For any startup, a business model defines the business concept and shows the road map to create and grow a business. It is a fancy and visual way to show the business story with judging figures and assumptions; however, a business model must be tested in the marketplace and proven successful before it is taken on board. In this article, I want to highlight some critical issues in creating and testing a business model for start-ups.
Enables you to show your appealing story
A business model shows how a startup- or any business- creates, delivers and captures values. In creating values, a business model describes the value propositions, revenue streams and cost structures, while delivering values explain the problem-solution fit of a new business. Besides, a business model describes how a new business captures values, including selling and monetising values to customers. Explicitly, a business model identifies three significant elements for any business, namely: the resources, transactions and value creation. Enterprise resources represent people, assets and capital required to create, deliver and capture values, and the transactions describe the activities necessary to make and sell benefits to customers. In value creation, a business model explains the value propositions, e.g. benefits and features of the new product, the selling price and cost structure of a business. Business models vary in terms of comprehension and application, and it will be more convenient for a new venture with limited information to use the simplest business model to develop a business concept. Here, a business model can explain the resources and transactions needed to create values. However, this simple model may not be suitable for the start-ups, who are looking to test their new products in the market, and I can instead propose the model developed by Ash Murphy, as a good fit for their needs. Ash’s model provides a better basis for start-ups to create and test their new values with customers in the market. This model explains how to create values, including defining the value propositions, cost structure and the revenue streams, and how to deliver and capture values. Ash has introduced the traction concept that explains why some ventures are successful and others are not. According to this traction concept, customers will buy values if only they get benefits exceeding the paid prices. For those start-ups looking for growth, the business model-Canvas is convenient. The model-Canvas includes nine business blocks namely: customer segment, value proposition, channels, customer relationship, revenue streams, partnership, activities, resources and cost structure. This latter model enables a new venture to set and test assumptions in the marketplace and grow business.
Guides you to test your assumptions
Writing a fancy business model is not sufficient for a startup to succeed, and a new venture will need to validate its business-model assumptions in the marketplace to be successful. Validating a business model is a process that shows the approval of customers to your business model, and early validation enables the market testing with the least resources and low associated risks. Reasons for validation are to ensure acceptance of customers to your new values and to confirm the three tests of desirability, feasibility and viability to your new business. In a lean startup, validation enables essential testing of the new business with little resources and low risks, before you can deploy more investments into the business. In the desirability test, it explains the ability of your business to meet the customer needs, and the feasibility test shows the technical ability of your business to make new products that customers accept. Whilst the viability test explains the ability of your business to monetize values and make a profit. Practically speaking, start-ups go through three distinctive stages, before they become companies. These stages include the concept development, selling and growing. In the concept development, a new venture will need to test the desirability of its concept, and in the selling and growing stages, a startup will need to conduct the three tests of the desirability, feasibility and viability before becoming a company.
Wait, is your business model innovative?
Innovation is the practical creativity and making new ideas useful, while creativity is thinking, feeling and focusing differently. The outcomes of creativity are ideas or thoughts, and of innovation are tested products. Innovation can be for the product, process or system and aims to create new value, originate competitive advantages and enable a firm to stand out the crowd in the market. Innovation landscape includes the value creation, growing sales, increasing profit, improving processes, creating a new product and competitive market mix. For example, Google has created a disruptive value by offering a free, accessible and useful online searching services. Another example of product innovation is the invention of the android mobile that enables free calls, touch-screen mode and comes with multi-tasks replacing the traditional land-line phone. Although innovation has become a necessity for any successful business, it is still a challenging process that requires an enabling business culture to create useful ideas. Thus, entrepreneurs usually possess the right mindset of innovation to create and transform breakthrough values that customers want. Innovation can be incremental or disruptive. Incremental change is the improvement of an existing product or process, while disruptive innovation is making a new product, serving the untapped markets and selling with the lowest prices. For example, the introduction of the video-call apps, e.g. WhatsApp or Skype, enables a free call, encourages market streams and comes with unexpected desires.
This article is extracted from my new book- Mastering Enterprise Skills for Potential Entrepreneurs, which can be found on www.amazon.co.uk. If you want to receive more information about the book and our activities, you can register in our newsletter by using this link.
Prepared by Munther Al Dawood
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