just a small sampling; Manufacturer, Distributor, Retailer, Franchise, Brick-and-Mortar, eCommerce, Bricks-and-Clicks, Freemium, Subscription, Aggregator, etc., etc. Although there is no ONE magic business model to use across industries and products, there certainly are BETTER business models depending upon what you have for a business and how your customers expect to engage with you.
I use this example a lot with the entrepreneurs that I consult with but it shows perfectly how important it is to get the ‘right’ business model for what you are doing.
Most of us, if not all of us of a particular age, can remember the company Block Buster. Block Buster was the dominant player in the home video rental business. They maintained a bricks-and-mortar business model.
They had physical locations within communities and if a customer wanted to rent a movie they had to get in their car and head down to the Block Buster nearest to them to rent a movie. Block Buster used this business model exclusively for their entire existence and was good at it and it worked for them…until it didn’t.
Disruptive Business Models
‘Across town’…an entrepreneur was working on another business model for the movie rental business. Block Buster, he surmised that customers didn’t want to go to a central location but instead would prefer a mail service where they would be mailed a rental movie in the form of a CD and would return it via the mail for another movie at their convenience. Upon the acceptance of the marketplace for this new ‘innovative’ approach to renting movies, Netflix was born.
Interestingly enough, for some time BOTH the bricks-and-mortar and movie mailing service coexisted. However, when technological improvements enabled digital streaming of movies across greater broadband networks, the video streaming era began.
On the leading edge of this new innovation, Netflix quickly began to convert over to a video streaming service. At the same time, Block Buster stayed its course. It insisted that customers interested in watching movies wanted to leave their houses, get into their cars, and drive miles to a physical location to rent a movie. Block Buster insisted that customers liked the social interaction of renting movies.
With more and more movie goers being from within the population that owned computers and that were hooked up to the Internet, Block Buster quickly became extent and Netflix became the dominant player in the movie rental business.
I use this case study about business models all the time to make a point. BOTH business models worked. Yet, Netflix’s business model better reflected HOW customers expected and wanted to receive the service/product.
The Business Model must serve the customer
However, Netflix’s business model was tuned into how customers ultimately wanted to receive the service…Block Buster’s business model was a nuisance to customers and they used it only because there wasn’t a better alternative…until there was! The rest of the story is that Block Buster even had the opportunity to purchase Netflix in the early stages of the company’s development but still chose to stay the course!
What is ultimately the most important aspect about the business model that entrepreneurs need to understand is that HOW you set up your business and the business model predicts its success. As a result, what must be taken into account is that every business idea has a certain business architecture. To visualize this, this ‘architecture’ is made up of an X axis and a Y axis so to speak.
The X axis is the product or service axis. It is WHAT that your business is offering. It defines the niche that you operate in and the customer base that you sell to. It defines most of what your business does and the confines in which it operates. For the most part, it is what your primary product or service is and is pretty much defined by what this is.
That said, however, the X axis also accommodates any other product or service offerings made by the company; Are there other products/services we can/should offer?
Are there derivative products/services we can/should offer? Is there an opportunity to affiliate other companies/people’s products/services? Are there “supportive” lines of products/services (clothing, nutritional, etc.) that complement our product/service?
Does your Business Model allow for multiple touches with your customers?
What is so important nowadays is that businesses must realize that their business model needs to accommodate a broader ‘interpretation’ of what their business is. The example I like to use for this is a business that I worked with that was in the weight loss physical product business.
I asked them a very simple question; How could you broaden your exposure to your existing core customers or market? Could you offer Instructional manuals/programs/E-Books? Coaching? Courses/Programs? Groups/Masterminds? Summits/Boot Camps?
These ‘derivative’ products and services propelled this company to significant higher and overall profit but more importantly it solidified its position within its primary niche market of physical products. This can easily work in reverse. Take a weight loss consultant who is providing professional services.
That individual could easily brand a nutritional supplement product line, create several targeted weight loss courses, white label a line of clothing that complements their business, host boot camps on weight loss, co-brand a workout program with a fitness provider and create a podcast on diet and weight loss. This example shows how a business could extend their breadth and depth along the X axis.
The Y axis is the community, branding and delivery platform. The first and foremost important aspect of the Y axis is that it’s about community; building one, growing one and maintaining one. Marketing guru Seth Godin so aptly refers to this as our “Tribe” while Kevin Kelly refers to community as our “1,000 raving fans”.
However you refer to it, it is the essential ingredient of the Y axis which is about developing a “following” of potential customers. In order to do this, we need to generate ‘content’ that allows us to engage these customers and enables us to become an “authority” in the niche.
As much as we are looking to engage our customers, we want to dominate the particular niche or space that we are in. Where individuals that are interested in this subject go to OUR resources for information and solutions.
Secondly, the Y axis is about Branding our business: What are we doing to position our business in this Niche? What is the messaging that we are trying to convey to our customer base? How do we want our customers to see us? What do we want to be known for?
Lastly, this is about the Platforms that our business will be utilizing: Where will we be engaging our customers? In-person interactions/events? Webinars?
What platforms/mediums will we use? Facebook, YouTube, Instagram, Pinterest, Tik Tok? Are we acknowledging WHERE our customers hang out and how they want to be engaged with us?
As you can see, I’m a HUGE proponent of getting the business model right BEFORE we create a business and as part of this seeing how the X and Y axes play into this is critical.
The Business Model Canvas
That said, in order to dial in which business model we might need to use for our business there truly isn’t a better tool to utilize in this exercise than what is called the Business Model Canvas. Created by Alex Osterwalder and Ives Pigneur the Business Model Canvas has taken its rightful place within the Lean Startup process and toolbox. I insist that all my clients use it because it requires them to figure out the potential and aspects of their X and Y axes and how all of it fits within the business model that they ultimately choose to utilize.
Remember…there are several ways to provide home movies to customers…but one is currently better than the others!
In my next post, I’m going to go through how best to utilize the Business Model Canvas and dial in the BEST business model for our incredible business idea!
