Radical business model innovation
Back in the day, business models were quite simple: Buy low, sell high. It’s the basis of capitalism and the more it’s repeated, the richer you get. But with new technologies and globalisation, the world has become more complex and competitive, meaning this simple business model can’t deliver a competitive advantage needed to stay ahead of the pack. Though disruptive new business models are emblematic of our generation, they remain poorly understood. To get busy redefining your business model, here’s what you need to know.
Business model 101
Before you can innovate and refine a business model, you need to understand what and where you can tweak. Simply put, a business model is a description of how an organisation creates, delivers and captures value. This can be broken down into nine elements:
1. Value proposition
A clear description of the company’s offering and how it solves problems or creates value for customers.
2. Customer segments
The specific group of people that the organisation aims to serve.
The means that a company uses to reach, communicate with, and deliver to its customer segment.
4. Customer relationships
The methods used to maintain relationships with customer segments.
5. Revenue streams
The income generation and collection mechanism in the business.
6. Key resources
The most important assets that the company needs to make the other elements of the business model work.
7. Key activities
The most important things that a company must do to make its business model work.
8. Key partnerships
The network of suppliers and partners that make the business model work.
9. Cost structure
The major costs that need to be incurred to sustain the business model.
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Now to build and refine
Through these nine elements you’re able to understand your current business, whether it can be refined to be more profitable, and where there’s room for designing a new business model. The process is relatively simple but extremely powerful.
- Understand your model
Bring together your management team and other external participants, and present a copy of your current business model. Explain the nine different components and what they mean to the business so everyone’s on the same page.
- Brainstorm new ideas
Brainstorm ideas for different ways of doing things within the business model. If you’re designing a new business model, the focus should be on how you build up the different elements to create a valuable enterprise. Ask yourself, “How can we do things differently?”, “How can we create more value?” and “How can we be more efficient?” Be sure everyone participates and all suggestions are recorded for pondering later. Draw up a business model canvas including all suggestions made, and put it up where everyone
can see it.
- Identify good ideas
Identify good ideas with the input of everyone from the group. Try using gold star stickers where participants can vote for their top picks.
- Rewrite the model
Bring the best ideas together in a coherent business model. Get each participant to rewrite the business model using the best picks. Each person can then present their new model back to the group.
- Take action
Begin implementation of the new model by creating a set of action steps and allocating responsibility for their implementation.
How to use the methodology
Here are some examples of business models that have emerged and proliferated over
the last 20 years.
- Long tail business models
In short: A company sells lower quantities of more types of products to niche groups of customers. Unlike finding a ‘hit’ product to appeal to large segments of mainstream customers, you service small, dispersed groups.
An example is book publisher Lulu.com. Instead of finding the next Harry Potter, Lulu.com is an emerging book publishing business. It enables amateur authors (read: anyone) to publish a book. They make money by providing authors with the tools to self-publish and a platform for buying and selling these books.
- Multi-sided Platforms
In short: These bring together buyers and sellers by creating a space where people can transact. The model creates value by facilitating interactions between groups of people. It gains value as more people use it.
An example is local real estate platform, Private Property that brings together buyers and sellers of real estate on the Internet. Other examples include eBay, Gumtree, Apple App Store and Google advertising.
In short: Yes it’s possible to deliver a product or service to a large customer segment for free; having non-paying customers financed by some other portion of the business. By offering products or services for free, you generate demand and create interest which then encourages a customer segment to buy additional products or services.
An example is Skype. Provided you have an Internet connection, video calls are free (except for the bandwidth you’re paying your ISP for). This gets people using the network. There are then a whole lot of additional services that are worth paying for — like group video conferencing or calling from Skype to phone. Other examples include YouTube and Dropbox.
- Bait & Hook
In short: The business model lures customers in with a relatively cheap, upfront purchase but then makes money by offering more lucrative ongoing services.
An example is BMW Financial Services. BMW retailers give customers a very good deal on cars, and then use the Financial Services package as a means to finance the car. Ongoing interest payments by the customers ensure the model makes money.
Developing A Business Model That Works
Use these six tips to create the financial section of a business plan that will get your company off the ground.
The following excerpt is from Scott Duffy’s book Breakthrough.
What’s the first step in figuring out how to execute your big idea? Creating a working model for your business.
We’ve all been brainwashed into thinking that the best way to do this is to sit behind our desks and write a long, detailed business plan. You know the kind: It starts with a fancy cover and your mission statement, then describes your team, market, product, competition, and so on.
Most entrepreneurs spend a lot of time and resources writing their plan. Too often, they get feedback from all the wrong people. Their friends and family want to support them, but they’re telling the entrepreneurs only what they want to hear — that they have come up with the next Google or Apple or Tesla (keep in mind, none of this feedback is coming from customers).
By the time the entrepreneur gets to the last section in the business plan — the financials — he’s totally sold on the idea. Sometimes the financial section is left unfinished or dropped entirely as the business is launched.
And why not? We’re passionate. We’re committed. We know we can’t fail. So what are we waiting for? Let’s go!
Here’s the problem: Most entrepreneurs change their business model six times when working through the financial section of their plans. While running the numbers, they identify key distinctions with regard to income and expenses. They gain a deeper understanding of what it will take to break even and how to achieve free cash flow. As a result, they come up with better-informed strategies for attaining their desired financial outcomes.
The most important part of the initial business planning process, and the one people most often neglect, is getting your numbers to tell a story that makes sense for you and your investors. If you start at the beginning of the plan only to learn that your assumptions about the business don’t add up once you reach the end, you’ve lost valuable time and money.
Regardless of whether you’re in startup or growth mode or moving to the next stage of your business, mistakes can be costly, so here’s what I recommend:
1. Start with the last page first
Once I have a basic understanding of what I’d like to build, the market, my target customers, the business opportunity, and the product, I dig right into the numbers and create a simple one-page spreadsheet that clearly identifies how the money flows. Basically, I write business plans backward. I’ve learned that once the numbers tell the story you want, the rest of the plan will write itself.
2. Don’t wait
Don’t make this process more difficult than it needs to be. Limit your model to one page. Create the simplest, most basic spreadsheet you can that identifies income, expenses, breakeven, cash flow, and the capital required to achieve your outcome. Use conservative assumptions, and don’t rely on best-case scenarios.
3. Get out of the office
You’ll learn more about your business by getting into the market than you ever will sitting behind a desk. At least 50 percent of your time should be outside the office gathering information that can be applied to your plan. That means contacting industry insiders to learn more about the market, talking to prospective customers about their needs, and testing your competition’s products and services.
4. Be careful who you listen to
When we have an idea we passionately believe in, we’re convincing. It’s easy for our family and friends to tell us we have a winner on our hands because they want to be supportive.
But when you’re modeling your business, the people whose feedback matters most are current and potential customers. Listen to what they have to say and apply what you learn to your model. Let their feedback, and not your enthusiasm, sway your projections.
5. Don’t throw out negative feedback
Sometimes it can be difficult to absorb negative feedback in a constructive frame of mind because we’re so close to our projects and have so much on the line. We start rejecting and deflecting feedback that isn’t in line with what we believe.
But honest, educated feedback is like gold — use it to open your mind and ask tough questions about your assumptions. You must be obsessively committed to asking what you can learn from this feedback and how you can apply it.
This is especially important for people entering new markets where they don’t have prior experience. Getting feedback from others who’ve lived in the space will add to your perspective. Sometimes you’ll learn that there are things you don’t know as a newcomer that would significantly impact your financial results.
In fact, this holds true throughout your business’s lifetime. The entrepreneurs I know who’ve built the most successful and thriving businesses are obsessed with getting constant feedback from the marketplace and adapting their businesses based on evolving market needs.
Related: Developing a Stable Business Model
6. Be open to what the numbers tell you
The worst thing you can do is try to manipulate a model to match your assumptions. You need to approach your financial model with a completely open mind.
Recognise that it will probably take longer than you initially thought to get to market, generate revenue, create profits, and accumulate the cash flow you need to operate and further invest in the business. By being open, you’ll be able to make distinctions, apply them to your business, and set yourself on a path to success.
You need to be clear on where you want to go and put a simple and adaptable plan in place to help you get there. The clearer your vision is upfront, the easier it will be to back a plan to help you get there. Being obsessed with customer feedback will enable you to tweak strategy in a way that evolves with the market and helps keep you on top of the competition.
This article was originally posted here on Entrepreneur.com.
4 Types Of Business Models To Suit Your Business Concept
There are four main types of business models, see which one suits your business concept.
Different types of business models suit different types of businesses. A business model is the way that a company sells products to its customers. It describes how a business creates, delivers, and captures value.
What type of business model should you adopt?
A business model defines how the enterprise delivers value to customers, gets them to pay for that value, and converts those payments to profit.
There are four basic types of business model that any for-profit business will fall into:
How To Pick The Business Model That Works For You
So, you’ve picked your lane. You’ve decided what you want to do and why you want to do it. You’ve picked something you’re good at. You’re convinced the world needs and values it. You now need to decide how to make money. That’s where business model design comes in.
There are plenty of business model options for the same idea. For example, let’s say your idea is to offer historic tours of Cape Town. You could either do it yourself or hire professional guides to do it. Or you could use mobile technology to provide DIY walking tours. You could charge per tour or you could charge a membership fee. There are so many options. How do you pick the model that works for you?
The Lean Canvas is a great tool for entrepreneurs who are faced with this question. Adapted from The Business Model Canvas, it provides a simple, one page framework for brainstorming possible business models, prioritising where to start, and tracking ongoing learning. It walks the entrepreneur through the business model process logically and ensures the key elements of a successful business are considered.
My co-founders and I have used the Canvas extensively at Simply – for designing our business model, and for communicating it to partners and investors. The only thing you know with certainty when you start a business is that it’s not going to turn out as you expect it to. The Canvas evolves as you go – it was, and continues to be, a very useful guide in our journey.
Recognising an opportunity for disruption
We figured there was an opportunity to do something disruptive in the SA life insurance space. It was clear to us that lots of people were either not covered or getting a rough deal. Guided by the Canvas, we defined our first Customer Segment as adult South Africans, aged between 25 and 45 and earning between R5k and R30k monthly.
We then identified the 3 big Problems – specific to that segment – that needed solving:
- Most of the people in our segment have some form of funeral cover, but very few have life or disability cover.
- The cover they do have is often expensive relative to the benefits provided (i.e. a very small % of the premium goes towards the risk costs).
- There is no simple, intuitive way to buy good value life, disability and funeral cover online.
Developing a value proposition
Next came the Value Proposition. We believed we could use technology, digital marketing and human-centred product design to deliver simple, online life, disability and funeral insurance at a great price. We felt we could be for life insurance in South Africa what Takealot has been for retail.
We thought the world was moving far faster than incumbents realised; that millennials were ready to buy life insurance online; that we could build for the digital world and be in the right place at the right time.
And the rest flowed from there. I don’t have the time or the space to walk you through the other elements of the Canvas here, but you can probably fill in the blanks. Suffice to say, the process was invaluable and enabled us to build our business around a clearly considered business model. It’s early days, but the signs are good – we’re making a positive impact, having fun and keeping our investors happy.
Creating a Lean Canvas
So, how should you go about sketching your own Lean Canvas? The team at www.leanstack.com suggest the following approach:
- Sketch a canvas in one sitting. While a business plan can take weeks or months to write, your initial canvas should be sketched quickly.
- It’s okay to leave sections blank. Rather than trying to research or debate the “right” answers, put something down quickly or leave it blank and come back to it later.
- Think in the present. Business plans try too hard to predict the future which is impossible. Instead, write your canvas with a ‘getting things done’ attitude.
- Use a customer-centric approach. You may need to sketch one Canvas per customer segment. Start with the Customer Segment and go in sequence.
The Canvas has brought clarity and a common language to our business model design process. It’s enabled us to agree upon and communicate our business model effectively – both internally and externally. It’s also allowed us to tune and adjust our model as our story has unfolded – an inevitability for entrepreneurs. I highly recommend the Lean Canvas as a tool for designing your business model. Give it a try – I think you’ll like it.
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