How to build a sound business model?

To develop well, a good value proposition needs a sound business model. So what constitutes a sound business model? And how to build it? This is the platform from which businesses need to begin and not, as is generally the case for young entrepreneurs, with an insufficient and otherwise inappropriate business plan.

When entrepreneurs talk about their business models, what often occurs is the “chatter phenomenon” which leads to the Babel paradigm: people conversing without understanding each other because they are not, in fact, speaking the same language. Vocabulary changes along with professional background, area of expertise, or current job title.

Professor Yves Pigneur decided to create a simple, visual, holistic shared language capable of representing the different components of a business model. His language is represented by a canvas in which nine separate blocks join to form a single unit, like an assembled puzzle. Once created, this canvas can explain, analyze, and critique the business model it represents. But creating a good value proposition first requires good knowledge of the customer: How to build a customer-adapted value proposition within an innovative model?

Get inside the mind of your customer

First, you should put yourself in your customer’s shoes and determine every little step he takes when, say, booking a flight; he buys a ticket, gets to the airport, checks his luggage, picks up a snack for the road… You have to try and imagine every hypothesis, including the unpleasant ones (like paywalls that separate the customer from the good or service, waiting times, and problems or potential malfunctions that arise during use). And always remember to keep in mind what the customer expects from the good or service.

Phot du public concentré à l'usi 2015

The canvas should symmetrically provide answers and associated value propositions for these three hypothetical categories. Provision of imagined products and services must be guaranteed, ascertained inconveniences reduced, and profit generators determined. Within the value proposition, profit generators will correspond to what has been identified as expected by the customer.

Ultimately, the value proposition has to not only correspond to the customer and to his needs but must also factor in the market, and be inserted into an adapted business model. Keep in mind the “building a business model is not a decision-making process but a creative one. It can be chaotic at times.”

In business management, it often feels like the first idea is the right one, but that’s usually a mistake. Most successful companies were born out of the exploration of many alternatives. The takeaway: “Don’t fall in love with your first idea!”

photo d'ybes pigneur sur scène à l'usi 2015

What makes a business model fail?

36% of the time, failure is linked to the creation of something nobody wants. Surprisingly, even mid-sized companies make this mistakes, not just small start-ups. It is crucial to test a business model before launching the product or enterprise.

When putting the business model to paper, the many hypothesis previously emitted must be tested. In the US this process, called “lean startup”, allows the company to produce something quickly, to make that something available, to monitor the customer’s reactions, and learn from the experience to be able to make changes to the business model as necessary. For Steve Blank, who fathered the movement, Lean Startup comes with a caveat: don’t have the process take place within the walls of your company – who have to have a real exchange with your customers. That said, you have to beware of what your customer is telling you at this early stage because as all humans are wont to do, your customer can choose not to stick to his guns. The value proposition must be tested by a call to action in order to determine whether or not the customer is prepared to pay for the good or service.

Vu du public USI 2015

“Business models have expiration dates, like that pot of yogurt sitting in your office fridge.”

An existing company, wishing to reinvent itself, can require a change in business model. The person drafting the new business model has to abide by the same common-sense logic and constraints as an architect renovating an existing building. Companies usually go about modifying their business models when new challenges, like the emergence of a competitor, arise and they must adapt. Also good to keep in mind that, as time goes on and organizations evolve, some business models become outdated and in need of a makeover.

The difficulty lies in forecasting change in the long-term, in imagining the future. Evolving means far looking ahead which is anything but a science. “It is likely easier for companies without legacies to project. Even if failures do happen, and happen a lot, there are also some great success stories out there.”

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