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Tag: Business Model

Part Three: Test And Verify Your Business Model

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You have analyzed all the elements of your business model and designed a business model that appears to offer an excellent opportunity. But, you still only have a hypothesis, and your risk is real. The next step is to test, iterate, and verify your business model.

Following is an example of why you can’t take your business model for granted, even if the model had proved it works, When JC Penny was in trouble they hired Ron Johnaonk the man who designed the Apple stores which have been an enormous success, How could they go wrong? He laid out the store design into various boutiques rather than the traditional “boys department,” etc..

Plus, because the concept was so successful (at Apple), they modified all their stores within a  year, which cost millions of dollars, But customers hated the new store and loss of “bargain items,” sales declined rather than increased. A little over a year later, they fired Ron Johnson and looked to go back to their old way and search for another business model.

A lot of the information here is from Seve Blank, entrepreneur, and professor at Sanford University, and comes from his book,  “the Four Steps to the Epiphany.” The point of testing and verifying the business model is to move away from the standard product development model and move to a customer development model. Having a product isn’t sufficient, You need to verify you have paying customers and a financial model that works.

The cost of getting the business model wrong is devastating, and not all startups are the same. (See our article on market types).  This test and verification process looks at two areas: customer discovery and customer validation,

In Customer Discovery you are trying to find out who the customers are for your product and if the product or service you solve is vital to the customer. nOt just the early adopters but to the mainstream customers, You are developing a sales model that can be replicated and can drive customer demand,

In Customer Validation you are developing a sales pathway for sales and marketing, You are trying to prove you have found customers and a market that is positive about your product or service.model and the process is repeatable

These two steps will:

  • Verify your market

  • Locate your customers and identify the economic buyer

  • Test the perceived value of the product or service

  • Establish your pricing and channel strategy

  • Establish your sales cycle and process

When you have completed both of these steps, you can move on to executing your business strategy and model,

 

Part Two: Design Your Business Model

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Now that you have a basic business model put together, you do not want to accept that design as the best one automatically. Your goal is to find the best business model. The one that will set you apart from your competitors, deliver the most value, and offer the best revenues and profits. The business model canvas allows you to design alternative models easily by changing the data points in the individual modules and create an entirely new business model.

There are many, many examples of this design process. For example, Walmart changed the design of its business model several times before arriving at its current model. They had to reframe the definition of a big-box retailer. Even today, they are continuing to change their model with the economy, customer characteristics, and technology.

Another example is Southwest airlines. They were bankrupt trying to use the traditional hub and spoke business model of all the other airlines. They decided to redesign their business model and fly direct from San Antonio to Dallas or Houston and land at the suburban airports with far fewer gate fees. Passengers loved it as well as the suburban location was preferable because most of the business occurred in the suburbs. They also added some “viral marketing” like stewardess dressed in hotpants and great food and drink, Today, they are the only airline that has been profitable every year, since they redesigned their business model.

These examples point out three important things to remember when you are designing your business model (per Alexander Osterwald);

  • The product is essential, but not sufficient; you need a business model that makes it work

  • You can’t just copy the business model used by a competitor

  • A business model design is not proof it will work. It is a hypothesis and, therefore, a risk, and has to be tested and verified.

New products and services are opportunities that seem to get everyone excited. But, innovative business models also offer great opportunities. How could you redesign your business model to increase your value proposition?

 

The Business Model Canvas

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Creating an in-depth business plan for new, developing companies is not realistic. When I started work at Honeywell in 1968, one of my first tasks was to work on was the yearly, one, five, and twenty-five-year business plan for the commercial division. Honeywell had been in business for almost a hundred years, so they had lots of data. Today, things are changing too quickly, and for startups, just trying to get a business plan that works may take many iterations. That is why Alexander Osterwalder’s Business Model Canvas makes so much sense,

The business model canvas illustrates the nine fundamental drivers of the business model. And how they all work together to deliver value to the customer, including revenues and profits to the company. Also, because it is an illustration on one page, the entire business model is visible and defined so everyone can participate in the discussions about how best to deliver value to the customer.  

We are going to look at the business model canvas in three parts. First, the nine elements that make up the model. Second the “Design” aspects or capabilities you can use to experiment with the models until you get what you think is the right strategy and composition (referred to as a hypothesis). Third, the requirement initially proposed by Steve Blank, entrepreneur, and professor at Standford on how to get out of the office and into the market so you can test and iterate your hypotheses until you achieve product-market fit.  

Following is a description of the nine critical elements of the business model.

1  Value Proposition. This is, of course, your product or service, but it is why customers will buy and pay for your product or service or both.

2 Customer Segments. These are the people who will buy or use your products and services, This could be one segment or multiple customer segments. And it could be for multiple kinds of jobs, pain points or potential gains,

3 Channels. This is how you are going to sell and deliver your products and services to your customers (retail stores, internet, etc.)

4 Customer Relationships. This is how you are going to find, get, keep and grow your customers base,

5 Revenue Streams. This  is how you are going to capture revenues from buyers and users of your products and services (one time sales, subscriptions, etc.)

6 Key Resources. What resources are you going to need to make and deliver your products and services (physical facilities and equipment, Intellectual Property, human resources, and financial resources)?

7 Key Activities. What key activities must be done perfectly if you are going to deliver the value proposition you promised your customers. (e.g., Ikea must continuously find well designed, contemporary furniture that can be broken down and packaged into a box for customers to take home with then from the store,  

8 Partnerships. IN today’s world, we are not going to do everything ourselves, So, in addition to suppliers, who will you get to help you execute your business model.

9 Cost Structure. Knowing the eight elements above, what are your costs going to be to fulfill your business model?

These are the things you control. There are also four things not included in the canvas above, but which issues you will have to deal with when you design or modify your business model. These are the competition, the government, the industry, and the market. These issues will be dealt with here separately.

 

Prepare To Deal With New Regulations On Privacy Protection

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Starting on January 1, Americans – or at least 40 millions of them living in California – now have a comprehensive online privacy protection law in place called CCPA (California Consumer Privacy Act). Just like it’s European General Data Protection Regulation (GDPR) counterpart, which was passed in 2018. CCPA will eventually extend far beyond the State of California and reach the entire nation. 

Professionals and experts believe the odds are pretty strong that CCPA will be the foundation of privacy regulations in many other states or even U.S. federal online privacy law.

CCPA has established much stronger rights for Californians concerning their online data. For example, California residents now have the power to order any company NOT to SELL their data to any third-party for any purpose without their consent. Californian consumers can also ask just about every company that has collected their data and anybody else with which the company has shared it, to delete the information from the company’s record.

What Can a Business Do?

Under the newly enforced regulation, Californian consumers are entitled to know the categories of information that companies have collected and able to see any specific bits of the data, such as postal address and browsing history. Although CCPA is meant for consumers residing in the state of California, most companies will find it difficult to pinpoint the exact location of every single consumer. It is just the nature of the Internet that no one knows where a user is. Some businesses will have to apply CCPA across the board simply because they cannot effectively distinguish between Californian consumers and those from other states.

Another thing to consider is that Californian consumers have the right to take legal action for unlawful use of their online data in any form, so failure to comply may lead to disastrous consequences on companies’ part. CCPA applies to any for-profit entity which does business in California, collects consumers’ data, and meets any of the following thresholds:

  • Generates an annual gross revenue of more than $25 million
  • Trades (buys or sells) personal information of at least 50,000 consumers or households, or
  • Earns more than 50% of annual revenue from selling consumers’ data

The thresholds may appear to target medium-to-large-sized companies, but many small businesses and even startups can quickly meet one or more of the limits. But then again, this is not the end of the world. Online data privacy regulation has always been a hot topic over the years, and CCPA is the logical first step into the culmination of the discussion. There are several things businesses can do to ensure compliance without sacrificing profitability.

Read the fine print

Unless you have an executive team to do it for you, it is always best to try and understand CCPA yourself. This way, you can make notes of the things you don’t fully comprehend so that you can ask the more experienced legal professional for help later. While you’re at it, pay attention to the following rights granted to Californian consumers:

  •  the rights to know what personal information is collected about them
  •  the rights to know whether the personal information is being sold or disclosed to any third-party and who the party third is
  • the rights to decline the sale of personal information
  • the rights to access the personal information
  • the rights to receive equal price and services, regardless of how they exercise their privacy rights

And in the case of loss of personal information due to theft or other causes, California consumers have the right to seek damages.

Understand what personal information your business collects

As obvious as it may seem, many companies are not fully aware of the kinds of personal data their own businesses collect from consumers. Some probably don’t know that their businesses collect data at all. This is most often seen in startups where the focus is mainly on growing the business. Privacy regulation is likely considered an obstacle in growth, but now they cannot just ignore CCPA for the consequences can be severe.

Have your business partners read the law too

If you run a reasonably sized company, chances are you have multiple employees (or departments) to handle various tasks from bookkeeping to marketing, from networking to customer service. To properly implement CCPA and ensure compliance, make sure everyone in the company also reads the bill. Your officers, executives, and legal teams should understand the law better than anybody. Know the potential risk and craft a plan to avoid penalties.

You can read the full text here.

Privacy policy and regulation have the reputation of being the dark sides of business conduct. The reality is that many companies most likely takes advantage of personal consumer data for marketing or downright additional revenue by selling the information to third-party entities such as advertisers. CCPA is trying to get rid of the murkiness and provide a clear path for both companies and consumers to play it fair and square.

 

 

7 Ways To Sell Subscriptions

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This information is from John  Warrillow’s, book: The automatic customer: Create subscriptions in any industry and from Zuora’s blog,

1 Think 10x vs. 10%

Customers are aware that a subscription is more valuable to you than a one-time purchase. So, to get hem to commit, you need to give then a significant return for their investment., They are unlikely to subscribe to a “Save 10%” but might if they could enjoy 10x the value of the alternative.

Net; “provide a ridiculous amount of value.”

2 Appeal to their Rational Side

The subscription model has gone mainstream, and people are demanding a better value than the alternative. Subscriptions are sold by appealing to convenience — especially B2B.

3 Give Customers an Ultimatum

Most customers would prefer to keep their freedom and buy your product a la carte, on an as-needed basis. YOu might consider making a subscription the ONLY alternative (they have) you sell, You can’t buy one movie from Netflix.

4 Give Them a Freemium Option

Give them a free taste of what they will get from a full-blown subscription. Magazine publishers found it virtually impossible to sell first-time visitors a subscription to an information product (e.g., magazine or membership website) until they have first opted into a free email newsletter to sample the value of the content,

Once they opt into the free newsletter, they convert to paid at a rate of 3% to 30% per year depending on the number of offers are presented and how carefully the publisher manages the list (weeds out undeliverable addresses and those who have opted out.)

In this freemium, you want to leave plenty of value off the tale to instill a sense of intrigue about what the customer will get from subscribing. A good taster gives just enough to access the product but leaven plenty of temptations behind the curtain

5 Offer a Trial

If your product or service is hard to describe or has to be used to be understood, it (the benefits) consider offering a trial subscription. Unlike freemium, usually available forever, a trial has a start and end date.

6 Offer Your Subscription as a Gift

The problem with a gift is that it is forgotten in a few days, but if you give a subscription, it expresses that appreciation over time, Standard Coca offers 1, 3, and 6-month subscriptions. They get a 75% increase in sales for Christmas and Valentine’s day. BUT, gift subscriptions are difficult to renew, but you can use them to top off your regular subscribers,

7 Set Fire To The Platform

One of the best things about a subscription company is it is always on, always available. Customers love it, but it is challenging to sell a subscription if it doesn’t change from day to day, why buy today?

One thing to do is artificially simulate a burning platform that causes the customer to act to avoid losing something (they keep thinking about it but never do it). You could put a compelling offer out there (e.g., buy the first year for half price) through the end of the month (BUT only for those interested but not signed, don’t advertise it, use it discreetly.

 

Why Your Strategy’s General Policy Is Critical

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SnapDeal is an Indian company that is very successful in selling high-transaction products to value-conscious customers. They have been successful because they adhered to the General Policy of their strategy. What they were willing to do and not willing to do. Sometimes the decisions were very difficult.

While merchants everywhere were touting the latest cell phone, they decided not to sell them because they could not make the transaction efficient enough to be profitable. Many people told them not selling cellphones was a mistake. They didn’t rule out selling cellphones, they ruled out selling cellphones until they could do it efficiently and make a profit.

Based on their strategy of selling to the value-conscious customer, their General Policy was if they were unable to make the transaction profitable, they would not sell the product regardless of its popularity and selling price.

By sticking to their general policy, it did not turn customers away. In fact, it solidified the  “Positioning” in their customer’s minds as a retailer of value products. Today the company is thriving in a very competitive marketplace,

This story illustrates the value of having a long-term strategy and adhering to the strategy’s general policy and coherent action.

Are you staying on the path laid out by your strategy?

The Perfect Value Proposition

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Sarah LaFleur of MM LaFleur knew she had the perfect value proposition. Well designed, quality women’s clothes at affordable prices sold through her online platform. The only problem was that this was her definition of what people wanted. She was relying on direct mail marketing and Instagram. After a year, she was in trouble, She had lots of inventory, and her conversion rate was meager.

Then she started paying attention to customers and found out that while they liked her clothes and pricing, they still wanted to see and feel the clothes before deciding to buy. So, she put together a box, the “Bento Box”  of six clothing items, based on information from earlier email responses and told the prospect to look at the clothes, no-obligation, send back the clothes they didn’t want; and they would only be billed for the clothes they kept. Bingo! Her conversion rate went from 2% to 8%, and she is now doing great.

This may be hard to believe, but every zip code has hundreds of different mindsets, and many may not match yours, and maybe fewer still match mine. 🙂 The way to product-market fit is customer-centric, not product-centric.

 

The Customer Development Manifesto

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There are 14 rules that makeup customer development manifesto. I have summarized them from Steve Blank’s book, “The Startup Owners’ Manual,” This a much longer post than I would like, but I think it is vital that you look at them in total.  Learn them and use them. You will be glad you did.

Rule1 There are no facts inside your building. So get outside

The founder’s job is to translate the vision and hypotheses into facts. Facts live outside the building where future customers live and work. You can’t delegate first-hand experiences.  Only the founder can embrace the feedback, react to it, and adeptly make the decisions necessary to change or pivot key business model components.

Rule 2: Customer development is useless unless the product development organization can iterate the product with speed and agility.

It would be best if you paired customer development with Agile development. If you build the product without customer development (input), you will have a product that will be difficult if not impossible to change later, 

Agile engineering is designed to take customer input and deliver a product that iterates readily around a Minimum Viable Product (MVP) or its minimum feature set,

Rule 3: Failure is an integral part of the search

Failures in an existing company are an exception. IN a startup your are searching, not executing, and the only wah to find the right path is tot try lots of experiments and take a lot of wrong turns, Failure is part of the process, But failures are not failures, per se. Still, part of the learning process, If you are afraid to fail in a startup, you’re destined to do so.

Rule 4: Make continuous iterations and  pivots

Learning means making frequent iterations and pivots, A pivot is a substantive change in one or more of the nine boxes of the business model canvas (like changing from a freemium to a subscription model). An iteration is a minor change in the business model (like a small price change.) Pivots are driven by learning and insights; Founders should not hesitate to make changes,

Rule 5: No business plan survives first contact with customers so use a business model canvas

Once the business plan has delivered financing, the business plan is useless. Founders have to realize that the business plan is only a collection of unproven assumptions. The difference between a static business  plan and a dynamic business model could be the difference between success and failure,

The business model describes the flow and visual overview of the critical components of the company:

  • Value Proposition 
  • Customer Segments 
  • Channels
  • Customer Relationships
  • Revenue Streams
  • Key Activities
  • Key Resources
  • Kay Partners
  • Cost Structure

Use the business model canvas as a scorecard by posting your hypotheses and modify them as you test and validate your facts.

Rule 6: Design Experiments and Tests to Validate Your Hypotheses 

To turn hypotheses (guesses) into facts, founders need to get out of the building and test them in front of customers. Your tests should be short, simple, and objective pass/fail tests. You are looking for strong signals. Ask yourself, what’s a simple test I can run and a simple measurement that will give me a pass/fail.  Try to use a mockup if possible, to save time and money.

Rule 7: Agree on Market Type, It Changes Everything.

Not all startups are the same. The relationship between the product and the market has different requirements.  The market types are as follows:

  • A new product into an existing market
  • A new product into a new market
  • A new product into an existing market  (as a low-cost or niche entrant) 
  • Cloning a business model that’s successful in another country

See the information on Market Types for more information,

Rule 8: Startup Metrics Differ From Those in Existing Companies

Startups used traditional metrics for a long time. We now know that startup metrics should focus on tracking the startup’s [progress converting guesses and hypotheses into facts rather than measuring the execution of the static plan. Do this until you are ready to scale the company,  Following are the kinds of metrics you should be looking at:

  • Do the minimum product features resonate with customers?
  • Who is the customer and have the customer hypotheses been validated?
  • Customer-validation questions might include” average order size. Customer lifetime value, the average time to first order, rate of sales  pipeline growth, improvement inclose rate and revenue per salesperson
  • Cash-burn rate, number of months’ worth of cash left, short-term hiring plans
  • Amount of time left until you reach cash-flow break-even.

Rule 9: Fast Decision-Making, Cycle Time, Speed and Tempo

Speed matters because bank balances are the only absolute that declines every day. The sooner iterations and pivots get done, the more likely you will find a scalable business. The most significant impediment fo cycle time is admitting you are on the wrong track, and you need to make a decision. And yes, uncertainty is a problem you have to overcome. Therefore you have to think about decisions as reversible. Tempo refers to all levels at the company including investors,

Rule 10: It’s All About Passion

Without passion, the startup is dead before it begins. Successful founders are wired for chaos, uncertainty, and speed. They are focused on customer needs and delivering a great product.

Rule 11: Startup Job Titles Are Very Different from a Large Comp[any’s

I an existing company, titles reflect the way tasks are organized to execute in a known business model,  Startups demand execs who are comfortable with uncertainty, chaos, and change — maybe daily. For example, rather than business development, sales, and marketing, the tile might be Customer Development Team.

Rule 12: Preserve All Cash Until Needed. Then Spend

Once you find that repeatable and scalable business model, spend all you can to make the company grow. But, you need repeatable sales, not just one-offs like friends and acquiesces, you need a pattern or pathway you can replicate. Is your return on investment higher than your costs? If your goal is to get outside funding, you need to deliver 10x the investment.

Rule 13: Communicate and Share Learning

You need to share everything you learned on the outside of the building with everyone inside the building. Technology enables us now to share information in real-time through management tools and dashboards. One way to do this is with a daily company-development blog which will let everyone keep track of the entire development process (hypotheses, tests, results, people talked with, questions, etc.)

Rule 14: Customer Development Success Begins With Buy-In

To be successful, everyone on the team needs to understand ad agree that the Customer Development process is different. Everyone must accept the process and realize that its fluid and a search for the business model. Everyone needs to understand and agree that the old way of executing a business plan doesn’t work for startups.

Summary

Following these rules will help you achieve a successful company. Its the only approach for web-based businesses where you need constant customer feedback and product iteration. Also, doing things quickly and conserving cash enables you to pivot as necessary.

 

 

The New Startup Model 

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According to Steve Blank, entrepreneur, and professor at Stanford, a startup is a temporary organization in search of a scalable, repeatable, profitable business model.

A little history. Until 1950, the traditional way to start a new business was to use traditional tools and methods. But, as entrepreneurship grew, and many startups failed, entrepreneurs realized that startups are not just small versions of large companies.

Large companies knew and understood who the customers were, their business model, the problems involved in their company, markets, and industry. Startups, on the other hand, we’re searching for a repeatable and profitable business model.

The startup model required different rules, roadmaps, skill sets, and tools to minimize the risks and optimize the entrepreneur’s chances for success.

Some of these new tools include

  • agile development, an incremental and interactive approach to engineering that allows product development to pivot to customer and market feedback,

  • A business model design which replaces statistic business plans with a nine-box map of critical elements,

  • New tools for creating and fostering winning ideas

  • Lean Startup which allows the customer and agile development  to process simultaneously

  • Lean  user interface designs to  improve web/mobile interface and conversion rates

  • Venture and entrepreneur finances were attractive to managed funds, which freed up innovation.

These processes and tools allow startups to refine and scale their ideas faster and more affordably.

Different types of entrepreneurship

The main types of startups we are concerned with here are:

Small business entrepreneurship: the 5.9 million small businesses that make up 99% of all U.S. companies and employ 50% of all nongovernment workers. Most of thee entrepreneurs define success as making a profit, not build a 100 million dollar business,

Scalable startups are entrepreneurs that start a company believing their vision will change the world and generate 100s of millions of dollars in sales. They are looking for a scalable business model and require venture capital.

Buyable startups are relatively new With the advent of developing low-cost apps, startups can fund themselves (often on credit cards) and raise small amounts of money, The goal is to get acquired by large companies.

 

Customer-Centered: How Can I Help You?

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In today’s world, most people realize that you must put the customer first, not the product. ?

But does that mean that you accept everything the customer tells you? NO, 

But it doesn’t hurt to be customer-centered and ask how can I help you.

 

According to David Stucer, in a Sales & Marketing article, you believe the customer when

he is talking about his issues. You do want to pay attention when they tell you their needs

when they tell you what’s broken in their lives, when they tell you why where they are hurting?

 

A customer comes to you or wants to do business with you because he wants you to solve his problem.

Therefore you have to show him how you can solve his problem or issue.

 

As David would say: “We hear you, we can help you, here is how.”

This is easier said than done, however. You can grasp the problem conceptually,

but most people have difficulty conceptualizing the solution.

Make it easy for them to see how you can solve the problem,

 

People often jump to talking about their company and their product or services.

That’s certainly not customer-centric. The customer doesn’t want to hear about your business;

they want to hear about how you are going to solve their problem.

 

You  will get a better reception if you focus on how your business can help him improve his business,

As David would say, “People are far less concerned with doing business with an awesome company

then they are about whether the company can solve their problem”,

What you want to do is consistently tell the story in every media,

about how you solved this problem and that problem related to their problem, market, or industry.  

 

 

Jim Zitek/Harbor Capital Group 

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