You have developed a fantastic new product and you want to release this to the masses to gain forward motion and develop yourself as an Inventor within a start-up. You decide you are going to sell the product for a considerable fee and decided that you are going to open your website to promote this, but then nothing happens.
This is a common mistake that many start-ups make, thinking that just releasing will ensure that customers come is short-sighted and outlines the point of this chapter. Your Product is not your solution, your business model is your product (Maurya, 2010) and without thinking of all the elements that make this up, your product may be destined to failure.
So, what is a business model in simple terms?
To quote Saul Kaplan (Kaplan, 2012. p. 102)
“A business model describes how you create, deliver and capture value from your customers”
At its core, your business model is a description of how your business makes money. It’s an explanation of how you deliver value to your customers at an appropriate cost. A business model for an early-stage startup is made of 9 key elements that underpin how the business goes to market. As Ash Maurya (Maurya, 2012) states “A business model is a living and breathing prediction of the behaviours of your customers and it’s our job as entrepreneurs to model and adapt these as we design, build and scale our business as we go through the start-up lifecycle.
These models introduce an important mindset, that we must embrace validated learning which will be outlined in a later chapter. This allows entrepreneurs to not let failure to deter them, we need to let entrepreneurs’ experiment, test, and model different ways that they could structure their costs and revenue streams etc until they find the sweet spot for their business and their customer channels.
This modelling lets entrepreneurs make quick, structured experiments to their business model and see how the change might impact their business now under control conditions in a time-boxed manner.
The traditional approach to business model design is to build your plan based on a set of assumptions and made-up financial projections. Try to convince an investor to part with their money and then action your set of assumptions. It is no wonder that 8 out of 10 businesses fail to hit product-market fit and end up closing down with 2 years. As Steve Blank (Blank, 2000) states “No business plan survives first contact with the customer”. This flawed approach and fails to be adaptive to the modern business environment. The modern environment has allowed start-ups to be launched from anywhere, it’s now common for a business to operate in a country without even having a physical presence, this has led to the rise of the global small business (Priestley, 2018) and the breaking down of the barriers to entry.
Secondly, due to the entrepreneurial revolution (Priestley, 2018) and the advancements in technology, launching a business is cheaper and faster than before. This, along with the access to equal knowledge and tools has increased the number of start-ups entering the market, thus increasing 10-fold the competition of 30 years ago. This competition raises, so does the access to knowledge of your customers and the availability to build from anywhere has made the modelling of your business model more important than ever.
So instead of the traditional approach, what should be used?
Instead of building your startup on a build first approach, slow down and test out your riskiest assumptions first. This approach reduces the waste in time, effort and money and allows the entrepreneur to get below the skin of their potential customer to address and meet the latent needs to allow the business to become more successful.
The Lean Canvas was developed by Ash Maurya (2012) to capture the main business model assumptions, deconstruct an idea into its components based around value creation, value delivery and value capture (Maurya, 2012). It has been positioned as an A4 planning canvas to move around the Lego pieces that make up your model. The canvas has been designed to focus on the main areas of the business model, purposely leaving the solution box smaller than the main sections such as customer segments and the problem etc.
So, as an entrepreneur, how should you use this important tool? Firstly, this is a progressive tool. You review the assumptions regularly based around your customer learning and other critical assumptions. Start from the outside in, in this regard we start with the two critical elements of any business. Firstly, which customer segment are you targeting? Several entrepreneurs I have coached outline their plan to target the general consumer market or all businesses, this approach targets no one and normally leaves the start-up appealing to no one. Therefore, spend time confirming your assumptions in this area to target a specific customer segment in a sniper rifle approach, identifying their trigging events and problems.
This approach is important to early-stage start-ups, once that has iterated through the cycles of the experiments and amended their canvas, they can define the initial target and focus their energy and resources towards this.
Therefore, following the experimentation cycles, a start-up business should follow
- One customer segment
- Example — Business owners with less than 10 employees etc?
- One problem
- Example — Helping small business owners grow
- One message
- Example — Positioning your product to be clear and address the problem
- One offer
- Example — Focus on your core product, develop this and in time amend or expand
This approach in combination with various other modelling tools will allow the start-up to become very clear in there offering, which ultimately will appeal to their target customer and allow the business to grow off the back of their business model.
This approach can be applied to any business model whether you are operating in a direct, multisided or market place format and allows the start-up to slow down, target the right areas and then build a more successful model which potentially can be scaled in time without wasting resources and more importantly, time and effort.
Thinking of your business model as a product takes a mindset shift but looking at the initial nine boxes of the Lean canvas stops the start-up focusing only on the product and thus neglecting the other critical elements of your business model.
- Your product is only a small element of your overall business
- You need to understand where you create, deliver and capture value to be able to define your product offering
- Start with the Lean canvas, focusing on the outside in.
- Focus on building a viable customer segment, addressing that customers problem
- Ultimately, your goal should be the target one customer, with one problem, using one message and delivering one offer.
- Then, following your review process, you can investigate scaling.
In the next chapter, the focus turns to the most important element from an investor’s perspective, gaining traction with your customers to display progress and the viability of your assumptions and models.