From Idea to Launch: Validating Your Business Model at Every Stage
Connecting the dots.
Introduction
As anyone following this blog for some time knows, I have written several posts on the Business Model Canvas (see below). The main reason for this emphasis is that having a business model is vital to a new venture's success. Sometimes, entrepreneurs see it as an academic exercise and see no relevance to practice. Usually, founders will create the first iteration of their model, never to review it again. I believe this is a mistake and that founders should take business model development seriously. Business models are an integral part of strategy formulation and action.
The Business Model Canvas (BMC) is a tool entrepreneurs use to develop, refine, and communicate their business models. Created by Alexander Osterwalder and Yves Pigneur, BMC has become a popular framework for businesses of all sizes. The Business Model Canvas (BMC) tool helps founders visually represent their business model on a single page. It allows them to consider all the critical components of their business and how they interact with one another. This practical approach enables founders to simplify their business model and present it clearly and concisely. The canvas has nine key areas that cover all aspects of a business model, from revenue streams to customer relationships. By breaking down the various components of a business model into easily digestible chunks, the canvas makes it easier to create and communicate a model that works for your business. In addition, companies can quickly identify areas that need improvement and change their model accordingly using the Business Model Canvas.
In this post, I want to focus on how the Business Model Canvas intersects with the new venture realization process. The Business Model Canvas intersects with the new venture development process in several ways. First, the new venture development process is a framework entrepreneurs use to take their business ideas from the concept stage to a viable, sustainable business. The Business Model Canvas helps, used at any stage of the new venture development process, to refine, iterate and communicate the business model.
Is the Business Model Canvas still relevant for Startups?
Brief Review of the Nine Elements
I suggest that founders focus on the customer segments and value proposition elements in the early brainstorming stages to illustrate the alignment between the customer's needs and the product offering. The customer segments element focuses on the specific problem the customer is trying to solve, the underlying task they need to accomplish, and the challenges or pain points they experience while attempting to do so. The customer segments element in the BMC is crucial as it defines the target customers for the product or service. It should outline their demographics, needs, and behaviors. By identifying the customer's needs within a specific context, founders can create a value proposition that resonates with them.
The value proposition element should address what the product or service offers and how it solves the customer's problem better than any other solution in the market. The value proposition element answers the question of what value the customer seeks from a practical solution and includes functional and emotional outcomes and the relief of pain points. The author emphasizes the importance of problem-solution fit, the alignment between the customer segment and value proposition elements, in meeting the market's needs.
The following two elements in the Business Model Canvas (BMC) are Customer Relationships and Channels, which are areas of customer engagement that help establish a long-term brand relationship. The Customer Relationships section outlines how you plan to interact and engage your customers throughout the product lifecycle, from initial awareness to becoming future brand advocates. The Customer Relationships element outlines how the product or service is delivered and how to engage with customers throughout the product lifecycle. It should identify the types of relationships the company wants to create with its customers, whether personal or automated, and the nature of the customer interactions.
Channels refer to how the venture plans to deliver the product or service to the customer through direct sales, online sales, or physical stores. The Channels element refers to how you distribute your product and communicate with your customers throughout the product lifecycle, and it should align directly with the customer relationship strategy. It's essential to consider how often you will need to engage the customer throughout the sales funnel, the nature of the problem and solution, and whether to use a low or high-touch approach. As you make assumptions about the optimal way to engage and deliver your solution, aligning the customer relationship and channel strategies is vital.
On the left side of the BMC, Key Activities, Resources, and Key Partnerships focus on the enterprise's infrastructure. Key Resources are the assets required to deliver the solution, and Key Partnerships refer to the strategic relationships necessary to execute the business model. The Key Activities and Key Resources elements focus on the operational aspects of the business. Key Activities should identify the activities fundamental to delivering the value proposition to the customer. Key Resources refer to the assets necessary to provide the solution to the customer. These assets can be physical, financial, intellectual, or human resources.
Key Partnerships refer to the strategic relationships necessary to execute the business model, such as with manufacturers, suppliers, distributors, and investors. Startups should identify the gaps between their competencies and resources and determine which partnerships are needed. Potential partnerships may include domain experts, key activity supporters, channel partners, and funders. Key Partnerships are crucial as they can help startups reduce operational costs, expand distribution channels, or achieve a competitive advantage. They should be strategic relationships that are necessary to execute the business model. These partnerships can be with manufacturers, suppliers, distributors, trade associations, regulatory agencies, competitors, and technology providers.
The profit model comprises the last two elements, Cost Structure and Revenue Streams. Cost Structure refers to the main costs incurred while running the business, while Revenue Streams outline each possible way that the various offerings generate income. Therefore, it's essential to ensure that the cost structure meets the operational requirements to execute the business model but is consistent with the projected revenues to emanate from the customer segments.
Cost Structure refers to the main costs incurred while running your business. At this point, you should identify the high percentage costs related to the core activities and resource requirements. These expenditures can include fixed asset and variable expenses and any high overhead costs you anticipate supporting the business model. Your cost structure must meet the operational requirements to execute your business model but be consistent with the projected revenues to emanate from your customer segments. Of course, you must revisit various business model elements if the costs exceed the revenues.
By delivering your product and service offering to your target customer, you generate Revenue Streams. In this element, you can outline how your various offerings generate income. For example, you can list how customers prefer to pay for your services, cash or credit, one or several payments, etc. In this element, you can also note the length of the sales cycle and the time it takes the customer to complete the purchase from the initial point when they are aware that the product is available.
Business Model Canvas: Where to Start?
Intersection with New Venture Development
The Business Model Canvas is a versatile tool that can be instrumental throughout the new venture development process, from ideation to launch. During the early stages, entrepreneurs can use the canvas to clarify their business model by identifying the key elements and potential challenges. Then, by exploring the business idea's feasibility, entrepreneurs can determine whether the venture is worth pursuing.
As the new venture development progresses, the Business Model Canvas continues to be a valuable tool for refining and iterating the business model. During the market research and business planning stages, entrepreneurs can use the canvas to test and refine their assumptions, creating a more accurate and effective plan for launching and scaling the business. This iterative process can help entrepreneurs stay agile and adaptable as they respond to changing market conditions and customer feedback.
In addition to its value as an internal tool for refining the business model, the Business Model Canvas can also communicate the venture's strategy and operational components to external stakeholders. Entrepreneurs can facilitate collaboration and decision-making among investors, partners, and employees by presenting a concise and transparent business model summary. This communication is critical to ensuring everyone is on the same page regarding the business model and its potential for success.
New Venture Realization Roadmap: Fresh Perspectives & Insights
Validation Points During the Process
The Business Model Canvas is a powerful tool for creating and analyzing business models. However, when using the canvas, you must validate your assumptions and ideas to ensure your business model is viable and sustainable. Here are some key validation points to consider:
Customer Segments
Founders must validate critical assumptions about their customers throughout the venture development process. Understanding what specific goal or objective the customer seeks to achieve through their behavior and actions is a primary validation point. Identifying the customer's desired behavior and outcome determines how a product or service will achieve desired results. Entrepreneurs highlight specific customer information in the business model canvas, including segment, context, critical behaviors, and pain points.
Founders must validate their customer segments by conducting market research, talking to potential customers, and analyzing competitors to ensure a real need for their product or service. During market research, one can explore the needs and wants of your target audience, understand their behavior and preferences, and identify potential competitors in the market. Talking to potential customers is also essential as it provides valuable insights into their pain points and desires, which helps to refine your value proposition and tailor your marketing efforts. Overall, the goal is to ensure that there is a real need for your product or service and that you clearly understand your target customers for the offering.
Value Proposition
This BMC element responds to how a compelling product will meet the target customers' needs. The focus here is on customer outcomes, potential product benefits, and associate metrics. At this point, one defines outcomes as what the customer hopes to achieve through a specific fundamental behavior. A desired outcome is the particular goal or objective a customer seeks to accomplish through their behavior or actions. This desired outcome may be related to the product or service, such as achieving better health or improving productivity. It may be related to more abstract goals, such as feeling a sense of accomplishment or satisfaction. Additionally, the customer wants to remove or diminish any challenges they face to achieve a specific outcome. Any product of interest must enable the key behaviors, mitigate challenges, and facilitate attaining the desired outcomes.
While it may be too early to identify product specifics, at this point, you will want to make assumptions about what benefits and features must an effective solution have to enable the desired outcomes. A product benefit refers to the specific value or advantage that a product or service provides to the consumer to meet particular results. It is the tangible or intangible advantage that the consumer derives from using the product or service. Product benefits may include features such as convenience, affordability, or quality.
One validates the value proposition by testing it with potential customers and ensuring it solves a real problem or meets a real need. Your value proposition is the heart of your business model and sets you apart from competitors. Testing it with potential customers is essential to ensure it solves a real problem or meets a real need. Like in the customer segment, validation occurs through surveys, focus groups, or other forms of market research. Feedback from potential customers can help you refine your value proposition and ensure it resonates with your target audience.
The alignment between the customer segment and the value proposition is vital to the success of your venture. Frequently referred to as the problem-solution fit, each aspect must be a significant focus of your customer discovery, market research, and product testing. Throughout customer engagement, you want to probe for information that validates the customer's segmentation profile, the degree of importance to attaining the stated goal, dissatisfaction with current product options, and specific benefits required for a compelling offer. I have reviewed interview protocols and product testing processes in past posts, and you can refer to them for more detailed guidance.
Customer Relationships & Channels
The Customer Relationships and Channels elements in the Business Model Canvas refer to a venture's interactions with its customers and how the team plans to manage them. It includes business strategies and tactics to establish, maintain, and enhance customer relationships. There are several types of customer relationships, including personal assistance, self-service, automated services, communities, and co-creation of products. First, the business must understand its customers' needs, preferences, and behaviors to determine customer engagement strategies. One of the essential elements to understand is how and where customers find their information about an issue of concern. How do they go about their research? What sources do they use? Whom do they speak with to learn more about a product? Channels refer to the different ways in which you reach your customers.
Founders have several opportunities to validate their assumptions about customer relationships and engagement channels, starting with market research, customer feedback, and other means of customer analysis. Again, starting with the customer discovery phase, you have many opportunities to learn from your customers their experiences using competitive products. During interviews, you can probe what past experiences they found helpful and what was missing. You want your potential customers to walk you through their journey with these competitors and their products. Identifying which parts of the customer journey were challenging, hard to understand, or overall dissatisfying is crucial.
While probing your customer about their experience with competitive products, you can validate vital channels reaching them at each sales cycle phase. For example, how did they learn about a competitor's product? Where did they go to research while they considered purchasing? Once deciding to buy, how was the product or service delivered? Finally, how are customer services provided post-purchase? Is the service offered in real time or by some automated process?
Another validation point for learning more about customer engagement strategies and practices is during your venture's product testing. During MVP iterations, you can test the most effective ways to reach your target customers and different marketing and distribution strategies. This analysis involves identifying which channels are most likely to be used by your target audience, such as social media, email, or direct mail. Testing different channels can also help you refine your marketing messages and determine which ones are most effective in driving customer engagement and conversion. Ultimately, the goal is to create long-term customer relationships that drive repeat business and increase lifetime value.
Key Activities, Resources, and Partnerships
You can view these three business model elements as working together to provide the needed operational infrastructure to deliver value to your customer in a repeatable fashion. In the process, founders make assumptions about what it will take to give value to their target customers. Then, operationally, domain areas will require expertise or specific technical skills.
I define key activities as areas that founders acknowledge are vital to successfully delivering the customer's needs. Key activities sometimes refer to the processes required to provide your value proposition. However, you should consider these activities as requiring a set of core competencies integral to performing these activities at the highest quality level. Startup ventures should view core competencies as the unique strengths and capabilities that distinguish them from their competitors and enable them to deliver value to their customers. Core competencies are often the result of a combination of skills, knowledge, technology, and resources that are difficult for others to replicate. For startup ventures, identifying and leveraging their core competencies can be critical to their success. By focusing on their strengths and building their business around them, they can differentiate themselves in the market and create a sustainable competitive advantage.
As part of your early business model assumptions, you can consider that the areas in which you must be highly competent will drive your key resource requirements. For example, if a core competency involves specific technical expertise, you must acquire talent in the specified area. In addition, you may need to hire experts or a whole technical team to support your capabilities in serving your customer.
Key partnerships are the last element of your operational infrastructure. Now that you know what key activities and resources you will need, you can decide on potential partnerships to support your operations. Startup partnerships can provide great value and close gaps in the founding team's knowledge and marketplace access. However, ensuring alignment with your business goals and objectives is vital.
To validate your key activities, resources, and partnerships, you need to analyze the processes required to deliver your value proposition and ensure they are efficient and effective. This analysis involves identifying the key activities and resources critical to your business's success, such as product development, marketing, or customer support, and ensuring they are streamlined and optimized to minimize waste and maximize efficiency. Additionally, one needs to connect the key activities to the resources critical to your business's success, such as technology, equipment, or human resources, and ensure they are readily available and cost-effective. Finally, founders must identify the key partners critical to their business's success, such as suppliers, distributors, or strategic partners, and ensure they share your vision and are committed to helping you achieve your goals.
One of the main approaches to validating what core competencies will differentiate you from the competition is to analyze the competition. I suggest that founders study each competitor's business model element to identify ways to be different. By diving deep into competitor infrastructure and operations, you can understand their strengths and weaknesses in these three key model areas. As starting point, you can assess whether or not they communicate their core competencies as a differentiating factor in the marketplace. Are these key activity areas prominent and significant to their brand identity? Founders can also look for any partnerships listed on websites and social media. For example, are your competitors affiliated with major influencers or domain experts? Have they partnered with any major corporations to access specific target customers?
Profit Model | Revenues and Costs
These final business model elements can be challenging to find information on, but they are worth the effort. One revenue model element that founders can validate is current revenue and pricing strategies in the marketplace. Founders can validate proposed revenue models by analyzing the pricing strategy of competitive products and conducting market research to determine what target customers are willing to pay. Both customer discovery and marketplace analysis can support what customers are used to paying in terms of the amount and timing of payments.
As part of your market research and product testing, you can validate specific costs associated with your business model. This effort involves identifying the key cost drivers for your business, such as production costs, marketing expenses, or overhead, and ensuring that they align with industry standards. Depending on the product, you can also discover a lot of information by speaking to manufacturers, suppliers, and distributors about the costs of similar products.
Summary
The Business Model Canvas is a valuable tool for new venture development, helping entrepreneurs clarify their business model, refine it, and communicate it to stakeholders. To ensure the viability and sustainability of the business model, founders must validate their assumptions and ideas at critical points in the venture realization process. These validation points occur during market research, customer feedback, analysis of competitors and industry standards, and product testing. Entrepreneurs can create an accurate and effective plan for launching and scaling their business by continuously refining their business model.
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