This post is an extract of my forthcoming book on business model innovation. The innovation book looks at why business model innovation is needed and how it works. You can read more about it here. These posts are early drafts of planned content and I’m putting them out to get feedback. Please do comment below, or subscribe to these pages to get each new section as it is published. In today’s post, we will be looking at finding opportunities in this new world.
Entrepreneurs need a business model because they are either
- Doing new stuff
- Doing stuff that is new to them
If you keep it all in your head, your thoughts are often not clear. There are always big chunks of your business that you don’t think about in enough detail. This is due to human psychology and the big package of cognitive biases that get thrown in free when we are born.
When we write long-form, it can be a mess and highly unstructured. I remember one client, a bitcoin entrepreneur, who gave me over 20,000 words in about five documents explaining what he wanted to do. It covered about 50% of what he needed to do to deliver on the value proposition, and we summarized it in less than a thousand.
Entreprenuers and Business Models
Entrepreneurs need business models because they help to challenge their assumptions.
We are all subject to confirmation bias. We see the things that confirm our own beliefs, and we ignore inconvenient evidence. Theranos in 2016 had clearly been in trouble for some time. It was only then, though, that the bad news became powerful enough to break through the dream unicorn story.
Business models thus let you challenge on a systematic basis. By making it clear that your value proposition is P and your key customer segment is Q you can ask the question “What evidence is there that P solves Q’s problem?”
In many cases, entrepreneurs make a mistake and assume that if they create a value proposition P, then there will be a customer segment Q that will need it. It may be R, S or T, or Nul. There are many ways that we can test for these.
The simplest is:
- What if X is true. Here you vary some input or environmental conditions to see if the assumptions hold out.
- Do Nothing. Here you say what would happen if we did nothing here r we didn’t have that resource. It is a subset of the above, and it helps parse the model down to what is critical.
So, challenging an entrepreneur’s assumptions is a super powerful part of the business tool. The biggest benefit of this is that it cuts away a lot of the fat. What is critical for success? What do we need to do? And what do I focus my very limited time and resources on?
In the words of Tim Ferriss, it is the “difference between being busy and being effective.”
Using business models like this has the wonderful effect of making your pitches more powerful. Many entrepreneurs when they start pitching launch into a stream of consciousness talk that quickly loses their listener.
A basic pitch strategy that is an improvement on this is to say
I solve problem X for Group Y by doing Z and making money by K
That gets the message across in fifteen to thirty seconds. Then they ask you more. That is perfect because the whole aim of a pitch is to capture interest. If they have control of the questions, there are plenty of rabbit holes that they can take you down. So, the next stage is to use the structure of a business model to structure the next two to five minutes.
Using the structure of the business model canvas, it goes something like this.
We offer this value proposition to this group of customers. We reach them using this channel, and we interact with them like this. To deliver value to our customers, we do these activities and need these resources. To do all this efficiently, we have a range of partners. Our costs are driven by spending in these categories, and we cover these costs and make a profit by generating revenue from this.
Uber’s Business Model
We offer fast and convenient urban transport to middle-class city dwellers. They book our cars using a smartphone app with no human interaction. To do this we need an IT system that allows customers to be instantly matched with drivers and which ensures that supply and demand are kept in balance. This is all powered by powerful city-by-city marketing, driver recruitment and retention, and product development teams. Our partners are the drivers who ‘freelance’ for us on a part-time basis providing us with their time and their cars. Most of our costs are incurred in paying the drivers for their time and in marketing to gain market share and local dominance/quasi-monopolies. We make money from the fees that customers pay for the journeys they take.
This provides a powerful framework for pitches and allows investors, clients, and staff to quickly grasp what you are about.
Business models are also exceptionally good at allowing business ideas or concepts to be challenged. When a business model is laid out simply, and clearly it can be understood. This allows co-founders and mentors to ask detailed questions about each aspect. How and why does this work?
Business Model as a Challenge
Flipping that on the head, a business model can be used to challenge existing ways of working. Heading back to the example of Uber. Before ride-sharing, there were several taxi companies in most cities. There was a big problem in finding a taxi at the right place, time and price. So the Uber founders mapped out the business models of different taxi companies and then started looking at how they could be challenged.
Alternatively, when you need to pivot, it’s a clear and powerful way of saying “This is what we were doing. This is what we are going to do. This is why”. That can create a compelling narrative for both staff and investors.
If You Want to Read More
I keep everything structured on my niftily titled business model innovation book page. Head there to browse, binge, read straight through, or cherry pick. Please do take a moment to comment below or upvote comments that you agree with
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