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9 Steps to Differentiating Your Business Model
Startups and young companies often put too much time into developing business plans and pretty power points and not enough time into developing their business model, testing their hypothesis, and proving their assumptions.
There are thousands of business planning competitions that go on throughout the year all across the country. In these competitions, teams are awarded cash prizes and receive accolades for coming up with the prettiest spreadsheets and presentations that spell out in great detail the assumptions behind operating costs and hypothetical profit margins. It can take months to write one of these award-winning business models and at the end of that lengthy period all you have to show is a 100 page book of assumptions.
You will be hard pressed to find any business modeling competitions anywhere in the world. But, for early stage companies a well thought out business model is much more actionable and results-driven than a business plan.
So, what exactly is a business model? A business model is a logical justification for the value that will be produced or delivered by your product or service.
Within this post I'll lay out 9 building blocks that you need to think through to complete your business archetype model. Even if you've had your business up and running for several years or if you feel like you have hit a plateau in any way, following these 9 steps will help you gain traction again in your business.
Step One: Define Customer Segments There are several potential ways of going about defining your customer segments. From a high level, this will be defined by the vertical that your solution is targeting. Will you be going after a mass market, a niche market, a diversified market, or a segmented market? In this process you'll also need to define which groups of customers you are going to serve and which groups you may want to ignore.
Step Two: Define Value Proposition Once you have defined the groups of customers you will need to serve, coming up with a value proposition that solves a problem or fulfills an existing need should be attainable. Each value proposition that you come up with should be comprised of a bundle of products or solutions that you offer and a list of benefits that the bundled solutions provide to each customer group or segment that you defined in step one.
Step Three: Define Communication Plan
• How will you reach your customer groups with your product or solution? • How do you raise awareness about your product or service? • What tools do you provide to your prospects for evaluating your value proposition? • How will your customers purchase your products and services? • How will you deliver the promised solution to the customer? • How do you provide post-purchase support for the consumer?
Step Four: Define Customer Experiences What types of experiences do you want your customers to have in the life cycle of purchasing and using your product or service? This includes the process leading up to the acquisition of a customer, retaining that customer, and up-selling them on future products and services. • What offers will you make to turn a prospect into a customer? • How will you retain each customer through client service policies? • How will you increase the revenue derived from each customer once they're in the door?
Step Five: Define Lines of Business (L.O.B.) Each line of business should represent a separate revenue stream for your company. Each line of business can be comprised of a onetime payment from a customer or a recurring revenue stream from subscriptions or ongoing services. For example an online business may have the following lines of business: 1. Subscriptions 2. On site advertising revenue 3. Ecommerce or Product Sales 4. Lead Generation 5. Classifieds (This could be a fee to post a classified or a percentage of sale) 6. Affiliate programs or shared revenue with strategic partners
Step Six: Define Business Model Assets Business model assets are resources that you possess or could easily acquire that set your business apart and allow your company to have leverage over competition. This could be manufacturing facilities, human/talent resources, intellectual property, financial resources, etc... These assets can be owned or leased.
Step Seven: Define Key Action Items Your list of Key Action Items (K.A.I.) should drive your daily activities. Each K.A.I. should revolve around what your business needs to do for your promised value to be delivered to your customers. To use an online business as an example again, here is a list of K.A.I.'s that may be worked into the business model: • Content Generation - content may be part of the product or service or it may be needed to help increase the online exposure via a search engine optimization strategy. • Production- This could be the manufacturing of a product or time needed to provide the service that is being sold. • Marketing- for online businesses this will be strategic planning and implementation of paid marketing campaigns, link building, partnership acquisitions, or page optimization.
Step Eight: Define Key Partnerships Your partnerships may just be the asset that sets you a part from your competitors. This could be any partner that helps you reduce risk, acquire resources, or add value to your offerings. It's important to have already defined your value propositions and your assets before tackling this step. If you don't know your role in the partnership you won't know what to bring to the table when approaching partnerships. If one of your assets happens to be a huge list of potential customers, for example, then you'll have much more leverage when approaching a manufacturer for a drop shipping partnership.
Step Nine: Define Key Costs This step includes uncovering and defining all costs that you will have to incur while raising awareness about your product, delivering your product, retaining/servicing customers, shipping products, human cost, and partnership costs. This exercise can also help you discover ways to keep costs low and/or how to scale your businesses model to adjust for high Key Costs.
In conclusion, as a startup or a small business, once you have refined your business model, you'll have a more solidified idea of what you're bringing to market. It's important to note that this is the foundation of your business and once you have these key steps defined, you will be able to present your findings to potential investors, customers, and partners for valuable feedback. Business models allow for flexibility. You may find that you'll have to pivot several times before finding the right mix of customer segments, partnerships, value propositions, and cost structures. But, this is a much more agile approach to defining your business than sitting down and writing a 100 page business plan that probably will not serve your company until your business is at a much more mature stage.
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