The purpose of a business
The purpose of a business is to make a financial gain by creating something of value to customers (products or services) and capturing that value by charging them for it.
Business model framework
A business model is a simplified representation of the different aspects of a business that enable it to create value for customers and profit from that value added.
To create a business model the following questions need to be addressed:
How will the business create value for customers?
- What is the issue the business is going to resolve to create value for the customers?
- What is the solution the business is creating to solve this issue (value proposition)?
- What segment of the population faces this issue (target market)?
- What are the key resources required to deliver the product/service?
- Who are the key partners required to deliver the product/service?
How will the business operate to make profit from the value it’s creating for customers?
- What are the key activities required to deliver the product/service?
- What are the distribution channels through which the customer’s will purchase the product/service?
- What is the businesses marketing strategy?
- What are the operational costs?
- What are the revenue streams?
Finding the right business model
Early in a business’s life, the overarching goal is to gain traction by developing the right business model.
A popular approach today to building a startup business is the lean methodology, which is very similar to the agile methodology for software development. Previously, businesses would spend a lot of time and money upfront planning and building a full featured product only to find out that the customers don’t like it. In the lean approach, you introduce a Minimal Viable Product to customers early on to get their feedback as soon as possible. This early feedback can then inform how to fine tune the product into something that customers actually want, without wasting time and money on features they may not want. In the lean startup process, the idea is to develop the right product and business model in iterations (startup phase) until you find product/market fit. Once product/market fit has been achieved, the business shifts into the execution and growth stage (customer building and company building phase).
The right business model is solidified when product/market fit is achieved. In general, product/market fit is achieved when your product solves a problem for the customers in your target market and you’ve gained traction. There is no benchmark for product/market fit that tells you that you’ve achieved it. However, one of the strongest indicators that you’ve achieved it is sustained traction where you are not reaching out to prospects to try your product (manual traction), but there are inbound prospects seeking out your product (automatic traction).
So what’s involved in the lean process of finding product/market fit? As was mentioned before, product/market fit, or traction, is hopefully achieved after going through an indeterminate number of product development iterations until you develop the right product and business model.
At the beginning of each iteration you share your product with customers. Market the product, promote the product, and see if the product and business model achieve manual traction. If it does, then try to take steps to convert manual traction into automatic traction. If after a certain period of time you haven’t achieved automatic traction, then you haven’t achieved product/market fit. Based on the feedback received from customers you have to figure out what’s wrong. Something with the product or the business model isn’t working. You can iterate or pivot based on the analysis of the customer feedback. A pivot is a substantial change to one or more of the business model components. For example, this isn’t our customer segment, our customers are over there. Or our revenue model shouldn’t be freemium, we should be charging for it from day one. An iteration is a minor change to one or more of the business model components. For example, small changes or additions to the product (changes or additions to the feature set). Once you iterate or pivot, start the next cycle and continue iterating until you achieve product/market fit or you run out of money.
Note, for software companies, bug fixing should be taking place at every stage in the life of the business.
