One of the toughest problems for entrepreneurs is to keep score as they search for their business model.
Keeping Score
One of the key concepts of Customer Development is writing down your initial hypotheses (guesses) of all the parts of your business model, then updating them with the facts you find outside the building.
Since I first wrote the book Four Steps to the Epiphany I’ve realized that an even better way to keep score is by diagramming each of your business model hypotheses on a whiteboard and updating them as your iterate and pivot. I’ve been experimenting with how to best teach this idea to students in classroom and with startups. My favorite book of how to diagram your business is Business Model Generation written by Alexander Osterwalder. It has the notion that any business model can be drawn with just 9 separate boxes. It’s a great idea.
The Real World
My teaching partner Ann Miura-Ko and I both love the concept of Business Model Generation. However we find using the book to teach and in early stage venture problematic. It makes assumptions about the depth of knowledge about business models that we find that students and startups lack. For example, we find that the distinction between who’s a user and who’s a customer may be obvious to sophisticated strategists in large companies but is often overlooked in a startup. The same issues arise between understanding the difference between a distribution channel and the specific demand creation activities needed to drive customers into that channel. Being able to get these concepts is the difference between startup success and failure. So while we love the book, Ann has been drawing her own business model diagrams you’ll see in the presentation below.
Given Ann and I are such big fans of the Business Model Generation book we were happy to have coffee with Alexander Osterwalder and share our thoughts about what we thought was missing. In hindsight I think we were asking for the business model generation book for dummies (kind of like someone asking me for six steps to Customer Development rather than four,) but Alexander was not only was generous with his time but posted a thoughtful response to our comments.
Business Plans Versus Business Models
Given what I think of Business Plan competitions, it was ironic that I spoke last week at the Clean Tech Open business plan competition conference. I did appreciate the venue and shared my thoughts of how a startup goes from an idea to a business plan to business model to customer development and finally to a venture pitch, all in the presentation below.
Lessons Learned
- Gather all your hypotheses in Customer Discovery
- Diagram all your hypotheses of your business model
- Update the diagram as you gather facts outside the building
- Minor iterations will make minor changes to the diagram
- Pivots will have you changing major pieces
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Filed under: Customer Development |
Another great preso! And it make me think…
Business Plans are like Medical Insurance Questionnaires: no one actually reads them, but if things go wrong they will use every answer against you.
Isn’t there a difference between using a business model diagram to draw everyone together around a simple and clear view of their world (model as communication device), and using it to understand all the marvellous complexity of the way you do business (model as exposition).
I think it’s important to have both — something everybody “gets” in two minutes and something they can understand and act on in twenty. But that means two different kinds of diagram.
Maybe it’s the difference between a picture drawn with marker pens (showing customers), and one drawn with a pencil (showing users too).
An owners space plan or an architect’s blue print.
Nick,
I believe that it can be hard to figure out who your users and your customers are. Using the Business Model Generation Canvas, it’s not easy to differentiate between someone who pays and someone who doesn’t. Of course, you can define users and customers in all kinds of ways (as Alexander Osterwalder shows in his post, linked above by Steve), but the Canvas does not have a section to separate users from customers and how the rest of the diagram impacts each one. For example, would you have the same distribution channels for users and customers? This might be OK for some businesses but it would not work for others (Google AdWords comes to mind as having different channels for customers [advertisers] and users [someone who runs a search]).
I find using Alexander’s Canvas a very useful tool for brainstorming and doing a quick sanity check of my assumptions, but as Steve says, one still has to validate what you put on that Canvas by getting outside of the building and speaking with customers.
I’d love to see some example pictures of hypothesis diagrams! I can imagine papering the walls with hypothesis tests.
Hi Steve,
I have read many of your articles in the blog. I can’t stop reading and I just love them. Thank you for sharing so much of your experience and wisdom.
You helped me to understand how important to get out of the building and talk to potential customer. But I just wonder where I should go to find the potential customer and how to get them to talk to me?
Really appreaciate you can write an article about this topic. Can’t wait to read!
Best Regards,
Shell Pan
Steve and readers I have used Alex’s business model canvas at a number of largish enterprises to help set the scope and agenda for various change programs.
For the enterprise context I have built in the idea of layers of customers, including both paying and non paying groups (such as regulators etc.) Coming from a corporate project background I am thinking “stakeholders and customers’ in my head.
It is always the point where you are asking the client “So just who are your customers” that the conversation gets awkward.
I am not so sure breaking ‘customer’ down further is that important. The detail you drill into depends on the circumstances.
You can get a long way with the vanilla model Alex provides, and sometimes you need to build on it.
Thanks for a great blog Steve!
In addition to Business Model Generation there is a great book (though very repetitive around a few key ideas) on developing your business model based on hypothesis testing, Getting to Plan B, written by John Mullins and Randy Komisar.
Their business model definition and key elements have a stronger focus on the financials than Alex’s brilliant visual model, being: the revenue model, the gross margin model, the operating model, the working capital model and the investment model. The two books are very complementary.
Getting to Plan B is about the process of discovering a business model that works (with a start-up perspective), with the assumption that the initial plan is most often wrong. The discovering process can be made systematic by constantly formulating different hypothesis and measurements and continuously follow up and iterate the business model into a new Plan B.
I have reviews/summaries of the two books at my blog.
Take care,
Anders
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