Tag: business concept

The components of a business model

As we discussed in our last post, a business model is a blueprint for the business, outlining how you’re going to run your business, and how you’re going to make money. It’s made up of five elements:

  • Business concept
  • Value chain position
  • Calculating customer value
  • Revenue sources and cost drivers
  • Competitive advantage

Let’s take a closer look at each one.

Business concept

A business concept is essentially a clear description of your business. It’s made up of:

Value chain position

Understanding the value chain, or more specifically, your business’ position in the value chain, is critical to further understanding your business on a larger scale.

A value chain is the series of activities that make products and services get from you to the end user. As products and services pass through the value chain, they gain value. For example, a leather bag involves researching the best design; designing the bag; sourcing leather; creating a prototype; tweaking the design; creating the final version of the bag; adding details such as pockets, straps or hardware; and packaging the bag for sale. All of these steps add value to the finished product.

In a value chain, there are two flows of activities: i) Upstream activities, involving the production or manufacturing of a product or service; and ii) Downstream activities which are associated with selling or marketing of the product or service, distribution of the product or service to the end user, product warranty and customer service.

If you’re going to operate a service business, your value chain is shorter because there is no manufacturing process. Most services are delivered directly to the customer only through downstream value chain activities like marketing, sales and distribution.

Where will your business sit in the value chain? Where can you add value for your customer along the way?

Calculating customer value

Are you 100% positive of the value you can bring your customers? Or are you only about 70% positive? It’s important to estimate the value of the tangible benefits your customers will receive through the purchase of your product or service.

After all, customers today are presented with a bewildering range of value and choice of products and services. They can shop for benefits and can buy from virtually any company worldwide. Figure out how exactly they will benefit from choosing you.

What does your customer value? What actual benefits will they get from doing business with you instead of your competitors? Once you understand customer value, you can better estimate what people will pay for your product or service.

Revenue sources and cost drivers

Next, it’s time to identify revenue sources and cost drivers (any activity that causes a cost to be incurred). A very healthy business model always has several sources of revenue from many different types of customers and multiple products and services. Diversification is good!

With multiple revenue streams, you not only reduce risk, but you also create several sources of income. If one revenue source isn’t doing so well, you have other sources to keep you going. Offering multiple products to multiple types of people also means you spread out your risks and minimize the costs of marketing and acquiring new customers.

Now – cost drivers. The most common ones are volume and time. The cost of an activity increases as more units are produced and the longer it takes to complete. For example, increased sales may also mean you have to hire a new employee – increasing your HR costs.

What are your cost drivers? How they can be improved and made more efficient?

Competitive advantage

Your business has a competitive advantage when customers believe you offer clearly superior products and service from your competitors. Craft a competitive strategy, which considers how your business will compete against others — either by being different, or by serving a niche market where there are no other competitors.

Why not just copy what others are doing? It seems like a good idea, but it can also get you into trouble. Why would customers buy from you if you’re the same as your competitor — one your customers already have history with?

Crafting a competitive advantage and clearly communicating your advantage to the customer will lower their risk and make them at least think about buying from you instead.

Small businesses can serve niche markets, or smaller markets with unsatisfied needs. For example, maybe your market research suggested that there were plenty of wedding cake bakeries in your area, but customers were complaining about not being able to find vegan or gluten-free wedding cakes. Sense a competitive advantage there?

Small businesses can change quickly; they can respond to changing market conditions faster than larger businesses, making them better able to satisfy customers. Understanding how your business will compete against the competition will help you stand out.

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The business concept: Putting it all together

Creating a clear, strong business concept statement – including a customer definition, value proposition and compelling story, product or service definition, and distribution channel – is the first activity in the development of a formal business model. In an earlier blog post, we shared the service definition for Maria’s Mobile Bike Doctors. Now let’s take a look at her completed business concept statement:

Imagine being able to call for help when your bike breaks down, without having to drag it to the nearest bike shop. Maria’s Mobile Bike Doctors speeds to the aid of stranded cyclists who want fast service, a solid repair and a friendly face. Maria’s Mobile Bike Doctors are well-trained bike experts, so cyclists can be sure their repair is safe and lasting. And they’re fast – we can get anywhere in the city in 35 minutes or less. Maria’s Mobile Bike Doctors takes the stress and hassle out of those pesky bike breakdowns – wherever you are.

Why does Maria’s business concept statement work? It works because it 1) Defines her customers (cyclists); 2) shares a value proposition and compelling story (more convenience, speed of service, reasonable prices); 3) describes the service (qualified bike repair people will fix bikes anywhere); and, 4) implies the distribution of the service is direct to the customer.

Further reading:

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The business concept: The product or service definition

product_or_service_definitionNext up in our examination of the business concept – the product or service definition.

Most small businesses today are part product and part service. Defining exactly what your product or service is, and what’s unique or special about it, is key to creating a strong business concept.

What exactly are you offering? What need are you satisfying? What problems are you solving? The product or service definition outlines what you’re offering, highlighting the benefits.

Here’s an example:

Maria is thinking of starting a bicycle shop. She and her friends often talk about how useful it’d be to call up a bike shop and ask someone to come out to fix their flat tires or other bike issues, just like with roadside assistance for cars. She thinks a lot of cyclists would love it. Maria’s bike shop business solves a problem because her employees would be bicycle experts, and therefore fully qualified to ride out to the other end of the city and do whatever replacements are needed to get cyclists on the move again. Customers can either buy a yearly membership or pay a fee each time they get a repair done. No hassle, and no dragging a broken bike across town to get it fixed.

Maria describes her business through the eyes of the customer:

“Maria’s Mobile Bike Doctors will rush to your location and fix your broken bike. We can get anywhere in the city in 35 minutes or less, and our bike experts can perform any bike repair quickly and with a smile. It’s quick, convenient, affordable and safe. Our customers will be on the road again in less time than it would take to find the nearest bike shop and get their bicycle there for repairs.”

Once you know who your target customer is and what they’re looking for, you can come up with a better product or service definition. This adds to a complete, well-rounded, and effective business model.

(Oh, one other thing: if your product or service is proprietary, it should be included with the product or service definition.)

Further reading:

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The business concept: Value proposition and the compelling story

Last week, we talked about the first part of the business concept: The question, “Who will buy?” Today, let’s talk about the value proposition and the compelling story.

Value proposition

The value proposition is a clear statement of the benefits your customer will get from your product or service. It should explain in about 10 words or less why the customer should do business with you. This reason usually involves achieving a dream or solving a pain. The more specific you can make your value proposition, the better.

Before we look at what makes a great value proposition, let’s look at three weak ones.

  • “We make your life better.”
  • “Our products were rated best by our customers.”
  • “This is the best system on the market today.”

You’re probably saying, “Yeah, so what? A hundred companies can tell me that.” That’s how most people react to a weak value proposition.

So how do you create a strong value proposition? You should deliver actual promises to the customer, like increased revenue, decreased costs, improved health, improved efficiency, fewer errors, unique solutions in less time or better customer loyalty. These are the clearly identifiable things that will actually benefit your customers, and the reasons they’ll be drawn to your business.

Examples of effective value propositions include Wal-Mart’s “Everyday low prices,” and MasterCard’s “For everything, there’s MasterCard.” These demonstrate the value and benefits these companies promise to offer.

The compelling story

No value proposition is complete without a compelling story that’ll make people sit up and take notice of your business. A strong value proposition identifies the need in the marketplace that led you to start your business, and offers your solution to the problem. When you have a clear understanding of the value your customers will get, and a background story that’ll appeal to them, you can really help your business stand out from the crowd.

Further reading:

The business concept: Who will buy?

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