#StartupWeekend events or similar time-limited business model or business plan contests are a good opportunity to simulate business model generation by going through the creation steps in an accelerated manner (BTW check #StartupWeekend Luxembourg’s edition – #SWLux – I had and still have the pleasure to participate both as judge and coach to #SWLux. For people in the region, I hope to see you there!).
During #StartupWeekend sessions, pitching events, and entrepreneur gatherings I get questions on the business model that are consistently coming back in a repeated manner. I created this post to address some of them, hope this might be helpful to some of you.
Let’s play the game of drafting a business model in two and a half days. You may try this with your co-founders over a weekend even outside #SW (I’d love to hear back from you if you try!). Also as many #SW would soon take place around the world you may try the steps below as a warm-up session before the event.
The business modelling approach
The business model generation and its recent update on value proposition design are must-read books for all people who are in the process of launching or have already started a business.
In conversations I have with entrepreneurs I often hear criticism about the rigidity of the business model canvas approach. Moreover it is clear that no methodology can teach somebody how to create a successful business. Although there is no recipe for success it is clear that lack of preparation when launching a business largely augments the chances of failure. Let’s address business modelling in the three steps below. I am not pretending this post is a comprehensive method to create a business model. However I tried to capture the aspects that seem important to me in the early stages of drafting a business model.
Step 1 (Friday evening)
You may start the exercise by thinking how your product/service/invention addresses the needs of your customers. The danger in that step is the temptation to open the box and list all features of your product/service. You should resist reasoning primarily in terms of technology/science/engineering (this is still hard for me as I have a technical background). Take the canvas template, forget about all the rest of the boxes, and just focus on the Customer Segments and Value Propositions parts of your business model for now.
Try to imagine who are your customers. For each customer segment, try to match it with a given value proposition. Sometimes it helps if you personify the customer segment and think of a hypothetical day of customer’s life. Be as precise as possible on the job of the customer (what is your customers try get done?) the pains (what makes your customers feel bad, stressed, frustrated) and the gains (what your customers expect, desire, or could be positively surprised by).
Product-market fit is about matching the above pains and gains with actions that relieve pain and create gain for your customers. This is precisely what you shall focus on when describing your Value Propositions. Don’t think features of your product or service. Rather list the benefits for the customers.
Coming up with a comprehensive product-market fit story is not an easy task. I have seen many people reshape their business idea (pivoting) already at this stage. Discussions on product-market fit shape your Value Propositions. They can be passionate and may create tensions inside the team. Better have such discussions earlier than later…
At this stage you should be tired, better get some sleep and start with step 2 in the morning.
Step 2 (Saturday)
Bright day for you today! Your thoughts are more precise regarding Customer Segments and Value Propositions. Next thing is to try to quantify your hypothesis both on the market side but also on the product/service use: how many customers are out there and how many can you acquire, or grab from competition? Can your customers easily postpone their decision to acquire your product or service? How often they would feel the need to use your product/service? How easy is for competitors to copy your product/service?
All these questions might have different answers for the different Customer Segments…
Then comes the question, how are you going to make money and what revenues are you expecting to generate? This has to be answered when dealing with Revenue Streams.
When reasoning about Revenue Streams you shall make the difference between
- the strategy you will adopt in order to generate revenues (are you going to change for a subscription, a license, a fee, a sum per transaction, etc.) and
- the price you are going to charge for your product/service.
Try to find examples from specific industries. For example in the case of the music industry customers are offered:
- to buy a CD (buy a set of songs for a given price and receive a physical good), or
- to buy individual songs on iTunes (dematerialized sale), or
- to subscribe to Spotify (all you can eat subscription model), etc.
In terms of pricing this translates to:
- $X the customer should pay to get the CD and get free shipping, or
- $Y to pay to buy the whole album on iTunes and get some discount, or
- $Z to pay for 12 months subscription on Spotify and get some months free, etc.
In addition to the distinction between revenue model and pricing model try also to think of how many times are you going to sell to the same customer. How often. How many customers you can acquire per month/quarter/year. How many customers you can lose per month/quarter/year.
Answering these questions will give you an idea of the dynamics of your revenues.
It is often the case that revenue models can trigger thoughts of additional customer segments and new value propositions. This can be the case especially if you are dealing with multi-side markets, e.g. when the end user might not be the economic buyer (think for example the toys industry: most often kids are the end-users while parents/family are the economic buyers).
Do not hesitate to cycle between Customer Segments, Value Propositions and Revenue Streams as many times as you feel necessary, your investment at this stage is time and postit paper…
In terms of timing at this stage it should be late Saturday night. You may get stressed because you know there are costs associated to revenues. That’s fine. Try to get some sleep for now and you will deal with costs first thing in the morning.
Step 3 (Sunday)
You got your Sunday morning coffee and you are ready for step 3.
By now you have some ideas on the Customer Segments, the Value Propositions and the way you can monetize these through your Revenue Streams.
You should now think how much money you will be needing in order to generate these revenues.
Acquiring and maintaining customers need Customer Relationships. Customer Relationships are materialized through concrete actions (marketing campaigns, promotions, advertisement, etc.) via specific Channels (virtual channels, distributors, direct sales, etc.). Other Key Actions related to creating and delivering your products and service would also generate costs.
Key Resources like physical goods, offices, stores, or salaries would generate costs too. Intellectual property might in some cases be a crucial aspect of the business model. Patent attorney, lawyer, accountant and/or other consultancy fees might be important elements of your Cost Structures.
Moreover if, for example, you enter an existing market, or if you need to access many customers quickly, you may establish links with Key Partners. If for example you are in the food industry and you deal with distributors this part of the business model might be a key element of success for the whole business. Not only there are costs associated to such partnerships but also the type of partnerships you may establish might affect your Customer Relationships and Channels.
It is clear that you won’t be able to list all costs during your Sunday and you should probably think of wrapping up the exercise with the objective of listing the various types of costs and associate amounts with these types of costs (an order of magnitude instead of precise numbers should be ok at this stage).
One last thing: think if some of your costs increase with the number of customers (and if this is the case, how fast costs grow – linearly, exponentially?). This might have a huge impact on your financing needs!
If you are in a #SW exercise you should by now be under stress of putting together the slides for your final pitch…
Think of the business model elements you identified as ingredients for your pitch story. Do not create your pitch as a presentation of the various items of the business model canvas.
Creating a canvas-style business model is about analysis. Pitching your business is about synthesis.
Don’t overload you pitch trying to talk about everything. Whatever you do it won’t fit in 5 min! You anyway have lots of material to answer questions at any level of details, if you are asked about a specific aspect.
You should pick the strongest messages your team came up over the weekend. Try to transmit the passion of your original idea…
At the end of the day, what remains is the impression you will create from your presentation. Your power of conviction. The links you create among your team participants. All the rest is business modelling “mechanics”.