The Business Model Sketch

2014-04-22 09:25:19 -0400

I was helping a friend work through some business ideas, and realized that like writing an outline helps you structure a essay, doing a "business model sketch" can help you break apart a business idea and evaluate its viability. Just like an essay needs a thesis, a body and a conclusion or it can fall flat, a business model needs specific components or it is not viable. I identified six components that roughly draw from The Personal MBA and the "lean startup" philosophy. If you are thinking of starting a new business, consider taking one page of paper, drawing six boxes, and filling out these six areas: customer, value proposition, marketing, sales, value delivery, and finance.

The problem with many business ideas is that, while they sometimes hit on a few of these areas, they are weak in others. That can be okay, but as a startup, your goal should be to develop a plan about how to address your idea's weak points, and quickly test whether that plan is viable. If it is, great! If not, reconsider or proceed with caution!

The template

The customer

The specific person to whom value is being provided and is making a purchasing decision. Many times a business's value proposition will include many people. For example, if you are selling family vacations, your business is offering value to the father (maybe you bundle in a few rounds of golf), mother (there's a reason cruises have spas), and kids (I don't think Disney pays actors to dress as Micky Mouse for dad). This is important to understand, especially when you get to the value delivery portion of the business model sketch. However, first identify the decision maker!

Value proposition

The value proposition is a description of the value you are providing your customer. Remember that your customer is the person making the purchasing decision, so when crafting your value proposition, you need to understand the wants and needs of that particular person above any secondary party.

Ideally, focus your value proposition on addressing core human drives. The Personal MBA identifies five core human drives: the drives to acquire, bond, learn, defend, and feel. Many consumer products clearly target their value propositions to these core human drives. This can be difficult if you are not selling consumer products or services, but if you look closely, many business-to-business or business-to-government sales are targeted the same way. Living in Washington, DC I notice this every time I go through the Pentagon metro station. Large defense contractors clearly target their buyer's core human drive to defend with advertisements that depict the strength and sophistication of their offerings. This example of advertisements for Northrop Grumman's unmanned drones is a great example.

Marketing

Marketing is fundamentally your strategy for getting your customer's attention to deliver your value proposition. When you create a business model sketch, you need to attempt to identify how you will reach enough customers at an economical cost. If you have an excellent value proposition but your customers do not know about it, your business model will fail.

In the marketing portion of your sketch, you should also attempt to identify in rough terms the market size and dynamics: how many potential customers do you have and is that number increasing and/or gaining purchasing power?

Sales

If marketing is your strategy for reaching your target customer, sales is your strategy for negotiating a contract to deliver your value proposition in exchange for money. For an online business, this could be as simple as "sign up for PayPal and put a Buy Now button on my website". If you are an enterprise software, this could be extensive contract negotiations.

Sales and marketing are closely intertwined, but separating them out to different boxes in the business model sketch should help you to separate the act of reaching your customer and delivering your value proposition (marketing) and the mechanics of "closing the deal" (sales).

Value delivery

This is what many people think of as the meat of your business model, but the previous sections are also key to determining its viability. Value delivery is the processes that delivery the promised value to your customers. In the family vacation example, this is the operations of your hotel from hiring staff to procuring food and drinks for the restaurant. If you are an online business, this is the cost of developing your website as well as operational cost of running your servers and supporting your customers.

Finance

The finance section should answer "what financial resources do I need to support this business model, and what is the return on investment?". This is hard to answer in specifics in a business model sketch, and should be tackled in more detail in a complete business plan. However, once you complete the other sections, you should be able to answer these questions:
  • Is this a financial capital-intensive business to set up? To run? If yes, what is the risk to capital committed to the business? What return can I offer owners of capital given that risk? How can I source that capital, loans or equity investment?
  • Is this a human capital-intensive business to set up? If yes, what is my recruitment strategy? Can I attract the right talent? Would I compensate them with equity or a salary?