Every start-up needs a roadmap to success. But, how can you ensure you’re developing the right business model?
As part of the EWOR Academy, our CEO Daniel Dippold gave a lecture on the significance of creating a great business model. As a serial entrepreneur, Daniel has experimented with different exercises to figure out the best business model for every product.
Learn how to develop an effective business model for your product in this article.
What Are the Main Business Model Characteristics?
Every business model includes a way of how value is generated, captured, and brought to the customer. If any of those components are missing in your venture’s plan, it’s not a business model.
Your venture’s product creates value for your customers. During customer discovery, you’ll ask yourself if your product creates value for future customers. If you don’t create value, you don’t have a business and need to conduct more customer discovery.
Once you have a product, think about pricing and other ways to generate revenue. This can still be part of your customer discovery process. If you don’t capture the value you’re creating, you won’t make any money.
Focus on how to distribute your product or service as a final step in developing your business model. Without a digital or physical distribution channel, you won’t be able to capture the value you’ve created.
Business Model Development – Common Tools
There isn’t one way to develop a business model. Instead, there are various ways and tools to craft the most promising model based on your product and circumstances.
The Business Model Canvas
A business model canvas is the most popular tool for developing business models.. It’s easy to use and its eight dimensions make the business process accessible.
Take this tool with a grain of salt and consider it as a first step to better understanding every aspect of your business. Although this canvas is great for consulting and putting together business plans, it cannot be used for prototyping, for example.
Exercise: Once you know how to create, distribute, and capture, think about more dimensions on the business model canvas.
Using this exercise, you’ll gain a deeper understanding of how your business works and inspiration for how you can improve the process.
The Business Model Navigator
“The Business Model Navigator” is more complex than the business model canvas, but it’s a fantastic tool in the ideation stage. Prof. Dr. Oliver Gassmann conceptualised 55 different business models in his book to create an extensive overview.
Exercise: Once you have a feeling for your creation, distribution, and capture mechanism, go through all 55 models and ask yourself: “Can I do this, too? If so, what does it imply? How would my business work if I had this model?”
This exercise is a great way to see the different variations of your business. It gives you useful insights and an idea of which version is the most promising model for what you want to achieve.
Aim for the best model, not the most accessible one.
Let’s take a look at a case study that showcases the importance of choosing the right distribution mechanism for your business.
Company X competes against SAP Tech in the software industry. Although Company X has better technology, customer feedback, and a great distribution channel, SAP Tech dominates the market.
To win a bigger market share, Company X offers lower pricing to its customers, IT advisors.
The result? No advisor sells their product – even though it’s better – because they will make more money with SAP Tech’s more expensive software.
Choosing the wrong distribution channel ruined Company X’s chances despite its superior quality.
An effective way to understand your distribution channel is AARRR: acquisition, activation, retention, revenue, and referral.
All five segments should be considered in a good distribution mechanism and should work well together.. If you notice that you gain enough customers using Google Ads, but can’t keep them, it signals that you’re using the wrong channel.
The sooner you do this exercise, the better. Distribution channels change over time, which means regular reevaluation of the pirate metrics. Sometimes, changing channels is difficult if you’ve used them for a while and are a part of your company’s DNA.
Investors will ask about the pirate metrics in pitch meetings, so be aware of their importance.
Famous to the Family
Seth Godin’s “Tribes” applies social status concepts to marketing techniques for start-ups. According to Godin, you should become famous in a small community before you advertise in larger ones. A strong ally will advocate for you in other areas and communities.
This approach to marketing makes it easier to scale your business fast. In fact, most successful companies have a fame factor in their early history.
Examples of these now-famous brands include Tinder, Airbnb, Uber, and Facebook. They started as polarising innovations in small communities that then advertised them to peers.
These companies gradually expanded their target market following this natural fame development.
The Three Biases About Distribution Channels
There are three biases that founders face when choosing a distribution channel for their venture. Consider these biases when developing your business model.
Don’t use a marketing channel just because it’s the easiest option. How easy it is to install a distribution mechanism shouldn’t define your decision.
The easiest channels usually have the most competition in your market. Be aware of the risks and do your research before choosing a channel.
Founders tend to gravitate to channels they already know. It’s a natural process, but it’s key to be as objective as possible when it comes to distribution.
One channel works for one product and business model, while the same mechanism won’t work for another company. Serial entrepreneurs learn the lesson of constant reevaluation of the best distribution channels for every new project.
Novice marketers tend to avoid channels that don’t seem “professional” enough to use. Take calculated risks and don’t miss out on the best timeframe to join a specific distribution mechanism.
You’ll spend a lot of time researching channels in the early stages of your business, but this method will produce valuable insights.
Early exploration pays off for exploitation later.
The Bullseye Framework
Use the Bullseye Framework to find the best traction mechanisms for your start-up. This method is simple, yet effective and fast.
Write all your distribution channel options in a big circle – either digitally or as a team exercise on a whiteboard. Choose your favourite six channels and put them in a smaller circle inside the first.
You’ll write the three most promising channels in the centre of your circles, forming the “bullseye”. Use those three channels to test what mechanism works best for your company.
It takes time and experimentation to develop the right business model. Use Daniel’s exercises to figure out how to create, capture, and distribute value for your venture.