4 Ways to Perfect Your Business Model
How are you creating and capturing value?
The most common misperception of entrepreneurship is that what makes a successful business is the idea for a unique product — that if you just have that one great idea that nobody has thought of before, a type of product that nobody has envisioned, you can make tons of money and the world is at your feet. Entrepreneurship-as-a-Great-Idea makes for a good story, but it is good only as a story, because the story is fantasy. And if you rely on what is fantasy rather than reality, you are likely to fail.
The truth is that what makes any product great is not the idea for it or even what it can do. It is how it is positioned. Entrepreneurial positioning is not the competitive niche-finding of strategic management, as per Michael Porter’s Five Forces or the VRIO framework. It is about finding the right business model.
A business model describes the rationale of how an organization creates, delivers and captures value. It is, simply put, how a business makes money. This includes figuring out what the product is, who its proper customer is, and thus what the value proposition of the business is. You need to craft a compelling story, but you also need numbers showing that the story makes financial sense.
I have found it very helpful to think of the business model in terms of product, customer and value. It’s an iterative thought process that should lead to figuring out the product you can offer, what customer is best for this product and how much they value it (which means you have to figure out what about the product they value). These are interrelated, if not interdependent, so it is almost impossible to figure out all three without going back to revise the first. And then the second. And then figure out the third again. But it is worth it.
Having a great business model means all three are well aligned. You know the product to offer, which fits (almost) perfectly with the customer segment you have identified, because those people are the ones who places highest value on the product. And your product offers exactly what they want, neither more nor less. This means you have a good chance at succeeding. But you will almost certainly fail if you have a bad or sloppy or just not well-thought-out business model.
The choice should be obvious, because there is none. You need a good business model. Here are four questions you need to address in order to improve yours.
1. Whom can I serve?
This doesn’t sound like a question that comes easy for someone who wants to be their own boss, but it should. The real boss in your startup is your customer, because they decide whether or not to buy. The first question after you consider options to start a business must then be: Whom can you serve best? Disregard what your product is, where you are located, whether you can afford 24/7 customer service. What type of person (i.e. what customer segment) is best served by what you can do?
2. How can I serve them?
You probably had a product, or possibly even a whole business, in mind, but scrap that idea. It won’t work unless you place the customer first and figure out how you can serve them. This means designing and developing a product that corresponds exactly to what they would value having. Don’t overdo it; more features is not more value. Target the highest-valued feature.
3. What’s the value?
Value is not a dollar amount, but the satisfaction someone gets from using a product. Yes, this means value is purely subjective. That’s just how it is. Whether we like a product or not has nothing to do with how it is produced or what materials are used. It is all about our experience in using it, and we buy something expecting that experience. Importantly, we are willing to pay a price based on that experience. The better the experience, the higher the price can be.
4. Are you doing it for them?
This is probably the hardest question, because it requires that you think hard about what isn’t but could be, all while imagining yourself in someone else’s shoes. Unless you already know who your customer is and what type product they would value, you simply can't answer this question. Sometimes, seemingly small tweaks can unleash great value for the customer, such as when Netflix went from mailing DVDs to streaming online, or when Volvo figured that customers would rather subscribe to a car than buy it.
A business model is all about understanding that your business is your customers, so you must customize it to them. In order to do so, you must know who they are and what they might want. What are their dreams? What problems do they have? What can you do to make their lives easier? It’s not about meeting them halfway, but about giving them an experience they really value — one they cannot resist. It’s the entrepreneur’s job to figure out what that is.
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