We understand “business modelling” as the definition of a framework by which a company creates and delivers the value its product/service brings to a group of potential customers and, at the same time, extracts some portion of this value in order to create revenues that allow covering costs and gaining power for the future.
We have chosen it as the first set of tools to look into because it relates very closely to the lessons from a Grander we have shared during the past month (about strategic and structured thinking), on the one hand, and due to its importance towards innovation growth, on the other hand.
|Establishing a favourable business model can be as important as the new product itself. The right model can make or break your product and sustainability, and even change the game for an entire industry. Along history, the world’s most successful companies have made the biggest leap by revolutionizing their business model, rather than or complementary to their technology.|
The most famous tool for business modelling is the Business Model Canvas by Alexander Osterwalder:
It draws all the structural components of a business model and, very importantly, their inter-relationships; so that it is well integrated. I have heard critics that instead of this canvas what you need is to ask yourself questions. The way I see it, the canvas is indeed “nothing more” than a complete and structured list of questions, so that it makes it easier to understand the implications of the answers we plan for them (For who are we creating value? Which customer’s needs are we satisfying? Why should they turn to us over our competitors?…).
Most common errors I have seen when using this tool:
- Not studying the tool in depth before starting to use it (and just attending a short course will not be enough unless you are very confident about the knowledge and experience of the trainer).
- Considering it more a tool for showing than a tool for reflecting. In general, companies devote too little time to really think about the design of their business; because of this, no clear market need and running out of cash are the top 2 reasons for failure, behind a 70% of start-up deaths).
- Not aligning the Canvas with a general corporate strategy. Companies either compete by differentiating from competitors, by focusing into specific segments (i.e. luxury items), or by owning the price in worldwide markets (being the ones producting at lowest costs). We need to have a clear strategy in order to prevent non-balanceable tensions amongst the components of the model.
- Wrong division of Customer Segments. The model must consider different segments only if there is something in the way they buy that makes them different (they differ in their reasons to buy, in their buying dynamics, in their way of paying…). If everything is the same, even if they are groups with different characteristics (i.e. SMEs and large enterprises), they belong to the same segment. In fact, most probably it is some other characteristic the one it is crucial for segmenting (i.e. in the previous example, instead of size, we could think whether they have some IT platform or no, strong or weak cash-flows, a formal business division or not, or whatever).
- Misstaking product/service features as “Value Propositions”. What does motivate you more: if I say “buy this new washing machine because it spins at 2000 rpm”, or if I explain “buy it because you will take half the time doing laundary”?
- It shows a little bit obvious when we are given such examples, but when dealing with commercialization of innovative products, many times we try to sell directly the technical advantages we have created, instead of the benefit our customers will get from it. Furthermore, for identifying the real, unique and specific benefit that will really engage them, we need to interact with our target customers properly, searching for this knowledge actively, and processing it strategically, keeping our minds ready to make changes in the business idea we had imagined.
In line with this last issue, Strategizer later released the Value Proposition Canvas, as an attempt to help defining what customers really want from an offer. Also, the LEAN Canvas introduces a very interesting modification in order to include the analysis of the Problem-Solution couple, and related key numbers, as the baseline for defining a Unique Value Proposition.
In spite of the tool you use to really identify the Value Proposition or Unique Selling Point your product/service offers to your specific and relevant target customers, in RTDI we also stress the importance of trying to quantify this value. It will allow you:
- Assessing the amount of value you offer your customers and, therefore, you level of competitive advantage;
- Paving the path for setting a price to your innovative product/service/technology.
For this purpose, you will first need to set an specific scenario to be able to measure improvements. We are interested into the change we create, so we need to compare the new situation we make possible with the current status, and show increments.
Apart from segmenting properly the target customers and defining the most promising Quantified Value Proposition, there is another element of a business model that should catch strong attention: The Revenue Streams. In the end, the potential for creating growth and changing the dynamics of a market held within this business model component is enormous.
We will devote our next post only to this, separating this analysis of tools in 2, not to make this article too long. So will come back to you next week! (By the way: We are already working in the interview to one of our favourite start-ups – Marsibionics – so will also come soon!).