Understanding your business model is crucial for evaluating the ability of the company to support a new product idea. Too often we see companies taking on a new product development project, only to discover late in the process that the company is missing key infrastructure, such as the appropriate distribution channels, expertise in key technologies or the ability to finance large product purchases for customers. This post will help you decipher your business model in 10 key steps.
Before we get started on those 10 steps, a brief definition of a business model: It describes how a company creates and distributes a compelling value proposition that customers are willing to pay for at a price that yields an acceptable profit for the company.
OK, now for the 10 steps to developing a business model. Throughout the process, stay at a fairly high level and focus on the most important attributes. It’s easy to get lost if you get into every little detail.
- What are the revenue streams? How are prices set? How are customers charged for products and services? How is revenue collected?
- Choose a particular target segment and describe it. A segment is a group of customers with similar needs, behaviors or other attributes that the company chooses to serve.
- Next, what channels are used to market to, sell to, distribute to and support this segment? Are there any partners we need to establish or maintain relationships with?
- What products and/or services are offered to this segment, and are there any differences by channel? If so, make that clear.
- Now, what is the value proposition delivered by each product. Think not only of value propositions for the customer (including the end-customer and any intermediaries), but also partners. Remember that the value proposition is from the perspective of the customer and can vary by customer segment; that is why we focus on one segment at a time.
- What are the key activities the company must perform to ensure the value proposition is delivered? This can include activities supporting partners and channels that are key to the value proposition. This may also involve outsourcing.
- What are key inputs and resources that must be acquired and maintained? This can include human, physical, financial and intellectual assets, as well as suppliers and vendor
- Next, what implications do the elements defined so far have for the infrastructure of the business? They may not have been captured already. Is there significant investment required in maintaining certain technologies, skills or branding, for example?
- The cost structure includes the fixed costs of maintaining the value chain, as well as variable costs. Where are the biggest or most volatile costs?
- Finally, have you adequately identified what the company does differently to deliver on the competitive strategy (how the company differentiates itself from the competition)?
If it’s not evident in the activities or resources identified you’ll need to take another pass at it. It may take several iterations to get something you are comfortable with.
Repeat for each customer segment, noting similarities and differences with the previous segment(s). You may find it helpful to arrange your findings for easy reference in a diagram like the one below.
The business model is one of the most powerful, and most overlooked, tools of the product developer. New products must fit the existing business model, unless the company is expressly willing to adapt its model to support the new product. Evaluating fit with the business model early and often throughout the development process helps prevent costly mistakes and improve new product success.