Your business model is the core system driving your business. It's the system should drive the desired objectives for your business and producing more capital than it consumes, eventually.

Once you figure out what problem you're solving, who you're solving it for and what value you provide, it becomes easier to focus on figuring out and optimising your business model. If you need help with the earlier part of this last statement, check out our posts on Market Validation and Value Creation.

What is a business model?

Let's start with the basics. What actually is a business model? In simple terms, it's how you make money.

How do you make money? You sell something for more than it costs to make.

How do you do this? You create something that is more valuable than the "raw materials" are on their own. You create something of value that people will pay for.

The process you repeat to do this is your business model.

Background

the SaaS Reckoning

The past

SaaS (software as a service) revolutionised the classic business model by enabling a service as a product that's highly scalable. This provides significant upside potential, that seems to mean that all business model logic goes out the window on the hope of being able to raise enough money on the smell of a great idea that the specifics of a sustainable business model become a lot less relevant. Investors are so eager to not miss out on the next big thing, and it's become so hard to predict what the next big thing is, that ...................... This resulted in the "unicorn approach", where investors hope that if they fund 100 companies, at least one will make it big and give a high enough return to make up for the 99 with no return.

What this has meant, is that 99 companies that didn't have a viable business model have still been funded. In a lot of peoples minds, funding equals success at a particular point in time (until the company no longer exists). So perhaps, this has meant that the hard work that is required to figure out a truly viable business model has become less relevant and just maybe, this is why such a significant number of funded startups fail. People are putting in more time trying to raise money than they are trying to figure out a business model that works. Finding a business model that works requires focusing on your customers and your product, not investors. 

The present. The business model has become significantly more important. Investors have learnt from their mistakes, and now it's hard to raise money before you have traction that demonstrates you have a viable business model.

But, a large number of founders are still living in the realm of a throwing all ......out the window and going ham on trying to ....... Sure this works for a period in the beginning, when your momentum is fuelled by the passion for what you're doing and the dream of building a high growth startup. But you need to introduce discipline in your pursuit for defining a business model that works well, to keep you going when the initial excitement and passion starts to wane.

This article is designed to help you set up the systems you need to define and then refine your business model so you turn your great idea into a revenue generating machine, that provides significant value to your customers.

Why is this important?

Your survival as a startup depends on your ability to generate money before you run out of money. A disciplined approach of focusing on building a business model that works will force you to focus on the tasks that will add most value, and help to reduce the time it takes to generate money. 

Your time is valuable. The more time you waste working on something that's not going to work, the less time you have in your life to focus on something that will work and add value to the world. There are infinite directions in which your idea could go, and there is very likely  a combination of variables within your idea that will work. You and your team need to be disciplined in your approach to building a startup so that you have the highest chance of finding those variables and making your business work. 

Working out your business model:

There are two fundamental concepts you need to understand to nail your business model:

1) Value Creation

2) The Compound Effect

Part 1: Value Creation

At the core of a successful business model, is a product or service that provides value, real or perceived, to customers. This article assumes that you have validated the concept for a product or service that a group of people want (you know what problem you are solving, who you are solving it for, and what they value in a solution). You can read more about how to create that in the Founder-Problem Fit,  Market Validation and Value Creation posts. 

To optimise your business model you want to maximise your customers perception of the value of your product , and minimise the cost of creating and delivering that value to customers. This involves a process of figuring out: (1) the product that will provide maximum value to your customers, and; (2) the touch points you need to have with your customers to build their perception of value to the point where they are prepared to pay for your product, which includes marketing, sales, customer experience & brand. 

There are an infinite number of different variable and decisions that go into building a product and it's perceived value. Your job is figure out what 

Your business model is the core system for your business. It’s the process you create for your customers that gives you the highest chance of success, i.e. a profitable, high value add business.

 

To optimise your business

 

The costs of initial value creation:

We split the cost of value creation into two parts:

(1) Real Costs  - the costs that go into production of the product or service that provides value, that is the cost of building and maintaining the product and business operating costs.

(2) Perception Costs - the costs that go into convincing people of the value of the product/service, that is sales, marketing, brand & customer experience.

 

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Part 2: Value Delivery (Acquisition Costs)

Convincing your customers that you have something of value, that is worth investing their time/money in. 

Working out how to do this at a cost that is less than the amount of revenue you make per customer.

 

 

 

 

 

 

 

 

 

 

in some ways this is great, because the opportunity to be able to   But, what this has also meant is that 

 

 

Classic product business model: building a widget: cost of raw materials plus cost of putting the raw materials together plus cost of selling raw materials 

Widgets:

 

 

 

As with almost everything in business, it comes down to how you create value for your customers and,for startups, the process you go through to get a customer to buy your product. 

Part 1: Value Creation

 

Part 1:

 

Your  It’s the process you create for your customers that gives you the highest chance of success, i.e.  a profitable, high value add business.

The Compound Effect

Small incremental gains built up over a period of time lead to significant improvement in the long term. This phenomenon is called The Compound Effect. The Compound Effect has a significant impact on the quality of all areas of life, including personal finance, knowledge and personal development, health and wellbeing, and of course business.

Understanding the compound effect, and how to apply it to your business is the key to success in the long run. If you don’t practice it, you’ll spend a lot of time chasing your tail in startup land without making a lot of progress, or revenue.

Your Core System

Your business model is the core system for your business. It’s the process you create for your customers that gives you the highest chance of success, i.e.  a profitable, high value add business.

The first part of starting a business is figuring out what this model is. You can do this using practices and tools such as market validation and the Lean Canvas.

compounding-interest.png

 

 

 

 

 

 

 

 

 

Once you've figured out your model and the value you provide, the second stage of growing your startup is making consistent improvements to the model so to realise the compound effect. It’s these small, sometimes tedious incremental changes that will drive significant success in the long run. Persistence with the process is essential. It’s what sets apart those who talk about ideas from those who execute on them.

 

Setting up your Business Model:

The process for determining your business model:

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Step 1 (customer acquisition): First touch point with customers. How do your customers find out about you? What’s the most effective method? e.g. Content, Social Media Marketing, SEO (do they search for you online), face-to-face, events, partnerships.

You will need to go through an experimentation process to find out what works best. Once you find what works, double down.

Step 2 (value add marketing): What’s the next touch point that gets customers one step closer to buying your product or service? Engagement/Information/appointment.

The number of in between steps that you will need is based on the reality gap between your customers current and desired reality (which is larger if it’s a new behaviour, high price point, they’ve had negative experience before etc).

This step should include capturing information from your customer so you can figure out whether your product/service is the right solution.

Step 3 (sales): Suggestion/Sale - buying the product/service that meets their needs.

Set up your sales process, including things like sales script, payment process, goods/service delivery process.

Step 4 (follow-up): Post Sale: engagement, feedback, referral (turn them into an evangelist).

Include customer feedback in this process. You want to feel like they are now part of the community so they will continue to be engaged.

Examples:

Mint.com, from their early pitch deck:

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Buffer:

Buffer Pitch Deck

Buffer Pitch Deck

We recommend putting together a document or presentation that sets out your core system, your business model, so you can refer to it constantly.

 

Setting the Structures for a Compounding Effect

Once you’ve got your core system setup, focus on getting users onto the system so you can start collecting data on what works and what needs to be improved. You need to have enough people going through your system so you collect data and make revenue, but not so many that things get out of control and you can’t spend time making the improvements and ensuring that your users have a great experience.

1. Set your target metrics for each stage of your core system - what are your goals and how are you going to measure them? Start with one core metric, and then work backwards through the system to set targets at each of the steps in your model (i.e acquisition, conversions, sales).

  • How many sales do you want to make each month?

  • What is your measure of success when it comes to customer satisfaction? How do you capture this.

  • How many people do you need to reach in order to hit your sales target? You will start to get an idea of what your conversion rates are, so you can work out how many people you need to contact to hit sales targets, and what needs to be optimised most. 

Be realistic when setting your target metrics otherwise you’ll be deterred/disappointed by reality. Your state of mind is everything, so don’t set yourself up for failure.

 

2. Capturing data -  set up systems/process to capture data at each stage so you can start to identify the areas that need improving. This includes conversion rate data and customer feedback. Remember that you are constantly trying to provide your customers with the best experience, so you need to engage your customers to know what you should be doing better.

 

3. Assess the weaknesses in your core system and prioritise the updates/adjustments that need to be made. What are the point that need more work to create a more effective process, e.g. are people signing up to your newsletter, but then not converting to sales, or are people buying once and not again? What are the drop off points.

There will always be a number of things that need doing, so you need to make sure you are only focusing on the most important, max value add tasks. You can’t do everything. your mind will freak out if it feels out of control and overwhelmed by everything that needs to be done. This is why it’s important to have a process for prioritising tasks, and being ok with not getting everything done in one day.

 

4. Rinse and repeat. Keep going with continuous improvement and iteration. Make sure that you’re continuously checking in identify the areas that need to be improved, and to ensure you’re allocating your time to the tasks that will provide max value. Also think about what parts you can hire for, outsource or systemise more effectively, so you can start focusing more on the strategic aspect, rather than doing all the work in the business. 
 

Persistence and Discipline

"Steve Jobs Quote"