BUSINESS MODEL:
With all the talk about product in the earlier section, now comes the interesting part –
Your product is not your product. WTF!
Your product is not your product. WTF!
Yes, because your business model is your actual product. The product is just cloak, a cover-up if you will, what the general population or your consumer perceives.
A mark-up of 150 percent doesn't mean much when you’re only making 75 cents per item. It would take a lot of key chains bought at 50 cents and sold for $1.25 just to pay the phone bill. That is if one just goes about selling them the conventional way. The invisible costs are always there to eat 150% mark-up esp. when earnings per service are so low. Now it is not like one can’t sell key chains - Disruptive revenue model with such small earnings/unit is the key to make good deal of dough. One needs to plan beyond what meets the eye.
Business Plan: Yes you need one. The most important thing to remember when writing one of these is that your product description should only be 10% of your document. The rest should go over how you plan to bring in revenue, the competition, your technology and why you would succeed aka business model. It would be a humbling experience. If you wrote a good one, it should make you reconsider starting a company; you could even have anxiety attacks. Just like a good meal, let that document sit in your stomach for a couple hours. If you're still excited, it's time to try and find money.
My first tryst with business model was when I along with my most cherished business mates started thinking about how we could start an Indian Aramark in a very fragmented facility management industry in India. We had a half-decent idea about the product and the service but questions like - what channel are we going to use to approach a customer, a partner? How would we describe our USP esp. with zero experience in the space? What is our unfair advantage over competition? What are the metrics and assumptions on which our business stands? The answers to all were equivalent to wishful thinking in business terms. One has to solve these simultaneous equations to find a viable footing.
Essentially your actual product/service should be just a small part of your business model and plan or for that matter of any pitch to an Angel or VC. It of course doesn't mean product is as less relevant but that everything built around the product for it to become a business is equally important if not more. Also short and easy to convey solutions are more acceptable for obvious reasons. But then again you can present your complex solution also in a better way and keep it simple. At least one should strive for that.
PS: Innovation is mistakenly taken as just product, you could equally have an obvious product and have a really disruptive business model to create huge entry barriers and successful venture. Examples galore- retail, food outlets are just a few.
Rule of thumb: The solution you provide to the problem statement should only be about one-eighth of the entire pitch to anyone. If a prospective mentor/investor doesn't quiz you beyond your product – about the business model, he is invariably not your guy. He is not interested, plain and simple.
You should continuously work upon your business model, as you would do on your product.
A simple format to start for b-model: http://ash.wpengine.netdna-cdn.com/wp-content/uploads/2011/06/leancanvas.png
The exact variables, the amount of space they occupy on the canvas would however vary with your product and industry.
The exact variables, the amount of space they occupy on the canvas would however vary with your product and industry.
Now if you have got many ideas and they successfully meet the criterion laid in the product section of the series- you could develop the business model for each and evaluate on the following basis –
1. How significant is the problem you are addressing to the customer? Is there payable demand or just a need? Is it worth building the product at all!
2. How difficult is to reach the holy customer for that model?
3. What would be revenue stream and cost structure with appropriate cushion?
4. Is the market evolving? The amount of risk of environment – acceptability issues your product could face due to existing perceptions, regulations or players.
5. How many fish are there in the sea both customers and competitors? How big is the market? Healthy competition also signifies demand and willingness to pay.
6. Do you really internalize the customer’s problem?
Essentially the business model forces you to see the reality before you significantly invest in the product development - The risks the venture faces. Instead if you procrastinate it, because most of us are comfortable with developing the product than the tough questions of actual demand, selling, marketing, channels, pricing etc it just hides the tough reality.
To answer these questions and learn, you have to come out of your comfort zone and talk to people, reach out to the market. Or one could trade this with making up stories for presentations and a chance of losing oneself in the same.
Related posts:
Previous post in the seriesThoughts for a start-upper - People
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