Business Model: The Great Predictor/Corrector

Predicting success – Examining your business model

Various definitions exist for what a business model is. I define a business model as “how you create business value and make money”. Making money is, of course, why you are in business, this is your side of the equation. Creating value is what your customers are looking for from your products and services. And that is the other side. In the best business models, your customers should perceive the value they are getting to be greater than the money they are spending.

Value to Customer ≥ Cost to the customer

Examining and validating your business model: Often times, the business idea sounds good, but without examining sources of revenue, demand for your products or services, competitive advantages, market share, and the market perception, you may be taking an unnecessary risk. Sometimes the business model works well for years, but conditions do changes. I believe that these five elements constitute a business model: Value Proposition

  1. Value Proposition
  2. Market Segment
  3. Value Chain
  4. Revenue Generation & Margins
  5. Business Environment

1. Value Proposition
Identify the customer pain points, needs, or problems. Does your product or service address one of the basic human needs? (As defined by Abraham Maslow), the basic human needs are; Physiological needs, Safety & Security needs, Social needs – Esteem, Aesthetic needs, Self-transcendence. As an example; safety and Security needs include:
Personal security, Financial security, Health and well-being, Safety net against accidents/illness and their adverse impacts

Clearly indicate how the product or services addresses that problem.
Quantify the ‘value’ of the product from the customer’s perspective.
Value may not be related to your cost (think of the value of the bottle of water, if you are thirsty, you would be willing to pay more for it)

2. Market Segment
Identify the specific group(s) of customers you will target. How large is the customer base? And how easy or difficult is it to find them?
Examine why you have chosen the specific market segment (market size, affluence, growing trends, unfilled need, etc…)
Cross selling and upwelling potential?
Quantify the market size in terms in actual dollar returns

3. Value Chain
A value chain is a chain of activities. A product or a service passes through all activities of the chain in order, and at each activity the product or service gains some value. The chain of activities gives the products more added value than the sum of added values of all activities

Do you need support/partnership for a supplier, a service provider or a manufacturer?
Where does your business sit in the value chain?
Can you go direct-to-customer?
If you are reliant on others, how will you capture your part of the value created?

4. Revenue Generation
How is revenue generated?
One-time purchase?
How does that tie back to the value chain?
What is your cost structure?
What are your target profit margins? (profit margins may not be the #1 priority)

5. Business Environment
Who are your competitors?
How much customer resistance to your product/service?
Who complements your business?
Are currents trends helping or hurting (e.g.; “going green” vs. a tobacco shop)
What is your competitive advantage
Examples: Costs, product differentiation, market insight, superior execution or niche strategy.

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