Very often entrepreneurs spend lots of time and money to write business plans that they never use. A business plan is at its best a static document, a snapshot in time, which outlines your hypotheses of how your business works or how you think it should work. Very often when businesses get going the reality they face is way different from the hypotheses in the business plan. For a business plan to be relevant those hypotheses would need to be validated and your plan updated to reflect your learning. Before you go writing a long business plan, consider validating your hypotheses by first creating a business model and testing it.
A business model describes the rationale of how an organisation creates, delivers and captures value. Alexander Osterwalder developed what we now know as a business model canvas in his book Business Model Generation which captures your ideas for a business model on one page. The main thought behind this was that once we get our ideas down on paper, we now have the opportunity to test the ideas to see if they are valid. Once validated, we can then proceed to writing a business plan. His idea, was built on by several others, including Steve Blank and Ash Maurya who wrote The Startup Owners’ Manual and Running Lean respectively. In this article we will explore the basic components of the business model canvas and how you can implement. The business Model Canvas has nine components and can be completed by addressing these four broad areas:
1. Define Your Offer
What will you offer to the market that will solve customer problems, and provide a service in a way that differentiates you from the competition? Your value proposition (offer) should be short, straightforward, factual and quantifiable. For example, Company A’s value proposition which states: “Discover the healthy way to reduce your blood pressure rate in just 3 days”, will acquire more traffic and conversion than Company B which states that “We will show you the healthy way to reduce your blood pressure rate”. Why? Consumers are able to identify quantifiable benefits from Company A’s positioning statement and would be more likely to purchase and maintain loyalty with that business. Your value proposition should also answer your target market’s minds why they should buy from you. You must identify your unfair advantage.
2. Define who your Customers are
Many business owners waste lots of time and money trying to be all things to all persons. It is not possible! Not everyone is your customer. The more specific you are about who your customer is, the easier it will be to market to them and serve their specific needs. Segment your potential customer in line with their needs, finances and purchasing and consumption behavior. An example of a specific target market would be “Young professionals between the ages of 25-40 who have 2-3 children with an income of $3 million and over” It is important to note that you can target more than one segment and for each segment you must be clear what value you propose to offer them. Once you have identified your segments you will want, define the type of relationships, you will have with each segment; are they transactional, long term, personal assistance, self service, automated services or communities? Each segment will dictate how they want to be reached, therefore your channels for reaching customers is important. This information will determine how you market , sell and service your customers.
3. Create your Action Plan
How will you ensure that your business model is functional? Well, it is now down to the ‘nitty-gritty’ details. You will need to determine what key activities, partnerships, and resources you will need in order to deliver your value to your identified target segments. Your key activities are those things you must do on an ongoing basis to deliver value, so if you are in the business of selling meats you must have a supply of meats that your customer needs. Key resources are the most important assets required to make your business model work. These resources may be physical, intellectual, human or financial. You will also need to establish a network of key partnerships that will help your business to maintain its competitive edge. Partnerships to consider are:
- Strategic Alliances with non competitors who serve similar customers
- Joint ventures to develop new business
- Supplier partnerships to ensure reliable supplies
4. Identify your Costs
Having created your action plan, you will now need to identify your costs. How will you generate revenue and what costs will your business model incur? Your costs can be sub-divided into two sections: revenue streams and cost structure. Your revenue streams outline the ways in which your company will generate cash, and the social and environmental benefits that you will provide to your customers. On the other hand, the cost structure describes all the financial, social and environmental costs that are needed to operate your business model. Businesses exist to make a profit, therefore , you should determine what price each customer segment is willing to pay for your product or service and how to deliver your product or service in a profitable manner. For your revenue model to determine the exact revenue streams will be derived from which customer segment. Revenue streams may be the sale of an asset, usage fee, subscription fees, lending, renting, leasing,licensing, brokerage fees or advertising.
We have only touched the tip of the iceberg of Business Models if you want to learn more or need help developing your business model leave us a comment below.