An Entrepreneur’s Guide to Creating & Testing Business Models

A magazine is nothing like a trade show and creating and distributing open source software is nothing like making and distributing printers . . . or so it seems.

To Entrepreneurs starting a business for the first (second or third time) every business looks different. To an investor, who evaluates hundreds of businesses a year, businesses clearly fall into groups with common costs, benefits, requirements, risks, vulnerabilities and opportunities. Some of those business groups are better than others because they are, by their nature, likely to be far more profitable.

Successful serial entrepreneurs adopt the investor’s perspective. They see businesses they are developing in terms of their underlying components and the dynamics between those elements. They explore and evaluate businesses similiar to their own, even when those businesses are from vastly different industries. They work to build a “best of breed” solution for their customers based on what they learn. In short, they model their businesses before they are built to determine exactly how to build them right.

What is a Business Model?

Businesses are “machines” that deliver “stuff” to “people”. These machines have several fairly well defined “components”. You may believe that it is simple to identify the elements your business is built on and that the relationships between those components are easy to document. You may believe that every other business in your industry runs the same way and that you’ll just build your business to their proven template. If that’s the case, you are who this article is written for. You probably don’t know your business as well as you think you do, and its likely you’ll be losing out on some great opportunities going forward if you don’t take time to really analyze the business you are planning to build.

Here is a quick, and fairly complete, list of the elements you use to build a successful business. Review these elements and see if you think of your business components in these terms.

A product (which may also be a service) is the “stuff” a business trades in order to get money from others. Note that the following list of products is described in terms of the benefit the product gives to the customer.

• A magazine publisher’s product is access to a well defined target market which are their readers. Magazine publishers may have a secondary product which is information they sell to their readers.
• A trade show producer’s product is also access to a well defined target market. In that case the market is called attendees. They may have a secondary product which is access to people and products of interest to their attendees.
• A printer manufacturer’s product is the ability to accept data in one format and display it in another. From this point of view a printer manufacturer, a scanner manufacturer and a fax manufacturer are all in the same business. And indeed they are.
• An open source software developer’s product is code that creates and store data in a specific format. It also, often, produces consulting and training products as well.

A team is the group of people that make a product. Usually the term team is defined by startups to be the management group that start a business, but really the team is everyone who works on a product. High quality products come from great teams. Teams can be fairly fluid when the product or products being built are predominantly media or intellectual property related. In fact, they almost have to be. The ability of a team to continuously recycle itself to meet changes associated with fast moving markets is key to the success of some enterprises.

• For a magazine publisher, the team is the editors, designers, printers, photographers and writers that produce the publication.
• For trade show producers, the team is the producers, location managers, caterers, event managers, marketers and speakers that produced the product.
• For a printer manufacturer, the team is the management of the business, the support staff, the engineers who design the printer, the folks who work on the shop floor to produce it, the firmware developers, the web developers who deploy and connect the product to the outside world, and the marketing team.
• For an open source software company, the team is the management of the business, the support staff, the application developers, the web developers who deploy and connect the product to the outside world, and the marketing team.

A network is the group of people who support a team. They can be insiders at suppliers, distributors and customers, as well as personal friends who work for competitors and old friends from college. They are people you don’t pay, and don’t take money directly from, who help your business.

• For a magazine publisher, the network may be those who make introductions to new advertisers or writers.
• For a trade show producters, the network might include those who make introductions to new advertisers, new speakers, and find new venues for events.
• For a printer manufacturer, they may be contacts at software developers who test printers with new applications.
• For an open source software company, the network may be friends from college who recommend the product to the businesses they work for or connections who provide connections to new programmers. They may also be “strategic partners” who produce related products and join in co-marketing arrangements.

Customers are the individuals who buy a business’s products. Note that these are people with whom you already have an existing relationship because they have purchased what you sell.

• For a magazine publisher, if the publication is ad supported, those who buy ads are customers, as are those who buy the publication. When companies with products featured in the publication purchase reprints, they are customers. It is worth noting, from an analytical standpoint, each of these customers is buying a different product though all their products are attached to the same item.
• For a trade show producer, those who advertise at a given show are customers, as are those and rent exhibit space are the customer, attendees (if they pay) may be secondary customers.
• For a printer manufacturer, whoever has purchased one or more printers is a customer.
• For an open source software developer, those who try the software are “prospects” and those who actually pay for advanced features, support, training and other services are customers.

A market is the group of people who share the properties of our customers, but who have not purchased anything from us yet. Startups who haven’t sold anything don’t have customers, they have markets. They may even have market segments, which are well defined sub groups within their market.

• A magazine may target the market of “mothers”, and may incorporate articles for market segments like “stay at home moms” and “working mothers”.
• A trade show may target the market of “film distributors”, and may create specific events that target “US domestic distributors” and “international distributors” and “theatrical distributors”.
• A printer manufacturer may target all people who print documents, but within that group it may identify the “student”, “home business”, “small business” and “large business” segments.
• Open source software developers may target “all US businesses that do their accounting in house”. They may have market segments like “businesses with fewer than 20 employees” and “businesses with 20-100 employees”.

Our competitors are those who produce competing or substitute products or services. Our Industry is the group of businesses who share the properties of our competitors. Occasionally members of an industry, though competitors, will band together to achieve common objects like passage of new laws that favor their businesses. In those circumstances they become part of our network.
Our prices are the amounts of money, and occasionally other resources, people give us in return for our products. The vast majority of businesses have multiple prices for the same product. They use bundling of products and services as well as variation in packaging and delivery method to justify price differentiation to their customers.

Using a Business Model

One may start a business with the idea that one will sell a product to customers only to discover that no one will pay for it, but they will accept it when it is provided for free. When that’s the case, advertisers may pay for the production and distribution of the product. A printer manufacturer may find that to compete he must sell his printers for very low margins, but the toner and replacement parts he also produces are far more profitable. Using a business model to fully understand all that your business is, and all that it can be, is an exceptional investment.

To get the most value from modeling your business:

• Start by very carefully working through the business you plan to create, or the one you already run. Identify all the components outlined previously in full detail. Remember to describe all the products you plan to offer your customers, and all possible products you could offer them. Remember to describe products in terms of their value to your customers.
• Identify all possible customers and consider all paths to them. Think about your network and how they shorten the path from you to your customers and how they can help you reduce your costs. Identify your competitors and consider, carefully, what sets you apart from them.
• As you work through your model, identify other businesses in any industry which are similar to your planned business in structure, purpose, market or customer. Look at successful examples of those businesses and consider their business models. Can your business benefit from the solutions they use? For example, you may be producing a product, but maybe you will make more if you deliver your value as a service. Ross Perot, who used to work in sales at IBM started Electronic Data Systems which delivered data rather than computers. He saw that the value to his customers was in the data, not in the machines.

Document what you discover as you work through your model with your team. You’ll find, in years to come, that when the market gives you a challenge what you learned while modeling your business will help you rise to meet it.

And Now a Word of Warning . . .

Anyone who has read my work, or attended my lectures, knows that I very strongly believe in Shipping Early, Shipping Little and Shipping Fast. This means that I absolutely do not think you should laboriously create an intricate and complex business model and then set out to implement it.

I think exactly the opposite of that.

Take the analysis you’ve done for your business and then isolate the one or two exceptional values that your business can give your customer. That is the business you will develop and deploy first. Your sole job is to get one or two of your best values out to the customers that need them most at a profitable price. That will be the start of your business. The insights gained from modeling your enterprise will subsequently help you grow and evolve your business to do more for your customers, and to do more with what you have created for other customers.

You make a business model so you can do less, not more.

I hope you take time, over the next several days, to begin modeling your business. I am certain, based on decades of experience in my own businesses and in supporting those I’ve mentored and those I’ve funded, the process will prove transformative and profitable.