In my last post, Edit Post “Developing a Business Model for Your Business – Part I” ‹ The Financial Stoic — WordPress I outlined the importance of creating the right Business Model for your idea. In fact, I have seen decent ideas executed with great business models turn out to be phenomenal businesses and I have seen phenomenal ideas with not so good business models turn out to be failures.
The Business Model is Important for Success
With the right business model you have a great chance for success. What is so interesting to me is that too many entrepreneurs confuse the business model with the business plan. As I laid out in my last post, the business model is how you utilize your resources to create value for your customer. As important the business idea is to the business, of course, the business model from which you create and deliver value for the customer is as important and in some cases, more important.
The Business Model Canvas
As a result, it is crucial for the entrepreneur to choose and develop the right business model. In order to do that right from the start I am a HUGE advocate for using what is called the Business Model Canvas created by Alex Osterwalder.
The Business Model Canvas is a key component of the Lean Startup suite of tools and is the focal point for a business in identifying if they have the correct product-market fit. In fact, 5 of the 9 sections of the Business Model Canvas are focused on the customer and assist the entrepreneur in dialing in how they are going to successfully interact with the customer and solve their problem.
I would argue that there’s no sense even moving forward with the business idea or the Business Model Canvas for that matter if you don’t know who your customer(s) is/are for your product or service. It may sound obvious but a lot of business ideas are created without there being a real problem that exists. There are endless examples of products having been created at huge cost and there really wasn’t a market for what was created or it turned out that the problem being solved wasn’t as big a problem to the population than initially was thought.
What are your business’ Customer Segments?
The very first step as recorded by the Business Model Canvas is identifying the Customer Segments for our product or service. First and foremost, do we know who our customers are and what jobs they need done? This is the most critical question that we need answered in order to have a legitimate shot at having a successful business. What do we mean by ‘jobs to be done’?
Quite simply that we are trying to fully understand from our customer’s vantagepoint what problem or pain do they need our product or service to address. We need to realize that as entrepreneurs that a customer is only going to be a customer if we can help them solve a particular problem that they have. If that problem is big enough…and WE can solve it for them…then people will give us money for that solution.
Once we can thoroughly identify the jobs that need to be done and who they need to be done for, we can focus on the ‘customer segments’ or separate customer Archetypes or Personas that form our ideal customers. These can be similar or very different. As an example, McDonalds has a significant variety of customer segments and therefore Personas and Archetypes that they cater to.
As a result, McDonalds doesn’t necessarily have its business model aligned along a particular demographic like age, gender, income, culture, etc. However, McDonald’s customers can be categorized more from characteristics we call Ethnographic. Ethnographic characteristics are defined more as to ‘how’ customers use a product or service. More specifically, what are their behaviors, what are their customs, what is it about their use profile, etc.
What are the usage profiles and desires of your Customers?
As it relates to McDonalds, their customers are not so much grouped by demographic aspects as they are their usage profiles and desires such as convenience, consistency, expectations, speed, etc. As it relates to our product or service, we have to be very aware as to whether our customers can be grouped primarily by demographic or ethnographic characteristics.
What is your company’s Value Proposition?
Now that we know who our customers are and what jobs they need done, we move over into the Value Proposition portion of the Business Model Canvas. In this section of the canvas, we are focused on ‘what’ it is that we do and why it is the best solution for our customers. Other than knowing who our customers are, the Value Proposition is the most important element of our business. We either have something that provides value at a level great enough for people to want to give us money for it or they don’t. It really is that simple.
A good Value Proposition is defined by how well we can identify what our customer’s ‘pains’ are that need to be addressed and/or the ‘gains’ that they are looking to receive by using our product or service. Essentially we are creating ‘pain relivers’ and ‘gain creators’ with our product or service. Along with the ‘jobs that need to be done’, if we are able to confidently address all of these elements we can be assured that we are truly providing value to our customers.
What Channels will you use to provide Value for your Customers?
Although all sections of the Business Model Canvas are important, the other section that I think is a critical one are the Channels by which you will deliver value to your customers. Channels are basically the means or the methods as to how you will deliver your product or service. For example, do your customers receive your product or service in person, bricks and mortar, via the internet, wholesale, retail, etc.
As we now are solidly within the era of customization and instant delivery its important to get the delivery channel dialed in to our customer’s needs.
A great example is the BlockBuster example. Instead of seeing how the demand for video streaming was growing rapidly, BlockBuster doubled down on their insistence that customers still were choosing to receive their video rental on discs and in person at a physical location.
Unfortunately for BlockBuster the upstart Netflix realized that customers were now interested in leveraging the new video streaming possibilities and wanted to receive their movie rentals on demand and on their computer.
In many cases, we may need to first experiment with the different channels that are available to us to see which one is the most preferable for our customer. For example, sometimes a product is more appropriately positioned in partnership with a physical retailer versus simply being sold direct to consumer via the Internet. However, testing which channel has the most appeal to the customer is part of the entrepreneurial process that has to be experimented with in order to get the right approach.
Customer Relationship – How will you interact with your Customers?
Once we get the channel dialed in as to how our customers want to be served we move on to the Customer Relationship section of the Business Model Canvas. In the Customer Relationship section we answer the question as to how we are going to interact with our customers. More specifically, are we going to maintain a complete hands-off self-service environment where we have very little contact with our customers or is there a possibility whereby we would establish assistance communities, direct personal contact and perhaps coordinated follow up with our customers?
With so many digital tools that now exist from automated bots to sequenced emails to the multitude of social media platforms, it’s so much easier to be closely involved with our customers. The point is to make sure that any interaction offers value to the customer and further builds the community around the companies brand.
After we decide how we are going to establish and maintain our relationship with our customers, we need to address the remaining sections of the Business Model Canvas; Key Partners, Key Resources, Key Activities, Cost Structure and Revenue Streams. As mentioned, I am a huge advocate for the Business Model Canvas so in my opinion it’s extremely important to make sure all sections are adequately addressed. To that end, however, the one remaining section that I think is particularly important to think through in-depth is the Revenue Streams section.
Revenue Streams – How do we intend to make Money?
Revenue Streams speaks for itself. I used to say to my staff everyday…no money, no business. Pretty straight forward. Therefore, it is crucial to figure out how many Revenue Streams your business can construct so as to diversify your ability to make money and increase potential revenues.
I like to use the example of a fishing guide who starts out selling his/her services to clients and eventually turns his/her guide business into a podcast, physical products, online courses, and a paid membership site.
What was originally thought to simply be a ‘trade time for money business’ has the potential of turning into a business model that leverages your time and customers so that they can interact with your company in several different ways.
Multiple Revenue Streams
Although certainly there are companies that are one dimensional, there are many different businesses whose business models provide for multiple Revenue Streams. Building your business from its inception to accommodate multiple revenue streams is not only a smart thing to do, it takes advantage of the opportunities for built-in leverage provided by business systems.
Everything in building a business is important. However, the business model is critical. It not only is the mechanism in how your business will generate income, it’s how your business is seen by your customers.
