The business model
A vision is the description of what a startup would like to achieve in the future. It is intended to serve as a direction and guidance to help entrepreneur explores and defines a list of actions to get there. The vision often starts with a simple phrase, it can be abstract or specific but the purpose is to inspire people who hear it about the intended direction. For example Bill Gates puts it simply: “My vision is to put a personal computer in every desk, in every home, and they all use Microsoft products.” Steve Jobs’ vision is more abstract: “Create the most remarkable product by figure out what customer want before they do, to innovate things that does not exist, to read thing that are not yet printed on the paper.”
A vision statement sets the direction of “What” the entrepreneur wants but does not describe “How” the startup operates or how it makes money. It needs to be expanded into more details called a business model. The business model describes the rationale of how startup creates values, delivers to customers and makes money. According to Dr Alexander Osterwalder, a business model for entrepreneur consists of nine components: Customers; Value; Channels; Revenue; Relationships; Cost; Resources; Activities, and Partnerships.
Customer segments consist of the list of different groups of customers that startup wants to do business with. Value Propositions describes the products and services that startup provides to a specific customer and any support that startup helps customers in getting what they want. Channel describes how startup reaches its customer segments to deliver a value proposition. The Customer Relationships describes the types of relationships startup establishes with specific customer segments to get them and keep them. The Revenue Stream represents money a startup generates from each customer segment. Key Resources describes all assets requires to make the vision become a reality. Key Activities describes all important things startup must do to make things work. Cost structure describes all cost incurred to operate the startup. Key Partnerships describes all suppliers and partners that support and contribute to the vision.
When entrepreneur expand his vision into a business model, he must conduct a market research to get answer to a number of questions such as: Who are the customer that you want to do business with? How do you reach them? How large is the group of customers? How can you get them, satisfy them and ensure that they come back for more business? How do you deliver your product or service? What specific resources and activities that you need to set up your startup? How do you get money to start your business? How do you ensure your revenue will exceed your cost so you are profitable? Will your startup cost structure generate enough profit? What are specific types of revenue that you can generate with the set up that you create? Is it possible to attract more business by build a special relationship with one segment of customers?
The business model is created to help entrepreneur completely follow a process to logically put everything on paper as he must organize the model, share it with the team, use it for discussion and most important, use it to validate his idea and vision. Many technical entrepreneurs, who do not receive proper training, often rush to start a company without clearly thinking through. They keep things in their head rather share it with others. They are blinded by their “personal biases” and guide by their ambitions to do something, they do not know who their customers are, how much money they could generate because they believe that they can be successful based on their idea. That is why so many startups failed.
There is no bad idea, there is no bad vision only bad business as entrepreneur does not know how to model their business and ensure success. If we look at how successful startups became giant enterprises, we can see that they all have very good business models. For example Google’s Vision is to “Get every web users to use their search engine”; their Customers are anybody who search something on the web; their Value proposition is to point them to relevant resources in response to their search; their Channel is the website on the Internet; their Customer Relationships is they do not charge money for people who use their search engine to encourage more users; their Revenues come from paying advertisers whose ads are displayed to customers based on their search. For example, if the customer is searching for the word “Car” then Google will display Car advertising on the webpage. By matching advertising with what customer is interested in, it is much more effective than any random advertising. This is how advertiser companies are willing to pay more. Google is using people who search things on the Web to attract the advertisers who pay for their advertising. By carefully thinking through each step, each component of the business model and validate that through many years of market research, Google is the biggest internet software company with billion users and hundred billion dollars in revenue.
A business model is a process that helps entrepreneurs discover and explore several options on how startups operate and makes money with the original idea and vision. By putting every thought on paper, by answer the questions and write them down on each components of the business model, entrepreneurs can organize their thought in a logical way, carefully discuss them with their partners to find innovative and disruptive ways to get into the market quickly to achieve a dominant position.
Sources
- Blogs of Prof. John Vu, Carnegie Mellon University
