What is a business model?
The first question that many entrepreneurs are asked is “What is your business model?” In a nutshell, the business model answers 3 separate but related questions
• What problem are you solving for the customer?
• How are you solving the problem?
• How much more does the customer pay you than you pay your suppliers
In my first startup, my wife and I answered all these questions. What was our business model? Oil rig manufacturers could not get 10cm thick steel plate that met the oil and gas industries fast enough to meet their project deadlines. We built relationships with steel stockholders across Europe and were able to deliver in days or weeks, rather than 6-9 months. Customers paid us 20% more than we paid for the steel and the logistics. A few years later when the oil price fell and there was no demand for oil rigs the business model fell apart and the margins shrank
What Problem are you Solving?
The first question is the first place that entrepreneurs fail. Many read “What problem are you solving?” as “What is your idea?” An idea is an amorphous death trap. It is enough to generate passion and enthusiasm. It is not enough to base years of effort on. You may have some insight. At that point, you have to step back and start talking to potential customers.
• Do they have a problem?
• Is the problem real?
• Does the problem hurt?
Far too often entrepreneurs realise that their initial idea or insight does not match what potential customers are saying. Sometimes they can’t find customers to ask about the problem. This is a really good thing. Just imagine how painful it is to build something and then discover that no one wants it.
What is Your Solution?
Once you know what the problem is you have to come up with a solution. This is the bit that entrepreneurs love. It’s building out the idea and making it happen. If you haven’t nailed the problem is it is common to build solutions that don’t really solve the problem.
• Does the solution solve the problem?
• Is it better than other solutions?
• What are the solution’s downsides
The key here is getting the fit between the customer’s pain and the amount of effort you put in. A trivial problem requires amazing solutions to capture the customers’ interest. An exceptionally painful problem is much more tolerant because it is far easier to improve on the status quo
How can you Make Margin?
All of the above is easy if you don’t mind spending more on your solution than the customer is willing to pay. When I was a systems engineer at one company we built amazing safety-critical systems that were bulletproof. They were the gold standard. The customers only wanted and paid for brass. This is not a point about the pricing though. It’s designing how you deliver the value so that you maximising the benefit for the least input.
- Does the customer need dedicated customer service? Google thinks not. Tiffanys thinks so
- Do we need to own our own assets? Uber thinks not. E.on, the power company, thinks it does
- Do we need to deliver our core competencies? Forbes thinks not, the Economist uses its own writers
Each of these approaches has an impact on cost and value delivered. Your business model is finding the right balance between the two
What is the Best Way that We Can Do This?
As I’ve built business models for over 300 entrepreneurs I’ve seen many attempts to answer the question “How can we do this?” There are always lots of answers. There are lots of ways to solve customers’ pain. This is the wrong question. The right question is to ask “What is the best way that we can do this?” The answers challenge the customers’ assumptions and delight them. They also challenge the entrepreneur’s assumptions and empower her.
What is Your Business Model?
If you’ve read this far I hope that you’ve been asking yourself the same questions. A business is rarely a static entity. Customers change, competitors change and so does the environment. Taking the time to think things through is a great way to gain competitive insight and then turbocharge your business.
What is your business model? Is it innovative or trying to break the mould. Send me an email and tell me all about it.