How to create a business model
Recently, we have heard a lot about how to pivot your business model – but how do you create this model to begin with? Here, we will look at how to fill in a business model canvas, score it, and tweak it to build in higher level dynamics that will provide greater value for customers and financial returns to companies.
A business model is the key dynamics of a business laid out in a simplified diagram or table. This one page plan should include information on the customers you’re targeting, the value you are giving them, how you pull the customer towards you, how to reach them, the different ways of generating income, what you need to be good at to make your business work, resources you will require, and the business costs involved.
There are 3 key types of focus when building your business plan:
- Customer centric: Rather than talk about what your product or service is, you focus on the value it creates for customers. This creates a more customer centric approach which is vital in the digital age where customers are research savvy and can choose where they take their money.
- Design thinking: This approach uses design thinking. Design thinking is thinking like a designer: it means taking a brief and then approaching it from different angles to create different iterations. It is only by trying different ways of creating and delivering value that you can then see which performs best.
- Customer development: Business modelling is part of the lean start up approach using the build, measure, learn cycle. It is cheap, quick, and easy to create multiple business models and evaluate which ones to take through to testing, but you do have to go through to testing. This involves finding ways of testing the models with real customers to see which work, and then investing in in the ones that get traction and disinvest with the ones that don’t (even if you are in love with them).
Your goal is to become eloquent at creating ‘high scoring’ business models. To achieve this goal, you need to do a lot of play, exploring different ways of delivering improved value to customers and better returns to the company. The best way to learn the business model canvas is to use it.
How to create your business model
You can sketch out a business model canvas on the back of an envelope, use a large whiteboard, or put post-its on a wall. Post-its allow you to quickly change models as you go along, and each variation can be captured by camera. Remote teams can work on the same cloud-based canvas with coloured text showing different views or ideas.
Early business models should include some blue sky thinking. Free yourself up to design the perfect business by placing no limits on people, money, place or things. You can always design realistic next steps later, after you have waved the magic wand. Go for quantity and speed rather than perfect answers. Explore the ‘new’, and then score, tweak and refine your business models later.
Have multiple blank canvases ready, so that as new ideas, value, or customers emerge, you can log them as a starting point for a new model. Create different models for each new customer segment which emerges.
Key questions to create your business model
- Who is your best customer?
- What value do you create for the customer – what’s in it for them?
- What do you care about that will connect you to the customer – why should the customer choose to come to you?
- How do you reach the customer?
- What do you have to be really good at to achieve this business model?
- Which resources do you really need to create value?
- What does it cost you to deliver your business model – is there a way to reduce your margins?
Once you have completed your first business model, this is when the fun starts. It is now time to view your business models from different angles, and use ‘pivoting’ and ‘design thinking’ to create alternative business models before you evaluate which ones are best and can be taken forward into testing or delivery.
How to improve your business model
To improve your business model you need to assess and evaluate how good it is and then consider what you can do to tweak your business model to produce a more robust business that provides improved financial returns for the company and higher value for the customer.
As you score your business model you will spot the opportunities to improve it. Here are some tips to tweak your business model to improve your scores:
- Switching costs – put the customer onto a contract, create a club, pump up the value of membership
- Recurring revenues – switch to a subscription model, give your customer an incentive and mechanism to bring you more customers, make your value so high the customer will sell it for you
- Earning versus spending - introduce a joining free, demand 50% upfront, increase delivery times and use ‘just in time’ delivery to order stock following sales
- Lower costs – cut out the middleman, create lots of efficient minimal gains, buy low, add value, and cut the customers that cost more to service
- Others do the work – get your partners to deliver value, get your customers to do the selling, focus on what you are good at
- Scalability – create a digital offer, focus on the value of data in the business,
- Protect the market - think about what makes your offer hard-to-copy. Develop intellectual property, assert your rights to copy and design, form and value relationships that can’t be copied, or secret knowhow that can’t be found out!
You never stop working on a business model, you just move forward into a next stage of building, delivering, testing and evaluating. Remember to make this process fun by doing it with friends, making new ones, and building the teams that can take the business forward.
Tobias Gould is a Business Innovation Fellow at the University of Leicester’s Innovation Hub and runs a social consultancy called Community Enterprise Engine. He has facilitated business model innovation sessions with over 100 companies helping them to do things differently.