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Business Model

Real Life Business Model Development

To illustrate an application of the process of defining and refining a business model, we explore a real-life case study of business model innovation.

Greg Fisher

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Entrepreneur developing a business model

After giving birth to her second child and completing an MBA within a year of each other, Colette Symanowitz was looking for an opportunity to launch a business that would allow her to work from home. She needed a flexible schedule and an annuity income stream that would allow for family time.

Her objective was: “To become a lifestyle entrepreneur,where my business works passively for me, rather than me actively working for my business.”

She had always had the ability to network effectively, coordinate large groups of people and facilitate interaction between different parties.During her MBA she arranged functions, coordinated the sharing of lecture notes and additional readings and ensured that the class worked together so that each individual gained more from the programme.

She thought about leveraging this innate ability to create a business and so the idea of MBAconnect.net was born.

Colette describes MBAconnect.net as a social network for MBA alumni and current students from all business schools. “We facilitate networking,knowledge-sharing, job opportunities, social interactions and a host of other fantastic features for the MBA community,” she says.

The business is still in start-up phase, having officially launched in February 2008, but Colette has had to face up to the challenge of defining and refining her business model.

To illustrate an application of the process of defining and refining a business model, we explore her business model on three fronts: what she currently does; what she could do to refine her model and where the opportunities for business model innovation lie.

How does the business generate revenue? Describe the sources of revenue?

Once the business reaches critical mass, there will be four major revenue streams:

  • Monthly fees paid by business schools for white-labelled* versions of the MBAconnect.net website, an alumni services package per school
  • Monthly fees paid by community representatives for white-labelled* versions of the MBAconnect.net website, such as a community services package for engineers
  • Fees paid by recruiters and employers to post their MBA-calibre jobs on the site
  • Advertising revenue, such as banner ads on the site and in communications with users, and special offers relevant to and negotiated specifically for the mba community”

What are the major costs in your business?

  • Development, maintenance and hosting of the website. In an effort to control expenses, the business is negotiating a trade exchange agreement with a major service provider, which will allow it to obtain free web hosting in return for the placement of the service provider’s advertising on the website.
  • Marketing. Where possible, the business undertakes marketing that is effective and either free or cheap, such as banner exchange deals with other sites with a similar target market,Facebook wall postings, and networking online and at events attended by MBAs.

Colette has a clear understanding of her primary cost drivers. She has prioritised them appropriately for this stage of development and will probably need to add on some additional costs and reprioritise as the business develops. One of Colette’s major challenges is that the development and maintenance of the site is outsourced to a separate company.

If you study high growth web-based start-ups they almost always have a technical person in the founding team or employed in the business from very early on.Website development and maintenance will always be a major cost for a business of this nature and the more control you have of that cost and the resource that carries out the work, the better off the business will be.

Outsourced website developers are excellent for more static,less innovative sites.

Business sites that are constantly evolving and developing benefit more from an in-house resource. Therefore, transfer from a variable to a fixed cost to get more control.The important principle here is that the business should have its most important competency in-house.

Less important competencies can be outsourced but the core competency of the business should be owned and retained by the business. Colette should consider recruiting one of the many young web developers who are looking for a partner to create a business that will change the world.

What do you see as the key success factors for your business?

  • Build critical mass quickly. The more MBAs that join mbaconnect.net, the more powerful and far-reaching the network becomes, and the better it can work for its members as a vehicle for mobilising knowledge, opportunities and talent throughout the community. The quicker this happens, the greater the barrier to entry it poses to competitors.
  • Viral marketing, word of mouth and brand evangelism. Research indicates that, when making network-joining or buying decisions, customers worldwide tend to value the opinions of their peers, colleagues and other customers more highly than traditional marketing methods. All of the business’s marketing efforts(described under “Costs”) are aimed at driving word-of-mouth and viral marketing, in order to grow the community quickly. In addition, new users are directed via other key features to the Refer a Friend section of the site, in order to encourage them to invite their friends to join. This is based on research which shows that users who have just joined, are most likely to tell their friends to join. Colette has  a number of brand evangelists on board who believe very strongly in the concept and the value it can add to the MBA community, such that they are actively promoting it in their networks. It is important to develop and support brand evangelists, as they are a critical source of word-of-mouth marketing.
  • Customer service excellence. Focus on adding value for customers and meeting their needs, asking customers for feedback and incorporating common trends into the ongoing website development process. The differentiation will come from the value that is offered. If the business is able to offer more value than other MBA communities, it will build critical mass and a successful MBA community.
  • Effective expense control
  • Secure annuity income-generating opportunities
  • Always be on the lookout for new opportunities

Internet advertising depends on web traffic and targeting. Until Colette has high traffic numbers on her site, advertising will be difficult to sell and is likely to grow slowly. When the website has high traffic numbers and information about members, it will become a very attractive source of revenue.

Recruiters will also place a premium on traffic and the ability to target certain people. Recruitment is a fairly localised process (restricted to a particular country), so the recruitment element of the site will need to be addressed country by country and is probably one of the smaller potential revenue streams.

The white-labelled version for specific communities is likely to be a tough sell initially. Most communities, such as engineers, doctors or accountants, are controlled by institutes that are fairly slow to adopt new practices.

Therefore it may be difficult to market the concept of an online social network to them. They are country specific which may restrict the possibility of broad reach.

Business schools offer an attractive opportunity. Most students develop valuable relationships that they want to maintain after school. Each business school could benefit from such a social network as it provides a very proactive means to keep in touch with alumni and students.

Also, by creating versions for specific business schools, you immediately gain access to their database, creating traffic for the site.

This may be an ideal area to start generating revenue. Colette’s first three critical success factors are useful in terms of being able to guide her actions and provide the business with focus. The next three factors are vague and therefore less useful.

They are not likely to inspire action or guide behaviour in any significant way and therefore Colette needs to provide a little more thought to these factors.

The one factor that is missing from this list is the establishment of a system that feeds on itself. The beauty of most highly successful web-based companies is that they have created a system that is not reliant on any one person or process to be sustainable.

They draw on input from many users and multiple systems and processes to grow and evolve. Facebook relies on user generated content – we all create our own Facebook profile pages to populate the site. Google uses links between other websites and web pages to determine the relative importance of a site in its search algorithm.

eBay merely creates a platform for users to buy and sell via a controlled auction on their website.

MBAconnect.net needs to become a self-sustaining regenerative system if it is to achieve business success. This needs to be one of Colette’s primary critical success factors. Pierre Omidyar, the founder of eBay said:“You’ll know you’re successful when the platform you’ve built serves you in unexpected ways.”

Colette has made excellent progress building her business model to this level of refinement at such an early stage of development in the business life cycle. Her business has more clarity and focus than many more mature enterprises and is establishing a platform for growth and success.

Colette thought about her business model from all perspectives– that of the customers, the suppliers, advertisers and herself as the entrepreneur.

This process has helped her to deal with all case scenarios. She says that the benefits that emerged from thinking about her business model were innovation, continuous improvement and evolution. “Innovation comes from thinking continuously about smart ways to satisfy your customers, especially on a bootstrapping budget.

It also comes from focusing on an end goal,” Colette says. She recognises that this is an ongoing process of refinement and evolution.

“The business model for mbaconnect.net was very different when the idea was first conceived, compared to now. And a few years from now, it will be even more different. Balancing change with a sense of completion, is a constant challenge. You have to be on the lookout for signs that you’re on the right or wrong track, and trust your gut.”

Colette calls this process the road-mapping theory. “If you get a number of positive signs (I use three as my indicator) you know you’re on the right track,” she says. “If you get a number of negative signs (again I use three), change direction, even if you’ve invested time, money and emotional commitment in that path.

This helps me identify early on when to stand back and not to continue on a path that isn’t likely to succeed. With time and practice, I have become better at reading the signs intuitively. This means that I am constantly modifying the business model.”

[*A white-labelled product is a generic product created by one company and then branded by another company. In this case a generic social networking site for MBA students and MBA alumni is created by MBAconnect.net and then sold to a business school so that they can put their branding and look and feel on the site.

Creating and selling white-labelled products enables a business person to build something once and sell it many times.

White-labelled versions of products are prevalent in all aspects of business. Some of the most popular are white-labelled credit cards, such as a SAA Voyager credit card which is actually a Nedbank credit card, or products that come from the large consumer products companies but are branded by a retailer.]

Note: mbaconnect.net was at almost 200 registered users after just two weeks of operation – visit www.mbaconnect.net to see the website.

Opportunities For Improvement

One of Colette’s challenges is that she has multiple sources of unpredictable income.  She is experimenting to establish which one will work. While this can be a good practice, one needs to be careful about experimenting too widely with revenue streams.

Each revenue stream takes time, effort and persistence to build and as a start-up entrepreneur your most valuable resource is time. A general rule of thumb for a start-up business is to have as many revenue sources as you have people available to focus on each one.

So, Colette should focus on just one revenue source in the start-up phase. Once that revenue source has been established and stabilised, or she employs someone else, she could develop a second source of revenue.

If you have many potential sources of revenue, you need to look at them and decide which are the most promising in terms of:

  • Time to cash flow. How long will it take to start generating revenue?
  • Overall scale. How much income could that revenue source potentially generate?
  • Growth. How quickly will the income stream grow?
  • Other benefits. In developing a particular revenue stream, other aspects of the business may benefit.

Greg Fisher, PhD, is an Assistant Professor in the Management & Entrepreneurship Department at the Kelley School of Business, Indiana University. He teaches courses on Strategy, Entrepreneurship, and Turnaround Management. He has a PhD in Strategy and Entrepreneurship from the Foster School of Business at the University of Washington in Seattle and an MBA from the Gordon Institute of Business Science (GIBS). He is also a visiting lecturer at GIBS.

Business Model

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.

Scott Duffy

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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.

Related: The Top Business Models For Your New Start-Up Business

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.

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Business Model

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.

Alison Job

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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:

  1. Manufacturer
  2. Distributor
  3. Retailer
  4. Franchise.
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Business Model

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. 

Anthony Miller

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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.

Related: Business Model Design – Picking The Business Model That Works For You

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:

  1. Most of the people in our segment have some form of funeral cover, but very few have life or disability cover.
  2. 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).
  3. 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:

  1. Sketch a canvas in one sitting. While a business plan can take weeks or months to write, your initial canvas should be sketched quickly.
  2. 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.
  3. 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.
  4. 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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