Business Plan competitions have been around for years. Run by a range of institutions from universities to incubators to angel investors to venture capitalists. The purpose was to find those potential high-growth companies that were worth investing significant time and effort to help achieve their potential. However, the amount of time and effort required to generate a business plan often far outweighs the value of the completed document. And, one might say, creating a business plan at this very early stage is often putting the cart before the horse.
A business plan is a document that tells the reader “how” you are going execute the business. It describes all the operational details of resourcing, sales, marketing, production etc. As a result, the most important “why” are you doing this business gets relegated. And the “why” is what the reader should understand as to where the value is being created and where the money is being generated. As incubation practitioners, who regularly evaluate new business ideas, focusing on the “why” can make the process of assessment more effective. As Steve Blank says “No business plan survives first contact with a customer”, so perhaps the time has come to rethink how we look at new business propositions.
The Business Model
A business model is all about the “why”. Why do you think you have a value proposition that will make these customers part with their hard-earned cash? Why do you have an edge in the market compared to your competitors? Why will your communications strategy get through to prospects better than the competition? A good business model will address these issues and allow you to assess the potential of the business very rapidly.
Googling “business model” brings up 156 million results. How do you find a process of modelling that can really help start-ups and early stage companies? Luckily a concept that builds on multiple existing approaches and condenses them into a single accessible and powerful tool is already available. Published in 2010, “Business Model Generation” was written by Alexander Osterwalder and Yves Pigneur but “co-created by an amazing crowd of 470 practitioners from 45 countries”. According to the book, “a business model describes the rationale of how an organisation creates, delivers and captures value”. And the important point is that the value captured is greater than the cost of creating and delivering.
There are hundreds of business model types in operation around the world but each one can be presented and understood using a simple tool – the Business Model Canvas.
Business Model Types
- Bricks and clicks
- Collective / Cooperative
- Cutting out the middleman
- Direct sales
- Fee in, free out
- Industrialization of services
- Low-cost carrier
- Multi-level marketing
- Network effects
- Online auction
- Online content
- Professional open-source
- Pyramid scheme
- Razor and blades
- Servitization of products
The Business Model Canvas
Think of the Business Model Canvas as a single page description of the inputs and outputs, the pluses and minuses, the income and expenditure of your business. On the right hand side of the canvas is everything to do with your customers, and on the left hand side is everything to do with your suppliers and internal resources. The costs of the left hand side should be lower than the income from the right hand side. Then you have a business! Let’s break it down.
1. Customer Segmentation
The first and most important starting point for any business model is a real understanding of your customers. This is not as simple as it seems. Take, for example, this magazine. As a subscriber you are clearly a customer of ours and we need to ensure that you continue to believe the value you receive from the payment you make is worthwhile. But we have other customers too. Our advertisers are customers, our sponsors are customers. And each customer segment has a different set of expectations in terms of the return on investment they make with us. So the first step is to really understand the different customer segments you have, and as importantly, quantify them. If you plan to sell in many geographical locations, understanding this spread is also important.
2. Value Proposition
Once you know who you are selling to, you need to really know what you are selling to them. And each segment will have a different value proposition. Our subscribers value the content of the magazine. They value learning about the experiences of other practitioners, picking up ideas that can be used in their day-to-day working. They value being part of a global profession that is recognised as a powerful force for economic development. The Business Incubator magazine makes them feel part of this group.
But our advertisers value something completely different. They want “eyeballs” on their ads. They want readers to see the ads and take some action that ultimately leads to a sale of their product or service. The only reason advertisers care about the content is that it brings eyeballs to their advertisement.
Sponsors take a higher level view. They are looking to make a connection between their brand and the business of incubation worldwide. They are not necessarily looking for short-term financial gains, but to establish long-term relationships with the readers of the magazine.
So, it is clear that each customer segment requires a different value proposition from the business. In business model evaluations, just using these initial two steps, it becomes rapidly clear that many businesses confuse their customer segments and value propositions. And therefore do not get the clarity required for a strong business model.
Once the customers and value propositions are defined, the next step is to identify the best way of communicating the VP to each customer segment. Again, it is likely that each segment will require a different approach. Channels fall into three types: own-direct, own-indirect and partner-indirect. Own-direct includes a personal sales force and a company website. Own-indirect includes company owned retail outlets (indirect because there is a distribution network in place before the product reaches the customer). Partner-indirect includes partner retail outlets and wholesalers. The choice of channel fundamentally depends on the expectations of the customer segment.
The fashion industry still maintains many own-branded retail outlets as most customers want to try on clothes before buying. Music and books are now delivered increasingly via website downloads. Business-to-business relationships are often direct with a sales force being required to close the business. With the magazine, subscription sales are driven by internet marketing and the direct purchase via the website. Advertising sales are made by personal connections to each company by our sales team. Each channel must fit the value proposition and customer segment.
Once customers are acquired, maintaining the relationship is also crucial (as the old adage states, your best next customer is your existing customer). The customer relationship should be driven and guided by the customer – what type of relationship to they want to have with us? Not vice-versa! Some customers want a highly personalised relationship that builds over time; for example if you are selling aeroplane jet engines to an airline. At the other extreme, some customers value a web-based self-service system that allows them to interact with your service whenever, wherever: internet banking for example. Some business can build communities of customers who engage with each other around the product or service, leading to self-help and increased loyalty. A further type of relationship is oriented around the co-creation on content for distribution back to the entire customer base.
So what may you ask has all this to do with revenues? Well, getting these four customer-based steps right should optimise the revenue potential of the business. Each customer segment, when properly quantified, should produce a revenue stream that can be clearly monitored and managed. The costs of building and maintaining each customer segment can also be monitored as the channels and relationship types are clearly defined. From this data the various contributions to the business can understood and analysed.
So what about the costs of running these customer focused activities? Understanding costs is usually easier and done with more confidence than revenue projections. Overheads are well defined and marketing budgets can be set against clear targets. In the business model canvas there are three areas that must be understood – key resources, key activities and key partnerships. Also some fundamental decisions about what to do in-house and what to outsource need to be taken.
The first thing to understand are the resources required to deliver the value propositions, channels and relationships. Resources are physical, intellectual, human and financial. For each of the value propositions, channels and customer relationships, the required resources need to be defined and quantified. Resources can be owned by the business, or acquired from key partners via outsourcing agreements. In the magazine’s case, the key human resources are the editorial and design function. The intellectual resources are the brand of the magazine. Physical resources are a minimum.
The focus here is on “key”. What are the key activities the business does? The important decision is to focus on what the core business is, keep these activities in-house, and consider how to outsource the rest. This magazine’s key activities are the editorial and design process, subscription management, and advertising and sponsorship sales. These activities are kept very close inside the business. Other activities include printing, distribution, website development, and social media marketing / PR. These activities are conducted by key partners.
There are many types of partnership a business can engage with depending on how close and how important the partnership is to the business. The simplest partnership is a buyer-supplier relationship created to ensure supply of the product or service is available when required. For example, the magazine has a publication deadline that must be met by the printer and distributor. At the other end of the scale, some business engage in joint ventures where two or more partners create a third party entity and take a shareholding. Strategic partnerships between non-competitors can add value to each party. The magazine has such relationships with many incubation and other networks around the world. There must be value to each side for such partnerships to operate.
Once the key resources, activities and partnerships are identified for each of the customer segments a full costing of running the business can be developed. The profit and loss for each segment can be understood as can the various contributions to the total P/L for the business. Even if a segment loses money, it may be strategically important to keep it part of the whole.
Putting it all together
Hopefully, as can be seen from this extremely high level summary, the Business Model Canvas allows business owners and advisors to pull apart a business idea and reconstruct it methodically, logically and simply. By ensuring that each element of the canvas is quantified, an early rough understanding of the profit or loss of the business can be gained. This initial view can help save significant time by eliminating the need to create a full financial model should the business look less than interesting. However, if the initial view shows profit, then the building blocks for the financial model are in place, and just require fleshing out with further research. Similarly, the bullet points created on the canvas form the basis for writing a high-level business plan.
What has been presented here is a superficial look at the power of the canvas. The “Business Model Generation” book contains a huge set of resources to help modellers to create their own canvases. And there is an iPad app, and an online version of the canvas that supports full numerical quantification, as well as textual descriptions.
This approach is highly recommended for incubators for both, initial assessment of ideas, and helping later stage companies evaluate their progress. As a starting point, it is a highly effective resource for incubator managers and the entrepreneurs they support.
http://goo.gl/2IM1R - buy the book from Amazon
http://www.businessmodelgeneration.com/ - see the website and download the iPad App
https://strategyzer.com/ - build canvases online and test out business ideas
David Tee is the Publisher of The Business Incubator magazine and a 25-year veteran of start-ups, consulting and incubation. He has worked all over the world setting up incubators, developing, evaluating and monitoring incubation networks and running small enterprises; he is the co-founder of three companies, to date. He recently delivered a training programme on Business Model Generation at the Palestine ICT Incubator (PICTI), as part of an EBN project, to build capacity within the incubator. This training module – which focuses on start-ups and helps with the evaluation of new business ideas – is an ideal additional tool for business incubators everywhere.
Published on 14-10-2012 13:49 by David Tee. 1193 page views
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