Pets.com, Dogster, eXcite, Alta Vista, Geocities, Webvan, Flooz are among the many high-flying companies of the 90s that failed spectacularly due to poorly thought out business models among other reasons. Here is a quote from Eric Ries in Nail It then Scale It, author of The Lean Startup, talking about his first startup, There.com:
We didn’t fail to execute the plan. That was not our issue. We had a flawless execution. … We were very rigorous about making sure that we hit deadlines and we did what we said we were going to do and we made the plan. And there’s a reason why we were able to execute that good plan. We held everybody accountable for doing really good work. The only problem is we didn’t have a mechanism for asking ourselves, is this plan any good? Is it worthwhile to advance it?
Eric learned a very hard lesson and happily, he went on to learn from it to found other successful endeavors including becoming a best-selling author warning the rest of us to avoid what he initially did not.
Get your business model right
First, let’s define “business model” – a design for the successful operation of a business, identifying revenue sources, customer base, products, and details of financing.
Making sure that your business model works over the long haul is vital for any founding team to get right. You have to be deliberate and thoughtful about getting all of the contributing areas right.
Arguably the most famous business model created by looking at an industry from a completely different angle is the one that combined the iPod and iTunes. Steve Jobs and his team, by asking the right questions the right way, found an industry ripe for change. Google also was a laggard in the online search game but quickly surpassed Alta Vista, Yahoo, Excite and Lycos by crafting a better way to satisfy the needs of its constituents.
Let’s explore how you and your company can create a profitable business model that gets the job done for all stakeholders.
From the conversations you have had from some of my previous posts, you may already have some clues as to what the proper business model is for your business.
Questions you need to ask
Review your notes from the previous market fit work you did in earlier posts to see if you can find answers to the questions below. If not revisit with the folks you interviewed and find out how they would want to buy your solution. For instance, you could ask questions like these from Nail it then Scale It:
- Would they buy it directly from you, from a distributor, from a partner, or from a large company?
- What would they need to feel comfortable making the purchase?
- What would a potential deal look like (specifically, what sort of terms or follow-on service would they expect, such as hosting or service calls)?
- How should the pricing model be?
- What should the price be? (I recommend Daring Caution by Robert Sherlock for more in-depth pricing help)
Focus on costs
Once you have discovered the different possible business models you could go with, you need to test all of your assumptions. We have learned from the list that started off this article, that going with your first choice or jumping in with both feet without testing the model could be disastrous. You need to understand the following and more:
- Fixed versus variable costs
- Customer acquisition costs
- Service costs
You then need to see where your biggest risks are in the model. What if assumption X is wrong, what impact would that have on business and financial models. Can we recover if we are very wrong? What if we are only slightly wrong? etc.
Shoot bullets, then cannonballs
It is extremely important to survival to not assume that all of this theoretical work was done correctly. Launching your business model in an iterative fashion can save your sanity and a lot of stress. I recommend, when possible to launch the least risky components first and as you test viability, you can introduce the riskier portions. It is important to make sure they are the key assumptions, though.
Patience and continual measurement are key.
While all of this is going on, I strongly encourage you to keep in touch with your customers and take their temperature, ask for their feedback every step of the way to avoid a fatal mistake. Your critical success factors need to stay top of mind throughout the process until you nail the business model.
Now you can move on to Scaling Up!
See you next time!
Be Exceptional! (www.catalystgrowthadvisors.com; firstname.lastname@example.org)
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