The start of a new year often drives the start of new businesses. As we move forward in 2017, and the economy is strengthening, you may be thinking that this is the time to capitalize on that idea you’ve had rolling around in the back of your mind for the last few years. Or you may have just had it with your crappy boss and soul-sucking job and think this is the time to make your move. Whatever is motivating you, you probably know that in order to get a business off the ground, you’re going to need a plan.
However, even before you sit down to write that business plan, your first step needs to be the creation of a workable business model. A business model is basically a visual representation of your business. It describes the exchange of value between you and your customers, and it is key to testing the viability of your business.
Your business model describes the exchange of value between you and your customers. That definition is deceptively short, but loaded with information so I’m going to break it down for you.
Value is a two-way street. It’s what your business offers in the marketplace, but also what you expect from your customers in return.
What does your business offer its customers? This is your value proposition. On the surface, it’s what your business does, but it’s also much deeper than that. It’s the change you bring about in your customers; the value you offer them. The value proposition is more than the product or service. It’s the reason that you offer those particular products or services.
Think about your favorite store, your go-to when you need something to wear on date night or to an interview. I’m a little preppy so mine’s J. Crew. Their value proposition is individuality which results from timeless style. How about a service-based business like Uber? An easy, stress-free way to get from place to place. In simple terms, it’s your “why”.
The cliche is true. If you don’t have a handle on your “why” (your value proposition), then your business isn’t going to make it. Get clear on your value proposition first, so that your offerings and pricing will reflect it.
Once you’re clear on your value proposition, you can move to the other side of the street: the value you receive from your customers. In most cases, this describes your revenue streams. What will your customers give up to get the change that you’re promising? Keep the traffic balanced on both sides of the street, or if there is an imbalance it’s because your business gives so much value but asks for comparatively little in return.
Who are they? My law practice caters exclusively to entrepreneurs and when I ask this question of clients, 90% of the time the answer that I receive is, “Anyone with money!”. But more often than not, failing to get specific on your customer segment will lead to ineffective marketing, pricing that doesn’t create desired revenues and products that don’t sell. Think about it this way: you have to know who you’re talking to in order to craft a message, and marketing is all about delivering the right message.
Specificity in your client segment doesn’t necessarily mean excluding a majority of the population. In fact, your customer segment might be a huge percentage of the population, like Dollar Shave Club (DSC). Their ideal client is a typical man in his 20s, of which there were about 21,600,000 in 2010 according to the last US Census. This ideal client all has something in common, the need for razors and a general dissatisfaction with the high prices of replacement razor cartridges sold at drug stores. But, because women also need razors and don’t like to pay more than we have to, DSC also generates sales to women and has been reviewed and recommended by websites that cater to women like POPSUGAR.com and blogher.com.
The key really is to focus on your customer segment by clearly defining at least one common characteristic. As you develop products, set pricing and create marketing, you will leverage that characteristic so that your business appeals to your customer segment. DSC knows that men in their 20s don’t have loads of cash to spend on razors and they set their pricing accordingly. DSC also leveraged their understanding of millennial men to create marketing content that resonates with the desired audience. Instead of focusing on traditional marketing channels like television and print, they launched their subscription service with a sarcastic video on YouTube. It went viral and has received almost 24,000,000 views since it was posted in 2012.
Method of Exchange
The final element of our business model definition is the exchange of value with your customers. It’s the way you reach them, the way they receive your value proposition and the way they give you value in return. It covers every element of the relationship: from the first time your customer learns that your business exists to the place they go to buy your value proposition to the way you deliver that value to the relationship that follows.
This is where it is especially important that business owners have a high-level of self-awareness. If you hate staring at a computer screen all day, starting an internet-based business might not be the right choice for you. Does interacting with different people every day make you want to claw your eyes out? You might want to reconsider that brick and mortar retail store. On the other hand, if you play to your strengths, your business has a higher probability of success.
It goes without saying that this is an extremely over-simplified explanation of a business model. There are an infinite number of possibilities for your business, each as unique as you are. For more detailed information on business models in general, check out Business Model Generation by Alexander Osterwalder and Yves Pigneur. The art in business building is to create a viable model and then to turn that into a plan that will get you through your first year. Nothing about entrepreneurship is easy, but by creating a solid foundation you’ll give your dream the best shot it can have. The only thing left is to execute.