6. Develop/Validate a Business Model
The most basic business model question is: how will you make money? Peeling the onion on that question, and it becomes more complicated than just choosing a pricing model. What value will you deliver to each customer segment? How will you deliver it? Through what channel? With what partners? With what cost structure? With what pricing?
The Business Model Canvas provides a model to brainstorm and organize the different aspects of your business model. And once you develop the model, you need to validate it.
Business Model Canvas
When people ask about your business model, they often mean "how will you make money"? A complete answer to that question touches on a number of issues.
The book Business Model Generation by Alexander Osterwalder and Yves Pigneur provides a model for thinking through the business model. They break business models into 9 aspects, all of which are represented on a Business Model Canvas.
It all centers around one thing: the Value Proposition.
To the right of the Value Proposition are the consderations that drive revenue:
- Customer Segments: What customers will you serve?
- Channels: What commmunication, distribution, and sales channels will you use?
- Customer Relationships: What types of relationship will you establish with each customer segment?
- Revenue Streams: What revenue streams will you create?
To the right of the Value Proposition are the considerations that drive expenses:
- Key Resources: What key assets are required to accomplish the above?
- Key Activities: What key activities will accomplish the above?
- Key Partnerships: What activities are outsourced, to who, and why?
- Cost Structure: What costs will be incurred in accomplishing the above?
TThe Business Model Canvas is a tool that can be posted on a wall and used in an interactive exercize of developing a business model. The canvas is shown below. (Download a PDF.)
Business Model Generation also distiguishes between 3 different patterns in business models:
Pattern 1: there are three types of Businesses (Customer Relationship, Product Innovation, and Infrastructure)
Pattern 2: Long Tail business models which offer a large number of niche products as opposed to a small number of best sellers.
Pattern 3: Multi-Sided-Platforms (or Markets), which brings together two distinct but interdependent groups of customers, such as Google, which brings the mass market (web site viewers who perform searches) together with advertiser, or credit cards, which link merchants with cardholders. Frequently in a Multi-Sided Platform, one segment of customers subsidizes another (e.g., Google ad revenue allows it to offer search for free).
The book goes on to describe Design considerations, Strategy considerations, and Process considerations when developing a Business Model.
Validate the Business Model
It's great to have a business model - but it always needs to be validated. It makes sense to you and your team - but does it make sense to customers, partners, and the channel?
Steve Blank, author of Four Steps to the Epipheny, proposes that the Business Model Canvas concept be combined with Blank's Customer Development model, which means treating the Business Model Canvas as a set of hypothesese that need to be tested in the market. In other words, your business model is based on a number of assumptions - assumptions that the Business Model Canvas helps you organize. Each of those assumptions needs to be tested!
Do customers understand and value your value proposition? Can you develop the required partnerships? Will customers pay what you think they'll pay so that you can realize your revenue streams? Are your cost projections correct? These, and all the other assumptions in the business model canvas need to be tested and validated!