As you know I am a big fan of the business model canvas. It’s a super flexible tool. It can be used to design your business model. It can also be used to stress test and analyse how well your business model is working. Think of it as a complete company strength audit in 40 questions. Without further ado here’s how to test your business model. (if you haven’t created a business model canvas yet – go here!)
What we have is a few questions for each segment of the business model canvas. The best way to test your business model is to have your latest iteration in front of you and look at each section in turn. For each question consider both the positive and negative side. So for example – if we look at the first question
How well do your value propositions align with customer needs?
Are they well aligned or poorly aligned? Are some value propositions better aligned than others? When I do this exercise with customers in a workshop we consider each value proposition in turn. Sometimes it becomes clear that there is a great deal of meat waiting to be discussed.
What we are doing at this initial stage is identifying the areas of the business model where you think you have problems. We’re doing it in a structured way. At this stage the point is to identify issues, then return and discuss them in more depth. If you schedule 5 minutes per question you can easily hit 2 1/2 hours which is exhausting for everyone.
An alternative approach is to put the questions into a Likert Scale and then have all key stakeholders fill that out as a questionnaire pre-workshop. If done like that the workshop can spend it’s time diving deep into the areas where the management team’s views differ rather than thinking too much about areas where there is consensus (unless there is a need to challenge)
Value Judgements
One risk with this approach is that it’s possible to make value judgements about some of the questions
Do you have synergies between your products and services?
You may have a presumption that synergies are a good thing and want to answer – yes – of course. The answers aren’t objectively true. They are useful only as they are relevant to your business model. So when you test your business model it may be entirely appropriate that your products and services have no synergies. That is ok. Many diversified conglomerates in India have no synergies for example but there are great, non-synergistic reasons why their business models are successful.
What is important is that you use the questions as a trigger to reassess the health of your company. You can then use the answers to help you form the basis of a revised and more effective strategy.
How to Test your Business model
Answer each question with a score between +5 and -5. If appropriate write a single sentence answer
Value Proposition
- How well are your value propositions aligned to customer needs?
- How strong are the network effects of your value propositions?
- Do you have synergies between your products and services?
- How satisfied are your customers?
Revenue
- How strong are your margins?
- How predictable are your revenues?
- How much of your revenue is recurring?
- Do customer repurchase frequently?
- How diversified are your revenue streams?
- How sustainable are your revenue streams?
- Do costs come before revenue or vice versa?
- How much of what customers are willing to pay for do you charge for?
- How much money does your pricing leave on the table?
Costs
- How predictable are your costs?
- How well does your cost structure match your business model?
- How cost efficient are your operations?
- How much do you benefit from economies of scale?
Resources
- How many of your key resources are unique and can’t be replicated by competitors?
- How predictable are your resource requirements?
- How easy is it for you to have your key resources in the right place at the right time?
Key Activities
- How efficient are you are doing your key activities?
- How easy are your key activities to copy?
- How good are you at execution?
- How well have you balanced in house vs outsourced delivery of key activities?
Partners
- How well do you work with your key partners?
- Do you have enough key partners?
Customers
- How high are your customer churn rates?
- How well segmented is your customer base?
- How well do you acquire new customers?
Marketing & Distribution Channels
- How efficient are your channels at acquiring new leads?
- How effective are your channels in converting new leads?
- How well do your channels reach your target customers?
- How easy is it for target customers to find your channels?
- How well are your channels integrated?
- How strong are the economies of scope in your channels?
- How well do your channels match your customers preferred channels?
Customer Relationships
- How strong are your customer relationships?
- How well does relationship quality match the requirements of customers?
- How easy is it for customers to switch
- How strong is your brand?
The outcome of this test of your business model is that you have completed a quick and systematic strategic review. You will have identified a number of areas of the model where you feel that you are weak, or where there is possibility for improvement. This is one of the ways that you can use the business model canvas to become more competitive
The next step is to decide what you need to change and how you need to do it
If you’d like me to help you test your business model or planning a workshop please reachout. I also have an excel version which I am happy to share. Do send me an email.
