7 Steps to Establishing the Right Business Model
Most tech entrepreneurs focus on creating innovative products but often overlook the fact that no matter how useful and innovative a product or solution may be, it may not automatically translate into a successful and profitable venture. That's why companies need a practical and innovative business model, with the right pricing and channels to target the right customers for the project to grow.
Identifying the right business model requires the same dedication and creativity needed to design the product, but the approaches and skills required are different. That's why investors prefer startups with two founders instead of one, where one focuses on the technical solutions while the other focuses on defining and building the business model. These two roles should be carried out in parallel.
The dual leadership approach could have spared me the frustration I experienced when I started a startup a few years ago. Customers loved our product during the trial phase as a free initial model, but we couldn't sell any in the first few months despite offering a reasonable price compared to the work and effort we put in.
In investment literature, this is called proving the business model, which begins with validating the business opportunity (a large segment of customers willing to pay for a real problem-solving solution) in the same way that proof of concept validates the technological solution you want to sell.
Here are seven steps I recommend for building the right business model.
Determining the appropriate price for your product:
Customers often complain that current approaches and solutions are not intuitive or integrated, but old solutions may be familiar and clear. Estimate the costs, taking into consideration a minimum gross margin of around 50 percent. Remember, no one will buy your product if it is too expensive. On the other hand, reducing the price may leave you exposed and weaken your competitive position. Try to match your prices with those of your competitors and the target market segment.
Ensure that your product or service solves a specific problem:
Once you have built an initial model or an alpha version of the product, showcase it to real customers to gauge their feedback. Ask them for comments and suggestions on how to improve your product. If your product fails to solve the problem that customers are facing, no business model will save you.
Test your support strategy:
Now is the right time to present the complete business model to a specific group of customers or a specially chosen focus group. This should encompass all elements of pricing, marketing, distribution, and maintenance.
Speak to industry experts and investors:
Consulting with a group of experienced individuals in your field will provide you with unbiased feedback and insights, as well as open channels for setting up distribution and sales networks. It is also important to speak to potential investors to understand their opinions.
Designing an Experimental Execution Plan
The best way to validate the robustness of a business model is by implementing an experimental execution plan. This allows you to test costs, quality, and pricing in a few stores or in a single city, with minimal risk and the ability to quickly recover and correct any errors. Save your effort and advertising campaigns for a later stage.
Gather customer feedback:
Focus on early adopters and ask them for testimonials to publish. If they refuse, consider it as a warning sign that there may be an issue with the product, and that the company may not grow as expected.
Target national trade shows and industry associations:
You need positive feedback, credibility, and reactions from these institutions as a final indicator of the robustness of your business model and the initial prototype of your product. This can also be a source of potential customers in the pre-expansion phase.
Your business model can be a sustainable competitive advantage for your products, or it could highlight the major flaws in your product. Many business plans focus on competitive product features but neglect the details of the business model and innovations.
If the time and effort invested in product innovation are not equivalent to the time and effort invested in building the business model, you will only accomplish half of the required work to succeed in today's market. It will be challenging to win with only half the work done, especially if that half is the easier part.
