A business model is a holistic approach, to understanding how businesses work, and also to building a viable, and scalable business, from scratch. Business modeling, indeed, is about experimenting with the underlying assumptions around a business to make it viable quickly, thus reducing the chances of failure.
Step 1: Define the problem to solve
One of the most common mistakes, when building a business model from scratch, is to fall into the trap of looking for possible solutions, without guessing a problem.
Indeed, the first step is about finding a problem, worth solving.
Once you find a problem, the next step is about guessing if there is a minimum viable audience around that problem.
Step 2: Find a minimum viable audience
Once you figured out what problem to solve.
The next question is about making sure there is an audience for that problem. It doesn’t have to be a big audience, quite the opposite.
Initially, you want to keep it very small, why?
First, it’s easier to test, and get feedback. Second, you get less competition. Third, you are able to build a personal relationship, which helps create positive feedback loops in the product.
Once you got a minimum viable audience, it’s time to test whether they are really interested.
Step 3: Sell first, then build
When building something from scratch, it’s easy to fall into the trap of asking around people what they think.
For the sake of building a business, asking around, is not a good idea.
You need to sell. Indeed, the sale of your product carries way more information about the customer’s preferences, than anything else.
This is the basic premise of revealed preferences.
You want to cut through the noise, and only look for a signal. If you’re able to pre-sell a product, then you know, customers want it.
Step 4: Build, launch and iterate fast
Once you got to pre-sell the product, you can start building it.
The first version needs to be extremely simple. As the main aim is to keep testing the market, rather than getting bogged down in technical details.
There is always time to make a product more sophisticated and complex.
Yet, at this stage, your business advantage comes from understanding your market, fast.
Thus, you want to build a first version, which is good enough, for your audience to be happy with that and start giving you valuable feedback.
Step 5: Refine, and test your assumptions, keep tweaking
The main point of building a viable business model is about testing your assumptions fast.
In many cases, you’ll be surprised about the things that might work and those that don’t.
Indeed, you’ll notice that ideas that seemed ingenious and destined to work, won’t. And those you might have thought wouldn’t have worked will.
Also, you’ll learn the difference between fake feedback (compliments, likes) vs. real feedback (sales, engagement, community).
This is at the core of business model experimentation.
Key Highlights of Building a Business Model from Scratch:
- Holistic Approach: A business model provides a comprehensive framework for understanding how businesses function and creating a viable and scalable business from the ground up.
- Experimentation and Viability: Business modeling involves experimenting with underlying assumptions to quickly establish a viable business, thereby reducing the risk of failure.
- Step 1: Define the Problem:
- Identify a problem worth solving before seeking solutions.
- Tools like Ash Maurya’s Leaner Canvas can aid in defining the problem.
- Validate the problem’s significance before proceeding.
- Step 2: Find a Minimum Viable Audience (MVA):
- Step 3: Sell First, Then Build:
- Instead of seeking opinions, focus on making sales.
- Sales reveal customer preferences through revealed preferences.
- Pre-selling demonstrates genuine customer interest in your product.
- Step 4: Build, Launch, and Iterate Fast:
- Begin building with a simple first version.
- Prioritize testing the market and gathering feedback over technical complexity.
- Business advantage comes from market understanding.
- Step 5: Refine and Test Assumptions:
- Continuously test assumptions and hypotheses.
- Challenge limiting beliefs and refine your model based on results.
- Ideas that appear promising may not work, and vice versa.
- Distinguish between fake feedback (compliments) and real feedback (sales, engagement).
- Business Experiments:
- Entrepreneurs use experiments to test hypotheses and assumptions.
- Formulate a few assumptions, design experiments, and measure customer responses.
- Genuine engagement, sales, and community involvement provide more valuable feedback than superficial indicators.
- Problem Definition through Experimentation:
- Instead of prematurely defining the problem, entrepreneurs use experiments to validate assumptions and adjust their understanding of the problem.
- Experiment results guide entrepreneurs towards accurate problem definition.
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