how-to-create-a-business-model

How To Create A Business Model

The most valuable asset any organization has is its business model. Indeed, that is the way all the moving parts of the organization fit together to create a value chain.

The aim of the value chain is value creation for several players in that industry, market and so on. The business model is not static, it changes and evolves along with the scale of the organization. The type of business model you designed for your company will not work if your company scales. You’ll need to rethink and redefine it.

This is even more evident with companies that are trying to innovate. When those organizations create a new technology or an innovative approach to existing industries, it is critical to understand who are the players involved in that industry and how you’re creating value for them. In this blog, we covered business models of many organizations. For instance, Google massive success is strictly connected to its business model.

The company managed to create a balance between several players in the publishing and information industry where each of those players gets back some value (economic and not) from having a relationship with Google.

Where do you start when it comes to creating a business model?

It’s all about business model design

The primary aim of a business model is to create a sustainable chain, able to unlock value for several players in a market, industry or niche. Therefore, this value chain will start from a value proposition, a promise you make to the key players and partners in that market, industry or niche depending on where you start.

For instance, when PayPal started out it didn’t look to dominate the whole market. It started from a niche. As Pether Thiel put it in his book, Zero to One:

The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.

Indeed, PayPal began from identifying its most valuable partner, what at the time they called “power user.” That was a choice driven by its business model design.

Therefore, instead of focusing on generically offering a service for everyone, PayPal focused on acquiring and attracting as much power users as possible. Those power users were mostly on another platform that had already scaled up: eBay. Thus, PayPal focused all its effort on acquiring those power users from eBay, fast!

Only after PayPal had drafted, tested and validated a clear value proposition for a small, yet a critical group of power users, it could move on to take larger and larger segments of that market.

What is a value proposition?

At its most basic level, a value proposition is a promise you make as an organization to deliver something (either monetary or advantage) to a critical player you have in our industry. For instance, when Google started it showed right away it was capable of offering 10x search results, at a faster speed and more relevant to users. However, had Google kept its search engine primarily focused on providing paid results, it would not have taken off.

Instead, Google focused on offering relevant paid results but also a bunch of organic results. In short, Google managed to index and rank the web pages from blogs, journals, news sites and any other website that made those pages available to Google for its index.

In exchange for that content, Google offered back visibility as qualified traffic toward those sites. Indeed, search engines back then (at the end of the 1990s) were not focused on offering quality traffic. Thus, most of the audience you got back to your site might have been quite relevant for your business. Google instead, with its dominant search engine allowed publishers, businesses (small and large) to gain customers.

That sealed an implicit deal “Me (Google) will send you qualified traffic that helps you grow your business if you (publisher, business or whoever publishes on the web) offer me your content to be indexed.”

We might call that an implicit contract, that is the beginning of a value chain. In fact, from this sort of contract part of the Google business model has been built. Imagine the scenario where Google was not attractive enough to provide qualified traffic to content producers. They would have stopped offering their content for free by blocking access to the search engine. Instead, they allowed Google to index their pages because the visibility they got was too attractive.

A business model is also about how you make money but how you make money isn’t your business model

One of the biggest misconceptions of the business model is to confuse it with the monetization strategy or the revenue model of the company. While this is an essential piece of the puzzle, it is just one of the components of a successful business model.

In this blog, we’ve discussed at great length how companies make money as a way to start the discussion of a business model. However, a business model implies the understanding of

operations, customer acquisition and retention, supply chain management, and the cost above and revenue aspects

According to the business model you designed over the years for your organization there will be a piece that plays a more critical role compared to others. For instance, a vital component of the Coca-Cola business model is its distribution strategy. For other companies like McDonald’s, the key to its business model success is the heavy franchised restaurants that helped the company scale up all over the world.

Each company will develop a unique model among the many types of business models which is what makes it thick in the long run!

What principles should I follow to create and design a business model?

Developing a deep understanding of your business model implies asking a few critical questions. For instance, some of those questions might be:

  • What value do I offer my potential customers? Or what problem do I solve with my product/service?
  • How do I charge my customers?
  • What does my acquisition cost look like?
  • What channels can I tap into to find my ideal customer?
  • Did I create a predictable revenue stream? If not what can I do to generate that?

Your business model will be based on a few critical assumptions about who your customers are, how your product or service should look like, what are the favorite channels to reach them and a few others.

Those assumptions will be tested as soon as you start kicking off your operations. Your main concern should be just that. You need to check those assumptions as quickly as possible. Steve Blank has identified 17 principles in his Customer Development Manifesto:

  1. There Are No Facts Inside Your Building, So Get Outside
  2. Pair Customer Development with Agile Development
  3. Failure is an Integral Part of the Search for the Business Model
  4. If You’re Afraid to Fail You’re Destined to Do So
  5. Iterations and Pivots are Driven by Insight
  6. Validate Your Hypotheses with Experiments
  7. Success Begins with Buy-In from Investors and Co-Founders
  8. No Business Plan Survives First Contact with Customers
  9. Not All Startups Are Alike
  10. Startup Metrics are Different from Existing Companies
  11. Agree on Market Type – It Changes Everything
  12. Fast, Fearless Decision-Making, Cycle Time, Speed and Tempo
  13. If it’s not About Passion, You’re Dead the Day You Opened your Doors
  14. Startup Titles and Functions Are Very Different from a Company’s
  15. Preserve Cash While Searching. After It’s Found, Spend
  16. Communicate and Share Learning
  17. Startups Demand Comfort with Chaos and Uncertainty

I suggest you read this manifesto over and over again. This should be the first step!

What tools can you use to design and create your business model?

business-model-tools

One of the most used tools to design and create a business model have revolved around the customer development manifesto above. However, it is essential to keep in mind that this manifesto was the fruit of an era where venture capital had become scarce compared to the dot-com bubble at the end of the 1990s.

Those tools for business modeling have been developed in that context. Thus, those are not a one-size-fits-all toolbox but rather work better in a context where capital is scarce, and you need to test your business model assumptions as quickly as possible. In that context three primary tools are:

Those tools can be used by entrepreneurs in the phases of the business model generation:

  • map the business model hypotheses
  • test these hypotheses with customers feedback 
  • iterative this process

The result will be an incremental development of a product that will reach a minimally viable version. The better the product, based on customers feedback, the larger the audience it will reach.

Lean makes sense when capital is scarce and when you need to keep burn rates low. Lean was designed to inform the founders’ vision while they operated frugally at speed. It was not built as a focus group for consensus for those without deep convictions.

Is the lean startup still a valuable model?

As Steve Blank has pointed out on an HBR article entitled “Is the Lean Startup Dead?

I realized it was time for a new startup heuristic: the amount of customer discovery and product-market fit you need to find is inversely proportional to the amount and availability of risk capital.

In other words, the more risk capital that is available on the market the least the lean startup model might work. Reason being, if you have a massive risk capital, you won’t need to test all your assumptions. Quite the opposite, you’ll need to execute them fast. Also, one of the primary logic of the lean startup is to burn cash at the slowest rate possible, while evolving (so-called pivoting) your business model. If money is not an issue, then why go for the lean startup?

Steve Blank went further in affirming:

Rather than the“first mover advantage”of the last bubble, today’s theory is that “massive capital infusion owns the entire market.”

Therefore, if you secured a massive injection of money, then your aim might be primarily toward growth, rather then profits. In that context, the lean startup might not work!

How to get started with your business model design? 

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Gennaro Cuofano

Creator of FourWeekMBA.com | Head of Business Development at WordLift.io | International MBA

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