One of the interesting thinking about a start-up is how is your company going to be organized and what we now know is the most efficient way to think about all the pieces just all the parts is by a business model. So, the next question is, what is a business model? What are all the pieces?
A business model is how a company creates value for itself while offering products or services for its customers. If you think about it, in the old days we think about how to organize a company around functional organizations. We think no-no a company is about its sales department or its engineering department and you would draw an org chart. But now we’re going to draw a very different diagram. We’re going to draw a diagram on how to think about all the pieces of a business. Let’s take a look at these 9-box diagrams below.
This nine-box describes any company from the world’s largest to a two-person startup starting in your parent’s garage.
Step 01: The Value Proposition
The first piece called the value proposition. The value proposition answers the question of what are you building and for who? The value proposition says, hey it’s not about your ideal product. It’s about solving a problem or a need for a customer. That is what pain are you solving and what gain are you’re creating, and more importantly who are your customers?
The value proposition is a fancy word for what products or services are you building. This is where you usually would list all your features and here’s all the speeds and feeds and gain and whatever. But we’re going to be asking different questions than might have been used to. It’s not all about your technology. Your technology is just part of the value proposition. Customers don’t care about your technology. The customer is trying to solve a problem or fulfill a need.
The difference between a problem and a need is, a problem is, I have an accounting problem or I want to use a word processor. And those types of products solve problems. But there are other things that human beings do like I want to be entertained or I want to have a date. Those are some basic hardwired social needs. Or, I won’t communicate with my friends like Facebook or Twitter. Those are needs. These are different than problems. If you could find products that solve needs your total available market as you’ll see later is huge compared to, I solve specific problems.
Sept 02: The Customer
The next things are, who are my customers? Who are they? And why would they buy? As you’ll hear several times. Your customers do not exist to buy. You exist for them. What you’re going to do by getting out of the building? Is mark out all their geographic, social characteristics, demographics.
Such that you actually could draw and put up a picture of on your wall of who the archetype is? Or, who the persona is of your customer? It turns out than in most startups. You might have more than one or two or three types of customer archetypes and personas. But you need to understand them in detail and there is no possible way you could have anything buy hypothesis on day one who they are.
Sept 03: Channels
The next is the channels. How does your product get to your customers? We use distribution channels to do that. Now what’s interesting is pre-1990s the only channels to get to a customer were a physical channel. That is, you went to a store. You had salespeople, there was physical distribution. But since the mid-1990s in the last couple of decades. We now have virtual channels.
The web, mobile, cloud and so distribution channels the first question you want to ask is how will I be selling and how do I be distributing my products are they through physical channels or they web, mobile or given today almost every physical channel also have a web presence. What is the relationship between how your product gets from your company to the customers?
Step 04: Customer Relationship
Customer relationship it’s kind of the fourth piece and customer relationship has a really interesting interaction. With these other three pieces. It says, how do I get customers? How do I keep them and how do I grow them? Just as thinking toward distribution channels these are very different for web mobile than they are for physical channels. But visually they kind of look like a sided funnel.
Let’s just take a look at quickly a web example in getting customers you’re gonna be worrying about how do I acquire them? That is how do I get them even to my website. How do I activate them that is how do I make them do something? Later on, we’ll see after I got them how do I keep them around?
That is how do I not lose them through attrition and churn. Then, what can I do once I have customers to make them spend more money or use my product even more? One of the things we’ll be thinking about is how do I get to keep and grow customers and just like every other step, you might have a hypothesis on day one. But you’re only going to figure this out when you’re out of the building.
Sept 05: Revenue Streams
The next things are revenue streams. How do you make money from your product or service being sold to customer segments? You know revenue streams ask the question of what value is the customer paying for? Then actually have you think about what’s the strategy of how I’m gonna capture that value. Is it I’m gonna just have a direct sale and it’s a complete a transaction based on price?
Is it a freemium model where I’m going to give away the product for free and hope that some portion converts later? Or, Is it a license or subscription model? That revenue model is different than the pricing tactics. That is what is the dollar or pound amount or euro amount that I’m gonna be charging. The only way to figure this out is by being able to interact with tens or hundreds of thousands of customers. So, you finally understand what the right revenue stream and revenue model is.
Step 06: Resources:
The next piece you want to think about is one of the key resources. What do you need to make the business model work? What assets are important. And what’s an example of an asset is a key resource? Well, finance. Do you need capital? Do you need a line of credit? Some assets are and resources are physical. Do you need a physical plan to like the manufacturing line? Or do you need specialized machines?
Do you need vans for delivery? Or, do you need cars is there something else you need? If there is the intellectual property you need? Are there patents you need to acquire or protect? Do you need to acquire customer lists or is it just that you need to get great people? Great software programmers in a specific area or great hardware designers or great manufacturing people. And finally, again at the interaction between intellectual and human capital is that’s another key resource. What specifically do you need to do to keep these people and who are they?
Step 07: Partners in business modeling
The next pieces are who are you, key partners and suppliers. The partnership is a kind of interesting thing is we need to ask yourselves before what’s the deal is? What exactly are we acquiring from partners? Also, what activities are they going to perform and when? This is where startups sometimes making a mistake of thinking well large companies do partnerships.
I guess I need those two on day one. It turns out the types of partnerships you need in a year. One is, certainly on ones, you’re going to need in your three of five or ten. The types of partnerships could be strategic alliances. Joint ventures. Just regular suppliers and buyers and so you need to be thinking through who they are and betting out the building and testing them.
Step 08: Key Activities in business modeling
Next our key activities. What’re the most important things you need to do for the business. To make the business model work. Are you in the production business? Are you making something or are you in the problem-solving business? Like you’re doing consulting or engineering. Are you managing supply chains? What are the key activities you need to become an expert at?
Step 09 Last component for what is business modeling is Costs
Finally, all this adds up to costs. What are the cost and expenses to operate the business model? One of the interesting about cost is, it’s not just the obvious ones like people or buildings or materials. What is the entire cost to operate our business model? You want to think about, what are the most important costs you need to worry about?
What are the most expensive resources you’re going to need to pay for and key activities are the most expensive? Then you want to ask the typical accounting things. What are the fixed costs? What are variable costs are there economies of scale? You want to start getting a good handle on what it is that will end up costing you money to run your business.