How to design a business model
Yesterday’s methods of business planning will not work today. In the past, a static business plan could provide you reliable guidelines and forecasts for business development over a 3 to 5-year time horizon, without having to make a lot of changes or including complex conditions. Today the speed with which conditions, technologies, and tools are modified requires us to use different forecasting methods for a business plan.
Today, a market can deeply change its internal equilibrium in less than 24 hours, which is why every company should build a solid but elastic structure that can adapt to these changes.
If you are one of those people who does not read the instructions when you have to assemble a toy or an Ikea mobile, you can go straight to the point and try to create your business model using the tool I created for the Viral Octopus Loop. Otherwise, continue reading this long article.
The example of Baliwarp struck me immediately when I started to write this article. Baliwarp was a project that used bots to analyze the buzz on Facebook and other sites to aggregate all the events on the island. Users could search for the event based on the user’s interests and whether friends on Tinder would go to the event.
The project started, reached initial great success, and then? After 1 month, Facebook inserted the search for events by interest and type, and after 25 days Tinder blocked the buzz-detecting bots. Kaput. The business was finished. Why? What did I learn? Not to hire employees to build a business that is heavily dependent on third-party businesses. Do not think of 5-year scenarios today.
Good business planning is a matter of providing the set of organizational and strategic solutions through which to gain a competitive advantage. What do all these big words mean?
This means that through our business model we must find concrete solutions to people’s needs, needs that change with changes in technologies and consumption habits.
What do you offer your customers? What you offer that is useful and satisfies an effective market need? Are you underestimating or overestimating your product?
8 out of 10 online businesses fail. Do you know why? Because we often fall in love with our ideas. We tend to emulate another’s business or to take our business offline, sometimes when it is already dying online.
Another pitfall: reproducing errors and critical issues without considering the dynamics of use of the internet environment and the real needs of the potential customer. Businesses also fail due to failure to plan a budget.
“The first to mount a urinal in a museum was an artist, the second a plumber”
Not too early, not too late.
One of the greatest risks is to present an indequately prepared product to the market, as happened for example with Webvan during the first dotcom era.
This start-up at its peak, in 1999, was valued at 1.2 billion dollars. Two years later the company filed for bankruptcy, 2,000 employees were fired, and the online shop was closed.
Webvan could potentially be considered a start-up that was launched too early. Their vision foresaw the supply of basic foodstuffs. Something, in short, that today we consider normal.
Following the model of “Get Big Fast”, a very rapid exponential growth, Webvan did not evaluate the initiative from a logistical point of view and did not consider overall what is actually a queen component of each and every e-commerce retail project: logistics.
After announcing their opening in 26 major cities, this business quickly became a logistical nightmare, with final losses of over $ 830 million.
We come to the old question of the Budget.
I am sorry to destroy deep-rooted beliefs with these data and with these examples.
But online is not synonymous with free and if something is free, then the product is you, as Chris Anderson would say.
Making an e-commerce business costs a similar amount to making a traditional store and sometimes even more. The fundamental difference is that the boundaries will be eliminated and that we will be open 24 hours a day anywhere in the world and regardless of time zone differences. Does it seem cheap? It always seems incredibly promising to me every time I say it.
Returning to our alarming number of online failures, should this demoralize us completely? Does it mean that e-commerce does not work? That it is only a viable business for companies with a strong brand and big capital? Absolutely not! This means, on the contrary, that it is necessary to observe our reference industry and seize the opportunities before starting an online business.
Doing business online does not necessarily mean having a site that contains our product. On the contrary, it will probably surprise you that a site does not always serve the purpose well, or at least in some cases, it is not the decisive factor. Of course what we can say is that one site is not enough. There is much more behind the construction of an online business and together we will see how to prepare ourselves for this.
How can we validate and refine our idea?
I use the Canvas model, the most widespread model used to define businesses today.
Every morning when I wake up, I have a new idea. What, however, are ideas without practical application? They are nothing except possibly a good mental exercise.
On the other hand, they sometimes turn into the worst obstacle to the effective realization of a concrete project.
We begin by extending this statement: ideas are useless without a business model.
If you are now thinking “What is ‘A Business Model'”? This is a problem! But it is not irreparable, because I am going to explain it to you right now.
A Business Model is the logical organization necessary to deliver into the hands of your customer the product/service that you intend to sell. In other words, a Business Model allows you to clarify how you will make money with your idea.
I also clarify another important point: a Business Model is not a Business Plan!
You can print the previous sentence and hang it on the wall of your office as a reminder.
The business plan comes later.
If after thinking of a sensible Business Model, you continue to think that your idea is a winner, you are about to transform the fury of your ideas that we were talking about before into something concrete. If it seems to you that the idea no longer makes much sense, instead, go back to the street.
Better to have stopped here, than invest time and resources to realize that the idea could not possibly work after you have started the company.
I know that at this point those who think they still have the right idea have already gone looking for “Business Model” or, even more specific, “how to make a Business Model”.
The Business Model Canvas was invented in 2008 by Alexander Oserwalder.
It is a sort of table that summarizes all the steps that are needed to ensure that our idea can succeed in nine points. It is still a bit ‘vague and without too many certainties, but it is a first step for your idea to become a real business.
The “scoreboard” is divided into two parts. On the right, following the not too scientific idea that the right brain hemisphere is the one devoted to creativity, you will find the factors that will help you to clarify these aspects. On the left, where the theory suggests logic dominates, you will find the logical-organizational structure that ensures we can manifest the idea concretely.
So, on the right side we will have:
- what product or service will we propose (Value Proposition)
- where are our customers (Customer Segments)
- how they will buy our product (Channels)
- how we will communicate with them (Customer Relationship)
- how we will earn (Revenue Stream)
On the left side:
- what we must do (Key Activities)
- what and who we need for routine activities (Key Resources)
- what are the external partners that we will need to rely on (Key Partners)
- what are the partners we need who will impose costs (Cost Structure)
There are several ideas to consider. Although many people say we should start by focusing on the customer and design a product around the customer, I find this anti-creative and anti-productive thinking, especially in the case of small businesses.
I am sure, in fact, that there is a right niche for every product idea and the social phenomenon is the confirmation: aren’t there groups for everything? Try, for example, to look for Quilling even if you have no idea what it is. There are dozens of groups frequented by thousands of people on Facebook dedicated to the topic!
Where to start, we may ask? My idea is that it is better to start with what you do best, then proceed to the Business Model Canvas box dedicated to the Value Proposition. Later you will define who and where your typical customer is.
What do you want to sell and why?
The Value Proposition is a statement of the usefulness of the service or product that you would like to sell. This block is located, not by chance, in the central area of the Business Model Canvas. This is the section in which you must enter the value you want to generate for potential customers, the value that you want to offer to the market.
You can add a separate Value Proposition Canvas, a kind of add-on for the Business Model Canvas. This scheme helps you to design, test and build the company’s Value Proposition for customers in a more structured way, just like the Canvas for the Business Model.
While the Canvas, with its nine blocks, focuses on the overall vision of the business, the Value Proposition Canvas allows you to zoom in on two of these blocks, Value Proposition and Customer Segment, to describe them in detail and allow you to subsequently adapt the overall business model.
The Value Proposition is something more than a product or a service. It is something that moves the deepest needs of the soul, those that dwell in our dark side, in desire, in insecurity, or in the sense of guilt that afflicts us.
To understand this, let’s take a practical example. Nobody buys a Rolex to look at the time or because it’s beautiful. Let’s see. Think about it for a moment: why do you buy a Rolex? You will quickly realize the answer: a Rolex is bought to belong to a group. Actually no. I’m sorry to disappoint you, but whoever buys a Rolex does so out of fear of being excluded from the group. This is the lever. Not being excluded is good. This is the reason why we buy most things.
I advise you to create a Customer Persona also called a buyer person or a marketing persona.
What tribe does your customer belong to? What is the marketing persona?
I found a very interesting defintion from Ardath Albee of the Content Marketing Institute:
“A marketing personas is a representative sketch of a segment of your audience. To produce content, you need to know who to direct it to. Therefore, marketing personas are ideal profiles of customers that help you produce and convey relevant and useful content “.
How do we really define marketing personas then?
Imagine answering the question: who is our ideal customer? It is essential to know this since it is precisely this person that we will address when we write content, when we publish images, when we create advertising content for social networks, when we organize logistics etc.
First we start by asking ourselves what we need to know about our typical customer. The best answer I can give you is: everything!
To do this exercise we will have to use a little imagination and try to represent the ideal customer in our mind and ask ourselves a few questions.
What are the customer’s goals? But above all how can our company help the customer achieve his or her goals? What are their needs and how can our product meet these needs? What are their values and fears? And what are the values that the customer shares with our company?
In short, we will go deeper and deeper into defining our customer personas, just like a writer who builds his characters. Before making them act, speak and interact within the story, he will have to define them in every detail, even in those aspects that will never be transformed into a part of his novel.
For example, a good practice to build better buyer personas is to involve our customer care and sales departments. They are the people within the company who have the most direct experience with customers. They are often in contact with them and know their problems, needs, and expectations.
If you have already started a project, the data that we can derive from the Analytics and social media insights will be a very useful basis on which to build our buyer personas.
I will show you a customer persona that we designed for Bali Warp.
Now we know who our potential customers are and we can already figure out where to look for them in the future. But after having found them, how will we relate to them? How will we assist them during the sales process? And what then? How will we earn their trust?
How will we relate to our customer?
With Bali Warp it worked like this. We used a good website with a filterable list of events in the area by type of music, type of evening we had in mind, and contacts Facebook and Tinder. We added a live chat with personal nightlife advisor that helped you choose an experience that would meet your standards, a newsletter with practical tips on Bali, and finally a community where you could share experiences.
The client, inspired by the site (a warm, even hot contact), will contact an expert via chat who will recommend the most suitable evening to him and conveniently communicate the deals available (customer acquisition / upselling) so that, excited and happy, he will ask for advice in the community (generation of content) and when he returns from the evening, he will share the overwhelming experience he has just had (word of mouth) with the same community. Finally, thanks to the newsletter, we would always be in touch with our now very satisfied customer, increasing the chances of having him repeat the experience.
Always remember that acquiring a new customer is very expensive, but when a customer returns to buy from you (Lifetime Value or LTV) all those costs will no longer exist and this will mean the sounds of change jingling in your pocket, or more aptly, the whirr of a money counting machine!
How can we reach the potential customer? How can we convince them to buy and above all to buy again?
Returning to our future nightlifer enthusiasts, I will tell you how we imagined one of the possible routes by which they could reach us.
Inspired by our site, which they have come to know by reading an article shared by an important blogger (Influencer), they discover that they can buy discount coupons for their Balinese nightlife adventures with a credit card. They were able to evaluate the quality of our service after talking with our experts who also guaranteed assistance in case of problems. Finally, they were convinced of the quality of the service due to the speed with which they received the follow-up email, after the chat with the experts and after seeing the positive reviews of the community.
Now we come to the juiciest part of our business model: how to make money (Revenue Stream).
You can earn with affiliations, sell subscriptions, rentals, licenses, advertising, but also with the development of vertical products. In the case of Bali Warp, we were making money from the sale of coupons, advertising in the newsletter, and managing the social networks of companies that needed photos of their events.
When you have filled in the various fields on the right side of the canvas, now the idea begins to become clearer and you can already see the shape of your new business. But if we are honest with ourselves, we realize we still do not know what to do and what resources we need to realize our idea concretely, and therefore our idea is still nothing but an idea. We are still pretty far from having something solid.
Now is the time to activate our left hemisphere and begin to work on the corresponding side of the Canvas.
On the left side of the Value Proposition table, we find the “Key Activities” – the list of activities that we have to carry out.
Who does what?
For example, with Bali Warp, we needed to develop technology, respond to chat, find deals, be present at events, and promote the site.
But to perform the key activities, we needed resources (Key Resources) which in our case were local experts who responded to live chats as well as photographers, developers, and marketers.
In our case the team was local and therefore we hired them all directly, but if creating a 100% in-house team is not possible, it may be necessary to find external partners (Key Partners) who can help us – accountants, freight forwarders or a web marketing agency, (viraloctopus.com for example!).
Don’t forget the costs.
Finally, we need to understand what the cost structure will be (Cost Structure) in order to be able to quantify the costs later. It is important to keep in mind that the realization of our dream can quickly turn into a nightmare (remember the example of Webvan?), if the difference between costs and earnings does not become a positive number in a well-defined time frame.
By defining a business model on paper, you have already done one-third of the work and you have completed the first point of the Viral Octopus Loop.
The outcome of this work will be a White Paper where you explain, first of all to yourself, how your idea will work in reality.
If you then want to go BIG, the whitepaper could be very helpful for pitching investors.
Of course, you need to do more than just fill in the Business Model Canvas to get a startup going and make it operational on the market. The Business Model is only the first step and it will always be necessary to confront the market, that is, interact with real customers and find out what happens. We will always have to be ready to come up with solutions and alternatives in case one of the aspects of our plan that we had expected and built on the Canvas does not go as we expected.
An additional tip? Social networks are an inexhaustible source of information for those who can listen. Our potential customers are right there, in that sea of users, and express themselves continuously, with posts, comments, and likes about their real needs and their desires. Learn to read all the available information with the right intention – to obtain useful data for your company.
- When you start imagining your business, ask your staff or a couple of friends to attend the brainstorming session
- Print the business model canvas
- Get Post Its and highlighters
- Design your business
- Use the business model as a guideline