A good business model is the foundation on which a business succeeds yet many business owners begin their venture without a well thought through model that will provide them the best chance of success.
Karan Girotra and Serguei Netessine wrote in Harvard Business Review (1) that a business model was essentially “a set of key decisions that collectively determine how a business earns its revenue, incurs its costs and manages its risks”. Whilst this sounds simple, it can be daunting to come up with a model that is succinct and easy to communicate to potential interested parties, most commonly investors.
It is important that the business model conveys how these key points are addressed in a clear and concise fashion if the business wants to grow and attract investors. Investors want to know the story and have a clear idea how their invested funds will be used and how a return on investment will be achieved. They also need to have confidence that the outcomes are what they want and are achievable. When this is poorly articulated, they might “think about it” or “get back to you” so you want to present a story that is compelling and engages them to commit.
Here are some of the key points to consider when designing your business model:
What is the market ?
The market is the world in which you play in, but the important thing to realise is that the market is however you define it, so you can make it what you want it to be. A cleverly defined market will engage your listener. Air BnB identified demand for accommodation and that many travellers didn’t necessarily want to stay in hotels and were groups that didn’t necessarily fit the standard requirement that would suit hotel styled accommodation. Uber identified that taxis were expensive and often not available. Both these markets present an enormous opportunity, so the listener is engaged and looking to how your company will benefit from the opportunity.
What problem does your business solve in that market ?
You have probably had consultants preaching to you about the importance of clearly defining your company’s vision and mission and yes this is important. The trick however is that in defining what your company does and its values, it leads in to the story of how you will capture your share of the market which you have just made to sound so attractive. Both Air BnB and Uber identified excess capacity in people’s homes and their cars which were underutilised, so they created a system of connecting potential customers with this underutilised capacity. Now people rent out their homes and earn extra cash from their cars. This is a now great story – but how will your company generate returns from it ?
How will you make money from solving that problem ?
Now that you have a great story of the market and how you capture your share, the critical thing is you need to show how you will make money from it. There are many great stories but unless a customer is prepared to put their hand in their pocket and outlay some cash for what you do, the business model doesn’t work, or at least as an investment proposition. Air BnB and Uber had identified a great opportunity and a solution, and simply charge a service fee for arranging the booking. They do not own any hotels or cars so their costs are well managed and their risks are minimal. It is very clear how Air BnB and Uber make money, which is a very compelling investment proposition. Once an investor can see clearly how you make money from an opportunity, it becomes a compelling investment.
In these examples of Air BnB and Uber, the business models are very simple but as we know now the opportunity that has been realised has been massive. It’s a great story, and essentially that is the essence of a good business model, it’s a great story that presents a compelling argument why an investor or interested party should be interested in your business.
You need to ask yourself, if someone presented your story to you as an investor, would you find it compelling ? If you would then you probably have a good business model. If not, you have some work to do.
- “four paths to business model innovation”, Karan Girotra and Serguei Netessine, Harvard Business Review, July-August 2014