The right business model can be the difference between the success or failure of a product.
Companies make two common mistakes in the product development process:
- The creation of a business plan or business case, full of assumptions and predictions, with a 5-year economic projection and take it as something true and immovable.
- Develop a product from an initial idea without validating and evolve the underlying business model
Either of these two errors, or the combination of them, causes many organizations to end up developing products with little or no market acceptance, generating a lot of frustration and waste in the process.
What is a Business Model
A business model is a story about how an organization creates, delivers and captures value.
The product or service is the core around which the business revolves to create value (for example, together with partners or through the use of raw materials), deliver value (by certain channels or means) and capture value (for example information or money).
A product is more than the object or service we buy. A product consists of a series of processes and activities to create and deliver that product to the hands of our customers.
And in these activities and processes is where the competitive advantage or the variables that can determine the success of our initiative lie.
Main Components of a Business Model
A business model is a combination of factors. It’s what we sell, how we deliver it, how we capture customers and how we make money.
These are the essential components of any business model:
- Acquisition channel
- Selling Tactic
- Revenue Model
- Product Type
- Delivery Model
Using Dropbox as a reference we can see the meaning of these components:
To Model vs To Plan
In contrast to the waterfall or Big Design Upfront (BDUF) approach of conducting a business case or business plan. What we have to do is detail the fundamental variables of our business model and then iterate and validate as we evolve the idea until we reach the Product-Market Fit.
To document and iterate the model we can use tools such as the Business Model Canvas.
In parallel to this process of iterative and incremental validation, what we are doing is increasing the amount of investment as we reduce uncertainty and risk.
What we don’t want to do is make the typical mistake of budgeting the entire product development when we have not yet validated the business model.
Making an analogy with the development of agile software, where we have epics and user stories. At this level we have assumptions or variables of the model that we translate into hypotheses on which we perform experiments.
Viable, Feasible, Desirable
To succeed with our product or service we have to manage three fundamental aspects of our product. That it is economically viable, that it is technically feasible and that it is attractive to the market.
If we map these three variables on the Business Model Canvas it would look something like this:
We cannot lose sight of this, because it is at the intersection of these three dimensions that the success of our product is found. Until we get product-market fit we can not stop iterating the business model. Even after adjustment-product market when climbing to enter the large market, important changes in the model may arise.
One of the first things we can and should do to study the viability of a business idea is the economic feasibility analysis. But we don’t want to do it in a 50-page business case full of lies, assumptions and opinions.
What we must do is a back-of-the-napkin study that allows us to determine the most influential variables in the success of the product and determine the experiments to be carried out to reduce uncertainty and risk.
It is not about guessing the numbers, but about creating a backlog of business hypotheses to validate.
In our Lean Product Management training we see the various techniques that exist to assess the economic viability of an idea:
- NPV (Net Present Value) Analysis
- Reverse Income Statement
- Profitability Analysis
These tools will give us a very early indication of some of our main risks without any investment.
Lean Product Management Guide
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