After assessing your startup idea, it’s time to translate it into a business model hypothesis, which will help you on better:
- Visualizing the idea: the business model hypothesis will consolidate the problem and the solution in the business model component called “value proposition” which—with other 8 components—will bring you a clearer picture of what you’re aiming to build.
- Communicating the idea: once it is easier to visualize it, it will be easier to communicate your idea to other stakeholders as: employees, co-founders and investors.
- Iterating the idea: With a structured framework, it will also be easier to analyze and define which assumptions should be tested first and how could you iterate your business model hypothesis in order to achieve success.
But how do I structure my business model hypothesis?
Well, there is a widely-used framework that will help you on that. It’s called The Business Model Canvas (BMC). It was developed by Alexander Osterwalder and presented in his book: “The Business Model Generation“.
Through its 9 components, BMC supports you on structuring the basis of your business model hypothesis.
What is your value proposition? What customer segments are you going to serve? How are you going to make money? What will be your core activities?
These are some of the questions you’ll be able to answer with the BMC.
But, wait… shouldn’t I use a business plan instead?
That’s a good question and the answer relies on the validation process. If you want to know more about why to use one instead of the other, please check this post.
Now, let’s understand the meaning and the importance of each BMC’s components.
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What can you tell me about your customers’ lives?
If you want to be great in developing your business, start by being an expert in your customers’ lives.
The better you know your customers, the easier it will be for you to generate powerful insights that will guide you on the development of your business model hypothesis.
Information you should search for: Everything that relates to your customers’ lives, as their:
- demographics (age, gender, income);
- psycographics (attitudes, behaviors, values, beliefs);
- geographics (home location, work location, etc);
- networks (social groups they’re part of and the roles they play),
- daily journeys (goals, difficulties, hobbies, activities, pains, etc)
Looking for the info: There are several techniques that may bring you the information you are looking for such as: Interviews, Observations, Empathy exercises (putting yourself in your customers’ shoes) and Data Analysis.
Generating insights: To generate insights from these data you may use some great methodologies such as: Personas, Storytelling, Storyboarding and Customer Journey.
Of course, people are very different from each other. However, you may find some important characteristics that are common to the majority of your customers.
You may prefer to define two or more customer segments for your product. That’s fine, as long as you’re considering that because customers’ differences are significant and, hence, demand significantly different approaches.
How will your product add value to customers’ lives?
The value proposition refers to the products and services you’ll offer to your customers as well as how will they make people’s lives better.
When defining your value proposition, include the following elements:
- A general description of the product you’re offering
- A brief description of its features
- All the benefits your customers will have when using your product
- A long-term vision showing how your product will change the world, after massive adoption
Don’t think solely about the features of your product. Think about the benefits your product brings to your customers too. What will they get that they are not able to get today from current alternatives?
After describing your value proposition, it should be clear for you and for anyone else how your product ads value to your customers.
What are the channels you’ll use to sell and deliver your solution to your customers?
To define your startup channels considering the whole buying experience, have in mind that, in order to make business with you, customers must be able to know:
- That they have a PROBLEM;
- That your SOLUTION exists;
- That your solution is the BEST ALTERNATIVE for solving their problem;
- Where and how to BUY your product;
- Where and how to GET your product;
- Where and how to get SUPPORT for your product after the purchase.
Now, you should define which are the most efficient and effective channel(s) to address each one of these points.
How will you get, keep and grow businesses with your customers?
While Channels relate to the experience of the customer when buying from you, Customer Relationship refers to the strategies to get, keep and grow businesses with your customers.
This BMC component aims to generate the traction needed for your business to thrive. The questions to be answered:
- GET: How will you acquire (and activate) more customers? What strategies will you have to find the customers and start a “conversation” with them about their problems and their solutions?
- KEEP: How will you ensure your customers will remain buying form you after the first purchases? What kind of incentives will they receive to make the next purchases?
- GROW: How will you expand businesses with each customer? How will you make them buy more frequently or spend more on high-value products?
When designing your customer relationship strategies, have in mind the customers segment profile you’re aiming to reach. Some strategies will work much better than others depending on the segment. For example, if you’re dealing with big corporate customers, it’s likely that a dedicated sales team will work better to GET customers than Facebook ads.
How will you make money with your business?
The revenue streams are the ways your startup will monetize the value it delivers to customers.
Of course, there are several alternatives to come up with good options. To start thinking about them, I suggest you to consider:
- Everyone who might benefit or is related in some degree with your business: Of course, the most obvious answer is your customer. Nonetheless, you may be surprised by how many different stakeholders might be benefited from some aspect of your business.
- How would you generate benefits for them: after considering everyone who could have some connection with your business scope, you may start wondering how would you produce the benefits for them. What is feasible and aligned with your business model?
- How much to charge for each alternative: now, you need to set a price range for each alternative considering the cost of producing it, the value it brings to your customers and the costs of alternatives they currently find in the market.
The items above are just suggestions and you may find other ways of coming up with ideas for monetizing your business. What is important to consider is that there are several ways of earning money from your business. Don’t get stuck with only the most obvious alternatives.
What are the key assets that your startup’s value proposition demands?
Well, you’ll need some assets to create the value you’re promising to deliver to your customers. For example, if your startup produces an innovative shoe, it may need machines and a building to do that.
To help you on defining your startup assets, consider the categories below and which assets are essential in your business model hypothesis:
- Physical: machines, buildings, etc
- Intelectual: trademark, brands, know-how, etc
- Human: key people to support core business activities
- Financial: working capital, commitment lines, guarantees, etc.
Understanding which are the key resources of your business model hypothesis is crucial to start being realistic about the structure your startup needs to be alive.
What activities are at the core of your startup?
Depending on the business model hypothesis you’ve designed, there will be some activities that your startup should pay more attention to. These activities account for a big part of your product’s value creation and underperforming on those activities might negatively impact your customers’ perceptions.
A good way to think about which are the key activities of your startup is to think about the other BMC components. Which of these components demand the most important activities? Is it Value Proposition production? Is it Channels management? Is it managing and developing Partnerships?
What are the essential partners to make your business model work?
Setting the right partnerships may leverage your startup’s results by enhancing your capabilities where you may not be so good at as well as giving some protection to your business by making it more difficult to copy.
Partners might help you to get more clients, more revenues, enhance your value proposition, improve your key activities and reduce your cost structure.
In the business world we may find an infinite number of synergies between two or more companies. Always search and develop partnerships there are beneficial for all the partners (not just for yourself).
Which are the main costs of your startup and what factors influence them?
Finally, you’ll have to face a crucial part of your business model hypothesis which is to consider the structure of your business’s costs.
It’s worth noticing that all the other BMC components will affect your cost structure in some degree.
For instance, if you decide (in your Channel component) to build a sales team, instead of selling just through your website, you’ll significantly impact your cost structure (obviously, in this case, the sales made by a dedicated team might easily offset its costs).
However, while your startup is still not generating revenues enough to offset its overall costs, be extremely careful about the burden of your cost structure, by estimating your Cash Burn Rate and Cash Runway.
The Questions Behind BMC
As you might have noticed, BMC is a powerful framework to help on structuring your business model hypothesis in an objective way.
However, more than just a sum of 9 separate boxes, BMC is better understood when the connections between the components are taken into account.
The word behind these connections is VALUE. Keep in mind that to be sustainable your business must be able to create, deliver and capture value.
Hence, let’s consider the BMC components as the answers to these four questions:
- How do you CREATE value? Customer Segments, Value Proposition, Key Partners, Key Activities, Key Resources.
- How do you DELIVER value? Channels, Customer Segments.
- How do you CAPTURE value? Customer Relationship, Cost Structure and Revenue Streams.
After completing BMC boxes, your first business model hypothesis should be very clear for you and for your team.
This is the beginning of your journey and the words “first” and “hypothesis” in the previous sentence illustrate quite well the mindset you should adopt from now on.
In the next months, your mission will be to validate your hypothesis in the market, which means you must be prepared to be wrong as much as you’re to be right.
“Learn” and “adaptation” will follow you in every step of this journey. So, be open to learn (and accept) when many of your assumptions fail and to quickly redesign (adapt) them considering what you’ve learned.
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Alexandre Azevedo (LinkedIn)