Understanding Your Business Model
Often a difficult question for many SME business owners to answer is:
“What is your business model?”
You would think that would be the thing they understand the most about their business but sadly not.
What exactly is a business model? How do you define your business model?
I like and use Alex Osterwald’s “Business Model Canvas” to succinctly explain and graphically display clients’ business models. Its simplicity is its beauty and it’s all on one page…
So where do we start?
The Frontend:
- You must understand your target market. Who they are, where they live, what they like and don’t like, what demographic they fall into, what spending power they have, what are the things that make their lives difficult and what things help them enjoy their life more. Know your customer base intimately and get to know who your perfect customers are.
- Once you have defined your target market you now need to understand exactly what you are trying to sell them. Is it a good or a service or a combination of those things? We call that your value proposition and you need to clearly understand how it is going to solve some of your customers issues that make their lives harder and delivers ways to enhance their lives. Think about your value proposition relieving your customers’ pains and delivering tangible gains that will enhance their experience.
- The next step is understanding how you maintain the relationship with your customers. How do you communicate with them? How do you keep them engaged?
- Understanding the channels you need to use to distribute your value proposition to your target market is critical. No point getting everything else right if you can’t deliver.
- How is all this commercialised? When and how do you get paid? What revenue streams are you creating and how do they work? Really important to know…
Those five steps are the “front of house” stuff that makes up half of your business model. Get all that exactly right and you are on your way but will still fail if you don’t get the other half of the model right.
The backend:
- To produce your value proposition and number of different resources will be necessary. What are those key resources? Is it proprietary knowledge (IP), people, raw materials, methodology, plant and equipment, tooling, etc? Carefully define the key resources that you need to produce your value proposition.
- Then you need to identify what are the key activities that go into delivering your value proposition. It might be production, transport, sales, scheduling, buying raw materials, training, coordinating contractors, recruitment, and a million other activities.
- Understanding who your key suppliers are and nurturing those relationships is critical. They should be partnerships where each party is doing their best to help the other succeed.
- All of the above points are costs to the business. Understanding the cost structure of your business is essential. It provides guidance on pricing your value proposition, how efficient the business is, where savings might be made and a measure for any changes you make to the operations of the business.
All your information can be mapped on one page on the Business Model Canvas. A great idea is to use a poster sized version and sticky notes to attach ideas for each section to the canvas. As a team brainstorming exercise it can be invaluable for building team morale and accessing ideas from every team member.
Google’s Model:
An interesting example is the Google business model.
What is Google’s value proposition? Think about it…
Google’s value proposition is to provide qualified, targeted advertising. Its target market is businesses that can reach their customers digitally and want to target selected customers based on pre-set metrics. Google uses its free search engine as the channel to deliver its value proposition and derives its revenue from clicks on the ads that its advertisers place. Its key activities are developing its search engine and associated software to enhance user experience and maintain its search engine as the most popular on the web. Its key resources are its people and IP. Google’s main costs are incurred in its people, research and development of its platform as well as acquisition of other businesses that dove tail into Google’s and provide synergies.
I heartily recommend the Business Model Canvas to visually understand your business model. It allows strategy development and great team exercises.
If you would like further in depth explanation or to conduct a workshop please don’t hesitate to contact us.
Further reading on this topic can be found at www.strategyzer.com
