Business Model Alchemist

I’ve been thinking about “plug-ins” that complement the Business Model Canvas for a while. One concept that I’ve been looking at more closely over the last few weeks is the invaluable “jobs-to-be-done” approach. I tried to turn it into a visual approach like the Business Model Canvas (BMC). The result is a prototype conceptual tool, the Customer Value Canvas v.0.8., that I present in this blogpost.

Originally, I set out to design an ultra applicable, simple, and visual Canvas for the (customer) jobs-to-be-done concept. My motivation was to create a dedicated and complementary Canvas that helps organizations sketch out and analyze the fit between their value propositions and the customers they target in a more granular way than the Business Model Canvas mapping does.

The result of my endeavor is a prototype conceptual tool, the Customer Value Canvas v.0.8. It’s the outcome of several iterations of prototype concepts, test runs with workshop participants, try-outs students, applications with my own team, and several conversations with my #bmgen co-author Yves Pigneur (who is also a concept geek like myself). While the initial idea was to design a JOBS Canvas, the result turned out to become a mash-up of several approaches from various different thinkers.

Relationship between BM Canvas and Customer-Value Canvas v.0.8

To explain the Customer-Value Canvas bit by bit and show how it relates to and complements the Business Model Canvas I used a series of annotated screenshots of our upcoming Business Model Web App (sign-up for the release date).

The first screenshot simply illustrates how I started to map out a business model, notably by adding sticky notes to the Customer Segment and Value Proposition part of the Business Model Canvas.





In the second screenshot the annotations highlight how a Value Proposition targets a specific Customer Segment (or several segments) aiming to create value by addressing a customer’s needs.

However, the Canvas does not make the details of the Value Proposition (VP), nor its fit with a Customer Segment’s (CS) needs, explicit, because it focuses on the big picture. The annotations in the second screenshot describe which characteristics behind the VP and CS could be interesting to study in order to understand and analyze their relationship and fit in more detail. This would allow us to map what value precisely is created and with regard to which customer needs. That’s where the Customer-Value Canvas comes in. It describes:

• (A) For each Customer Segment: which jobs a customer is trying to get done, and all the related customer pains and customer gains
• (B) For each Value Proposition: the bundle of products & services targeted at the customer and how they are expected to create gains or relieve pains

In the third screenshot the annotations introduce the first – customer-focused – part of the Customer-Value Canvas and they describe how this helps adding more detail to a specific Customer Segment in the Business Model Canvas.

• (1) Select a specific Customer Segment in the Canvas
• (2) That Segment will become the one you outline in more detail on the right hand side of the Customer-Value Canvas
• (3) Specify the specific job(s) that Customer Segment is trying to get done. For a digital music player, for example, the job(s) would be buying, downloading, transferring, and listing to music on the go
• (4) Now outline all the things that represent a gain to the customer for the outlined job. For the previous example that might be convenience, having all one’s music available at any time, the ability to buy new music, automatically playing music according to your mood, etc.
• (5) Finally, outline all the things that represent a pain to the customer for the outlined job. For the digital music player this might be the weight of a device, its learning curve, its battery life, etc.

In the fourth screenshot the annotations introduce the second – value focused – part of the Customer-Value Canvas and they describe how it helps adding more detail to the Value Proposition that targets the Customer Segment outlined above.

• (6) Select the Value Proposition aimed at the Customer Segment outlined on the right-hand side of the Customer-Value Canvas
• (7) That’s the Value Proposition you outline in more detail on the left hand side of the Customer-Value Canvas
• (8) Specify the specific bundle of products and services targeted at the selected Customer Segment. For the digital music player, for example, the bundle of products and services might consist of a device, a software, and an online store… does that ring a bell? I’m talking about the iPod, of course
• (9) Now outline how exactly that bundle of products and services should create gains. For the iPod that would be by offering “thousand songs in a pocket” (remember that sentence Steve jobs repeated over and over when he launched the iPod?), by offering access to an online store with content from all major recording companies, etc.
• (10) Finally, outline how exactly the bundle of products and services should relieve the customer’s pain regarding the outlined job. For the iPad that would be the reduction of the learning curve through seamless integration of hardware and software, the elimination of constantly having to copy songs back-and-forth due to tiny storage capacity (before the iPod digital music players could hold one album of approximately 24 songs)

The next image connects the two pieces described above. The resulting Customer-Value Canvas now allows you to map out and analyze how the Value Proposition you designed fits the Customer Segment’s job and the customer’s pains and gains. While the right hand side of the Customer-Value Canvas (customer-side) is something you observe in the market (= studying the customer), the left-hand side (value-side) is something you design (= make choices).

This is where the Customer-Value Canvas connects with Steve Blank’s Customer Development Process (outlined in his invaluable book The Four Steps). Steve invites people to “get out of the building” and talk to customers. Now you have another tool besides the Business Model Canvas to map the outcomes of those customer conversations.

Example

As mentioned above, I tried out several iterations of the concept with my executive workshop participants and university students. I also tested the final Customer-Value Canvas 0.8 presented in this blogpost in my own business. Together with Alan Smith, #bmgen designer and co-founder of my software business, we mapped out the Customer Segments and Value Propositions for our upcoming Web App.

In the images below I illustrate how the Customer-Value Canvas helped us visualize and structure our conversation about the Value Proposition of our Web App for consultancy clients (who apply the #bmgen concept to help their own clients innovate their business models).

The next image outlines the jobs we are trying to help our consultancy clients get done. There are two main types of jobs we are interested in helping our consultancy clients with. On the one hand they advise clients on business models by running workshops and delivering results and communications. On the other hand they have to continuously acquire clients, retain clients and demonstrate credibility in their consulting domain. I used color-coding to distinguish the different type of jobs.





The following image outlines some of the consultancy client’s most important pains related to the described job. This includes the risk of giving clients bad advice, the difficulty to manage client follow-up and communication, the time-consuming production of PowerPoint slides, and the risk of defecting clients .





The next image outlines some of the consultancy’s gains related to the job. This includes (specialist) support that helps them advise clients on BMs, easy monitoring of client progress, an easy way to acquire clients, switching costs that prevent customers from leaving, and growing and recurring revenues.





The next images shows which products and services are targeted at the customer. In the case of our example this is simply a cloud-based business Model Web App and dedicated teamspaces for clients or teams.





The following image shows how the Value Proposition is expected to relieve pain. This includes simplified production of business model documents and documentation, decreased risk of having various versions of the same business model document circulating, and a collaborative platform that makes working together easier.





The last image shows how the Value Proposition is expected to create gains. This includes the support for business model consulting, tools that just work, customization, smooth and continuous client communication and follow-up, and lastly, the fact that it creates switching costs for a consultancy’s clients.





How it all started

The JOBS concept is an approach that I read first about from Tony Ulwick of Strategyn (cf. Understand Customer Needs) and then from renowned Harvard Professor Clayton Christensen’s consulting firm Innosight (cf. Generating Breakthrough Solutions Using Jobs to Be Done).

I now frequently use the JOBS concept in my workshops because it helps business model innovators look at Value Propositions from a totally new perspective. Check out how Clayton Christensen explains and illustrates the JOBS concept in the video below:





The idea for a visual JOBS Canvas came up when I met with Mark Johnson last fall. Mark is co-founder of Innosight and author of the excellent business model book Seizing the Whitespace. In our conversation we chatted about the fact that the JOBS concept is tested and proven, but that there is no visual template for it like for the Business Model Canvas. That is a pity, since I have come to learn how powerful visual templates can be to foster strategic conversations and innovation. Hence, I set out to design a JOBS Canvas.

The JOBS Canvas would be like a plug-in that complements the Business Model Canvas. I started using the term “plug-in” for methods that either allow going into more detail for a specific building block of the BMC or allow mapping another strategic aspect that is not directly covered by the BM Canvas.

While iterating through several conceptual designs I quickly realized the value of mashing-up the JOBS concept with other approaches. I threw other concepts into the mix, notably the Customer Empathy Map (outlined in #bmgen, but coined by XPLANE, which is now part of Dachis Group), the problem-solution fit (a lean start-up concept), a working paper from 1996 by NYU on Reinventing Value Propositions (pdf), and Steve Blank’s Customer Development Process (outlined in his invaluable book The Four Steps).

If you found this blogpost interesting, don’t hesitate to test the Customer-Value Canvas v.0.8 and provide me with some feedback. I’ve already seen how it works for several people and groups, but I’d be curious how it works for you!

I deliberately left the Customer-Value Canvas v.0.8. in a raw form so you realize it’s still a prototype concept

Visual Thinking is central to designing, testing, and building business models. So I was really excited when Dan Roam accepted to write a guest post on the Business Model Alchemist. His brand new book “Blah Blah Blah: What to Do When Words Don’t Work.” is THE reference book to have better conversations and effective meetings.

At the heart of a business.

At the heart of every business beat two essential elements: an idea and a plan. An idea without a plan is just a dream. A plan without an idea is just a list. For a business to grow and thrive, it must have both.

Sometimes the idea comes first: “How about we make a computer screen you can touch?” Add a plan (design + manufacturing + marketing) and you’ve got the iPad. Sometimes the plan comes first: “What would happen if we sold something other than books the way Amazon sells books?” Add an idea (online shoes!) and you’ve got Zappos.

The first reason I think Alex Osterwalder’s “Business Model Canvas” is the greatest business modeling tool of the decade is because it gives us a place to quickly translate any business idea into a testable plan – and vice-versa.

I’ve got a model. Now what?

But once we’ve developed and tested business model, there’s still one more critical step towards making a living business: we need to sell it to partners, investors, and customers. And that’s the second reason I love the “Business Model Canvas”: it provides us with the basis of the Vivid Story we’ll need to crystallize and communicate our idea. When I say “Vivid” I mean something very specific: a Visual-Verbal-Interdependent idea; an idea made absolutely clear because it is expressed with both words and pictures.

Let me show you. A word-only description of a complex idea is hard to “get” and equally remember. Because words always proceed in a single line, when they are finished we usually forget where they started. That’s a terrible way to describe a business.

A “Vivid” idea weaves together both words and pictures to create a visual+verbal image we can see, understand, and remember. And that is a great way to describe a business.

—

Dan Roam is the author of the international bestseller “The Back of the Napkin”, the most popular visual-thinking business book of all time, named by Fast Company, BusinessWeek, and The Times of London #1 creativity and innovation book of the year. For more insights on the power of power of Vivid Thinking look at Dan’s new book, “Blah Blah Blah: What to Do When Words Don’t Work.”

More on Dan at www.danroam.com.

Ultimately, customers are the only relevant judges of your business model. However, even before you test your model in the market, you can assess its design with 7 questions that go well beyond the conventional focus on products and market segments.

First things first. In order to assess your business model you should sketch it out on the Business Model Canvas outlined in the video below. If you want to know more about the Canvas and how to use it you can read Business Model Generation of which 70 pages are available for free on our website.





Assessing the basics

Every business model has a product and/or service at its center that focuses on a customer’s job-to-be-done. I call this the Value Proposition. So before even turning to your business model as a whole, you need to ask yourself some basic questions related to your Value Proposition and the Customer Segments that you are targeting.

• First, ask yourself how well your Value Proposition is getting your target customer’s job done. For example, if a user of a search engine is trying to find and purchase the latest Nike running shoe, the measure of success will be how well the search engine helps the user get this job done.
• Secondly, ask yourself how many people or companies there are with a similar job-to-be-done. This will give you the market size.
• Thirdly, ask yourself how important this job really is for the customer and if she actually has a budget to spend on it.

That’s it as to the basics. However, even the greatest products are having an increasingly hard time to achieve a long-term competitive advantage. That is the reason why you need to shift your focus away from a pure product/market segment oriented approach towards a more holistic business model approach. Below are eight questions to assess your business model design. Rank your business model’s performance on a scale of 0 (bad) to 10 (excellent) for each question.

1. How much do switching costs prevent your customers from churning?

The time, effort, or budget a customer has to spend to switch from one product or service provider to another is called “switching costs”. The higher the switching costs, the likelier a customer is to stick to one provider rather than to leave for the products or services of a competitor.

A great example of designing switching costs into a business model is Apple’s introduction of the iPod in 2001. Do you remember how Steve Jobs heralded his new product with the catchphrase “thousand songs in a pocket”? Well, that was more than a product innovation focusing on storage. It was a business model strategy to get customers to copy all their music into iTunes and their iPod, which would make it more difficult for them to switch to competing digital music players. In a time when little more than brand preferences were preventing people from switching from one player to another this was a smart move and laid the foundation for Apple’s subsequent stronghold on music and later innovations.

2. How scalable is your business model?

Scalability describes how easy it is to expand a business model without equally increasing its cost base. Of course software- and Web-based business models are naturally more scalable than those based on bricks and mortar, but even among digital business models there are large differences.

An impressive example of scalability is Facebook. With only a couple of thousand of engineers they create value for hundreds of millions of users. Only few other companies in the world have such a ratio of users per employee. A company that has pushed the limits even further is the social gaming company Zynga. By building games like Farmville or Cityville on the back Facebook, the world’s largest social network, they could benefit from Facebook’s reach (and scale) without having to build it themselves.

A company that quickly learned its lessons regarding scalability was peer-to-peer communication company Skype in its early days. Their customer relationship collapsed under the weight of large numbers, when they were signing up ten thousands of users per day. They quickly had to adapt their business model to become more scalable.

3. Does your business model produce recurring revenues?

Recurring revenues are best explained through a simple example. When a newspaper earns revenues from the sales at a newsstand they are transactional, while revenues from a subscription are recurring. Recurring revenues have two major advantages. Firstly, the costs of sales incur only once for repetitive revenues. Secondly, with recurring revenues you have a better idea of how much you will earn in the future.

A nice example of recurring revenues is Redhat, which provides open source software and support to enterprises based on a continuous subscription basis. In this model clients don’t pay for new software versions because it is continuously updated. In the world of Software as a Service (Saas) these types of subscriptions are now the norm. This contrasts with Microsoft, which sells most of its software in the form of licenses for every major release.

However, there is another aspect to recurring revenues, which are additional revenues generated from an initial sales. For example, when you buy a printer, you continue to spend on cartridges, or when you buy a game console, you’ll continue to spend on games. Or have a look at Apple. While they still earn most of their revenues from hardware sales, the recurring revenues from content and apps is steadily growing.

4. Do you earn before you spend?

This one goes without saying. The more you can earn before spending, the better.

Dell pioneered this model in the computer hardware manufacturing industry. By assembling on order after selling directly they managed to escape the terrible inventory depreciation costs of the hardware industry. Results showed how powerful it is to earn before spending.

5. How much do you get others to do the work?

This is probably one of the least publicized weapons of mass destruction in business model design. What could be more powerful than getting others to do the work while you earn the money?

In the bricks and mortar world IKEA gets us to assemble the furniture we buy from them. We do the work. They save money. On the web Facebook gets us to post photos, create and participate in conversations, and “like” stuff. That’s the real value of Facebook, entirely created by users, while they simply provide the platform. We do the work. They earn the sky-high valuations of their shares.

Previously mentioned Redhat crafted another smart business model based on other people’s work. Their entire business model is built on top of software developed by the open source software development community. This allowed them to substantially reduce their development costs and compete head-on with larger companies like Microsoft.

A more malicious business model in which others do the work is the one practiced by so-called patent trolls. In this model patents are purchased with the sole intention of suing successful companies to extract payments from them.

6. Does your business model provide built-in protection from competition?

A great business model can provide you with a longer-term protection from competition than just a great product.

Apple’s main competitive advantage arises more from its powerful business model than purely from its innovative products. It’s easier for Samsung, for instance, to copy the iPhone than to build an ecosystem like Apple’s appstore, which caters to developers and users alike and hosts hundred thousands of applications.

7. Is your business model based on a game changing cost structure?

Cutting costs is a long practiced sport in business. Some business models, however, go beyond cost cutting by creating value based on a totally different cost structure.

Skype, for example, provides calls and communication almost like a conventional telecom company, but for free or for a very low cost. They can do this because their business model has a very different cost structure. In fact, Skype’s model is based on the economics of a software company, while a telecom provider’s model is based on the economics of a network company. The former’s costs are mainly people; while the latter’s cost include huge capital expenditures in infrastructure.

Similarly, Bharti Airtel, one of the world’s largest mobile network providers, has substantially modified its cost structure by getting rid of their entire network and IT. By buying in network capacity on a variable cost basis from a consortium around network equipment manufacturer Ericsson and IBM, they can now offer among the lowest prices for mobile telephony globally.

Redhat, which was mentioned previously, also built its business model on a game changing cost structure: by smartly building its own model on top of other people’s work.

How does your business model design perform?

Of course no business model design scores a perfect 10 as to every single one of the above questions. Some might even succeed in the market without scoring well at all. However, by asking yourself these questions and by scoring well on at least some of them you are very likely to substantially increase the long-term competitive advantage of your business.

Now all you need to do is test your business model with the real judge: the market. The best way to do that is by turning to Steve Blank’s Customer Development process, which fits perfectly with the Business Model Canvas.

Some more info on my workshops, speaking, and projects.

PS: I will be running a series of workshops you might be interested in. Sign-up or pre-sign-up here. In Paris (French: Sept 27/28), in Boston (Oct 27/28), and in Munich (German: Nov 24/25).

PS2: These days are your last chance to get your name into a book project that I’m involved in: Business Model You. Check it out here.

PS3: I wrote this post as a guest post for the Business of Software conference where I’ll be speaking in October.

I wrote about Computer Aided Design Tools (CAD) for business people years back in my doctoral dissertation. With the Business Model Toolbox for iPad we now made the first concrete steps towards a whole new breed of computer aided business design tools. The Toolbox combines the speed of a napkin sketch with the smarts of a spreadsheet. It enables you to map, test, and iterate your business ideas — fast.

It always struck me that we have relatively few good software tools in business to think through more strategic issues. We do have sophisticated business analytics tools to make sense of large amounts of quantitative data. We do have spreadsheets to simulate complicated financial scenarios. Yet, what do we have today to design and test strategies and business models? Little.

That’s exactly why the team behind the bestselling book Business Model Generation developed the Business Model Toolbox for iPad (V.1.0.) together with Geneva-based development firm Hortis le studio.

Watch my rough and improvised demo. It’s filmed with my iPhone in the middle of Berlin where I’m giving a keynote at Process World 2011 – more sophisticated product videos to come soon

The Toolbox V.1.0. focused on three core activities required to prototype business models:

• Sketch your business model using the practical methodology from the best-selling book, Business Model Generation.
• Add ballpark figures for market size, revenue streams, and costs — faster than any spreadsheet.
• Test the profitability of your ideas with a quick report and breakdowns by offer, customer segments, and costs.

Below are the screenshots of the simple example I sketched out in the video…

Starting a simple business model prototype (without costs)




Adding revenue streams: sales through the app store (and paying a Apple a 30% cut of your sales)




Playing with revenue stream ideas: what about a Web subscription?




Report view of a more complex business model




Obviously, many people asked us why just for the iPad. As soon as we launched they immediately asked for Android and Web versions. From a business perspective it might have indeed been smarter to start with a Web app because of its broader reach. This is particularly true, since we started developing the Toolbox when it was far from clear if anybody would buy an iPad.

The reason we went for the iPad first is because I firmly believe that the touch interface and the relatively large screen of the iPad will allow us to demystify and democratize the prototyping of business models – just like the visual design of the Business Model Generation book helped demystify and democratize business model thinking and thus make it accessible to a larger audience than the usual business book readers.

By going for the iPad first and the Web second we wanted to show what’s really possible when it comes to prototyping business models. Using your fingers to pull in virtual sticky notes just feels so much more natural than using a computer mouse, doesn’t it? The iPad app allowed us to test and validate this theory.

Today there are about 19 million iPads in the market (read more) and there is no doubt that Apple is currently dominating the tablet market. More interestingly, a majority of the senior executives and entrepreneurs I work with have an iPad. Some of them even bought an iPad just to use the app. For all others we will have good news later this year. The Business Model Foundry will continue to develop breakthrough tools for the Business Model Generation.

Go get the Business Model Toolbox for iPad if you don’t have it yet and got curious after reading this post. It will help you build better business models at the price of a lunch. Is a better business model worth it?
read more…
buy it on the appstore…


PS: Here at Process World 2011 in Berlin where I currently am at I’ll give a keynote about bridging the gap between business strategy and processes through the Business Model Canvas. Already, Software AG, one of our partner companies and organizer of Process World, has integrated the Business Model Canvas into ARIS, their business process management tool (read more).

The Business Model Generation is about people who strive to defy outmoded business models. They are visionaries, game changers, and challengers who want to design tomorrow’s enterprises. To succeed on this journey they will require new tools, such as the Business Model Canvas and Steve Blank’s Customer Development. In this post I outline how they fit together.

This post comes mainly as a reaction to the various attempts by others to adapt and merge the Business Model Canvas with Customer Development for the entrepreneurial context. While it’s great and fascinating to see how people are tinkering with Steve’s and our method to adapt them for their start-ups, I am also worried that they lead young companies down the wrong path.

Steve and I have both already written about how our methods fit together here (Steve) and here (me). However, this time I took some time to sketch out a more detailed start-up process that merges the concepts and tools from Steve’s bestselling The Four Steps to the Epiphany and our globally bestselling Business Model Generation – A Handbook for Visionaries, Game Changers, and Challengers. Additional concepts and tools, such as Eric Ries’ Lean Start-up, may be added subsequently.

I will illustrate this process through the fictional story of Dave Sanburn, a former finance type based in Dallas, who decided to launch his own start-up. His entrepreneurial story all started with an unsatisfied customer need that gave him the idea for his start-up.

1) The Business Idea and Initial Stress Tests

Dave likes wearing tailor-made shirts, but sees shopping as a chore. He used to buy these kind of shirts during his business trips to London, but was never really satisfied, neither by the experience nor the price. When Dave realized that it was not so easy to conveniently find and buy tailor-mode shirts in Dallas he wondered if this could be a business idea worth pursuing.

Ideas for a business can have various origins. Sources could be:

• An unsatisfied customer need like Dave’s. In fact, many successful entrepreneurs launch a start-up because their own personal needs couldn’t be satisfied by the market.
• A technology (innovation) that allows doing business in a different or more efficient way. Think of how Skype started offering free phone calls because they used the readily available and free Internet as an infrastructure, rather than a proprietary network.
• A new product or service that the market hasn’t seen yet, or that is offered with a different or better value proposition. The Nespresso machine is an example of the former, while cheap flights by Southwest, easyJet or Ryanair are an example of the latter.

Let’s get back to Dave and help him run a first rough stress test of his business idea. Dave should look at four areas: customers, key trends (e.g. technology), competitors, and the macro environment. (These for areas are a simplification of the Business Model Environment outlined in Business Model Generation).

Dave should investigate a series of questions related to each of the four areas:

• Customers: Who could the customers for the business idea be? What jobs are they really trying to get done? Are there enough potential customers? Do they have buying power? Are they easy to reach?
• Trends: Could some of the key trends render the business idea obsolete in the future (e.g. tech trends, legal trends, etc.)? Are key trends going to boost the business idea in the future (e.g. socio-economic trends, etc.)?
• Competitors: Which other companies are already operating in this space? What are the substitute products and services? Which actors (competitors or partners) are key in this space?
• Macro environment: Which macro-factors must be in place to make the idea reality (e.g. infrastructure, talented employees, etc.)?

In the graphic below I added four of the concepts from Steve’s The Four Steps to the Epiphany, which I think can be of tremendous help at this stage (additions in red).

Regarding customers (right-hand side), Dave should start sketching out some first rough customer hypotheses and problem hypotheses. Steve’s book contains excellent worksheets with questions to develop the hypotheses. Regarding competition (left-hand side), Dave should add a first rough take on the market type hypothesis and competitive hypothesis.

Stress-testing the business idea is part desk-research (thank you Google) and part “getting out of the building”, to use Steve Blank’s terms. The goal of this phase is to figure out if a business idea is worth pursuing.

2) Business Model Prototyping – Generating Alternatives

After some initial research Dave decides to continue investigating his business idea. The question is: how can he offer tailor-made shirts in a viable way and how can he turn this into multi-million dollar business?

At this point many entrepreneurs fully focus on the product or service they are planning to offer. Big mistake. It’s far more illuminating to sketch out and think through several alternative business models for a product, service, or technology.

The same product, service, or technology may fail with one business model, but succeed with another. For example, few people know that Nespresso – today a 2+ billion USD business owned by Nestlé – almost failed in the late 80s because of an unsuccessful business model. With exactly the same product and technology (Nespresso machines and pods), but a very different business model, Nespresso started its global conquest of the espresso market.

I call this phase business model prototyping. It’s the one that business people and entrepreneurs struggle most with. Rather than sketching out 4-6 potential business model alternatives in 60 minutes, most people feel more comfortable merely discussing ideas or one single business model. Big mistake. It’s more valuable to have several business model alternatives on the table so you can discuss their strengths and weaknesses.

To compare the different potential business models you particularly want to play around with ballpark figures for each alternative. You can either do this with a spreadsheet or even more conveniently with our upcoming iPad app (don’t ask for the release date .

3) Selecting a Business Model: Plan A

After going through several alternatives and comparing them with a set of criteria Dave has selected the one he thinks looks most promising. It’s illustrated in the next three images.

This first Business Model Canvas below illustrates the basic model of offering tailor-made shirts that are manufactured in China to white-collar office workers in big US cities. The hundred million-dollar question is of course how to reach them, i.e. through which channels?

This is where Dave’s business model becomes special. He plans to operate no stores and no sales force. His intention is to generate sales through independent “style advisers” who will earn commissions of up to 25 percent on clothing they sell.

The second Canvas illustrates the value proposition that shall attract the “style advisers” who will essentially be recruited by other advisers. Like in most direct-sales companies, advisers will get a cut of the sales made by reps they recruit.

The last Canvas shows how Dave’s company is different from most other shirt retailers. For example, he operates no stores, no sales force, and only manufactures shirts that have already been sold.

4) Testing the Business Model – Customer Development

As attractive as this first business model might look, it’s nothing else than a set of guesses. Nobody knows if it’s really going to work? This is where the real value of Steve Blank’s Customer Development kicks in. Each post-it note in the Canvas should be turned into a hypothesis and then tested. In Steve’s 4-step methodology this is the first phase called Customer Discovery.

Visually this can be represented with three layers. A first (Canvas) layer represents the business model. This is what we just outlined above with Dave’s example of a tailor-mode shirt maker. The second (Canvas) layer outlines the underlying hypothesis for each post-it note. The third (Canvas) layer turns each hypothesis into a test, so that it can be verified and measured.

Let’s briefly go through these three layers with a simple example that Dave could put in practice:

• Business Model Layer: In the business model Dave might define a price point of 150.- USD for a shirt, because he thinks his shirts need to be about 50% cheaper than a similar shirt sold through traditional retail. The profitability of his business model is calculated based on this price.
• Hypothesis Layer: The underlying hypothesis for this price point is that customers would not buy if the shirts were more expensive, but wouldn’t buy many more shirts if they were cheaper (else Dave risks leaving money on the table).
• Test (and Measurement) Layer: A way to test the above hypothesis would be a field trial with different prices. Another way to test the hypothesis would be to set-up a different websites with different prices and analyze customers’ response rates.

The challenge for Dave is to develop the three layers for each business model building block and post-it note in the Canvas ranging from customers, over value proposition, all the way to resources, and cost structure.

When Dave tests the business model with customers he is likely to modify it in an iterative fashion every time he learns more from customers. Once he thinks he’s got it right, he can continue with the remaining 3 steps of Customer Development, notably Customer Validation, Customer Creation, and Company Building.

ps

• The fictional example of Dave is based on the real-world example of Dallas shirt-maker J. Hilburn, that combines direct sales with custom tailoring. I learned about the company in a Businessweek article.
• Pardon me the typos and mistakes in this post. It’s 2am after a long day, but I just wanted to get this post out (and I definitely didn’t have the energy to re-read it)!

Originally I was planning to write a post on “Why The Crazy Facebook ($50B) and Twitter ($3B) Valuations Might Just Make Sense” by highlighting the key characteristics of their business model (e.g. scalability). However, I thought it would be way more fun to reverse engineer Facebook’s business model with ballpark figures in collaboration with you, my smart and loyal blog readers.

I sketched out the kernel of their business model and researched/guesstimated some numbers, since it’s always easier to start from something rather than from a blank sheet (or Canvas).





The above Business Model Canvas was sketched out with the Alpha version (V.0.7.0) of our upcoming iPad App. The numbers were researched on the Net and are still far from complete. Hence, your help and insights would be much appreciated.

Some numbers, like the fact that there is a ratio of about 250′000 users per Facebook employee, are pretty easy to find and calculate. Others, e.g. like the ad spending of Fortune 500 companies on Facebook (if anything like that exists) is much more difficult to research. Also, I rely on your knowledge for numbers such as the estimated IT cost of the Facebook platform.

Add your thoughts in the comment section! Below are the numbers I gathered today in my little temporary office in a fairy tale chalet in the Swiss Alps.

NUMBER GUESSTIMATES

Users/Customers

• Number of monthly active FB users: 500M (source: FB factsheet)
• Number of daily active FB users: 250M (source: FB factsheet)
• Average time users spend on FB per month: 1′400 minutes -> 46 min/day (guesstimate source: FB factsheet)

Resources

• Number of employees: 2k (source: FB factsheet)
• Number of servers: ???

Costs

• Average salary (guesstimate): 150k (source: glassdoor.com FB salaries)
• HR costs: 300M (deduction)
• IT costs (guess):????

Revenue Streams

• Advertising – Average CPM: $0.625 (source: Blogpost)
• Annual page views: 3.12 Trillion (source: Blogpost)
• Facebook Credits: 30% revenue cut (source: TechCrunch)

OPEN QUESTIONS

• How high could Facebook’s costs for its IT infrastructure (capital expenditure and operating costs be? This could probably be estimated by comparing to Amazon.com, Google, eBay, or Yahoo!
• How could its advertising revenues (e.g. banners and text advertising breakdown) really be?
• What budgets are Fortune 500 companies putting into Facebook advertising?
• How many SMEs and micro-enterprises are using Facebook for advertising?
• How much could Facebook already be earning from Facebook Credits, even if this virtual currency is still in Beta?

Don’t hesitate to point out any other big things that are missing! This is just a first sketch of a reverse engineered business model!

If architects conceived and constructed buildings the way we do start-ups there wouldn’t be much standing. I’m deeply convinced we can change that and substantially increase the odds.

Admittedly, launching a start-up means dealing with more unknowns than in architecture. The former deals with unpredictable markets and potential customers, while the latter deals with solid materials and the laws of physics.

However, while an architect uses concrete tools and systematic methods to come-up with and construct his buildings, most start-up entrepreneurs shape and build their ideas pretty much barehanded in terms of tools and methodologies. I’m convinced that this is a more important reason for the high failure rate of start-ups than the unpredictability of markets.

To boost start-up success we need to look at entrepreneurship as a science or at the very least accept it as a profession with its own fundamental rules and methodologies (and the same goes for intra-preneurship).

The slidedeck below gives you the 101 of such a systematic start-up process by combining the business model concept to shape and structure your business ideas with the customer development approach to test, prove and build them. Check-it out (and don’t forget to vote for the presentation in the slideshare contest!)

I’m pretty excited about all this because I believe it’s the beginning of a whole new movement that could become an avalanche.

Silicon Valley start-up guru Steve Blank is teaching this at Stanford next year together with two world-class VC’s, Ann Miura-Ko of Floodgate, and Jon Feiber of MDV.

Nathan Furr, a professor at Brigham Young University, is launching the first international business model competition.

And we are working on the first basic iteration of an iPad app to support all this business model thinking (yes, yes, we are slightly behind schedule – but we’re not that far from finalizing .

Are YOU going to be part of this exciting movement?

Earlier this week Karin Wall, chief editor at InnovationManagement, interviewed me about my work. You can check out the blogpost or read the interview below.

Karin: 1. What is innovation management to you?

It’s about harnessing the knowledge, experience, and passion of a company’s employees in order to continuously create value and increase returns. That means building the right managerial and organizational structures, providing the right incentives, and fostering the right innovation culture that promotes the development and implementation of new ideas. That might sound like a grandiose task, but it can start with something as simple as building meeting rooms with whiteboards and moveable furniture. However, the most important is consistency. You need to show that you’re serious about innovation.

Karin: 2. What’s the most satisfying part in your job?

When people who never before have read a business book put our innovation tools to work and get better results. Our team spends an endless amount of time to make the concepts we come up with as simple, as accessible, and as applicable as possible. It’s particularly since my co-author, Yves Pigneur, and I have started working with designer Alan Smith that we achieved a breakthrough. We now strive to change the way business books and business tools look: simple, accessible, and useable. Tackling big questions like that is the most satisfying in my work.

Karin: 3. And the most frustrating parts?

When great ideas and passionate innovators get ‘killed’ by internal company politics or 19th century management structures. In many large organizations politics has become more important than value creation. That’s why there’s an urgent need for management innovation: to enable passionate innovators to strive within large organizations and not just as start-up entrepreneurs. Many of the most brilliant innovators will leave their organizations to build their own company because they can’s strive within. The ‘war for talent’ is still a big topic, but I’m not so sure companies really understand what it takes to attract and satisfy innovators. A fat paycheck alone won’t suffice.

Karin: 4. What’s your next big challenge?

I’m working on a couple. The first one is about building software-supported tools that boost business model innovation. The challenge is to make them so simple, intuitive and accessible that we can reach new audiences: for example first-time entrepreneurs with a new idea, but no formal business education – all the way to senior executives. Hence, we started working on an app for the iPad with which you can sketch out business model prototypes.

The second challenge I’m working on is to design conceptual tools that helps so-called social entrepreneurs build businesses that make a profit and change the world. Increasingly, business model innovation allows tackling the big issues in the world (e.g. poverty alleviation, sustainability, social issues) with innovative and profitable models.

The third challenge is simply about continuing to grow the tools for (business model) innovation. We are trying to achieve this in an open source manner. We designed some tools to start with, such as the Business Model Canvas, and hope others will contribute to this kernel. For example, we are currently working with Sillicon Valley guru Steve Blank, to integrate his method, Customer Development, with ours. We need an innovation toolbox that goes beyond the individual authors who come up with the methods.

Few of the entrepreneurs I meet spend sufficient time exploring alternative business models for their products, services, or technologies. Too often I see them fall in love with their initial idea and then they immediately dig deep into spreadsheets and business plan writing. That has a great risk!

Failing to explore alternative business models before you choose a direction bears the great risk of getting ‘ankered’ with an inappropriate, mediocre or even bad business model. It becomes very hard to explore alternative business models when you’ve refined your first idea too quickly.

Of course there’s a reason that so many entrepreneurs and intrapreneurs stick to their initial business model idea. Few actually realize that the same product, technology, or service could have very many different business models. Now how could they do a better job to increase their success chances of creating a successful new business (model)?

This is where we business people should look to the design professions for help. After all it’s their business to create new things. This is what the Weatherhead School of Management of Case Western learned when they worked with star architect Frank Gehry and his team. Among other things they realized how important prototyping could become to design new strategies. Watch the video to see what they discovered:

I particularly loved the following quote at the end of the video by Jim Glymph of Gehry Partners:

“If you freeze an idea too quickly, you fall in love with it. If you refine it too quickly, you become attached to it and it becomes very hard to keep exploring, to keep looking for better. The crudeness of the early models in particular is very deliberate.”

Every serious entrepreneur and intrapreneur should apply the same type of attitude if he or she wants to find the best business model for his or her technology, product, or service. Here a couple of tips what you should pay attention to when making business model prototypes:

• Use the Business Model Canvas Poster to sketch out as many different business models as possible.
• Don’t discuss and decide which business model to sketch out on the Canvas. Do them all! Only then can you have a valuable discussion on what could work or not.
• Don’t spend 60 minutes sketching out an early and unproven model in detail. That hour is better spent by sketching out four to five ideas in a very rough manner.
• Sketch out each idea on a separate Canvas. For example, use two different Canvases for two very different customer segments.
• Sketch out diametrically opposed models. For example, ask yourself “what if I offered my product for free…” vs. “what if I offered my product only to the very high-end market…”

In Business Model Generation – A Handbook for Visionaries, Game Changers, and Challengers we tried to make a clear case for business model prototyping. I think the following spread from the book visualizes our thinking pretty clearly:

In the book we also outline different types of business model prototypses, ranging from the Napkin Sketch to the Business Model Pilot.

I hope this convinces at least some entre- and intra-preneurs to spend some more time on their business model rather than on their business plan… Don’t fall in love with your idea too quickly!

I’m writing this blogpost following another inspiring discussion with Steve Blank. One of the topics we chatted about was how his Customer Development process and the Business Model Canvas fit together. I wrote these ideas down while visiting Steve’s K&S ranch – inspired by its beauty, surroundings and amazing view on the Californian coast. I’ll illustrate the ideas with an example from the field of social entrepreneurship.

In a nutshell, this post shall help entrepreneurs and intrapreneurs develop better business models by designing and exploring multiple alternatives, closely listening to customers and continuously adapting their early models until they find the right business model to scale. I believe a start-up or new venture’s quest for the right business model should consist of three rough phases:

• Designing a starting model
• Iteratively adapting your starting model in response to market feedback
• Scaling it when you nailed it

All three phases can be supported by the tools and concepts outlined in Steve’s book on Customer Development and our book on Designing Business Models. We provide you the tools to map, design and discuss a business model. Steve provides you the mindset and tools to continuously “test” your model and your assumptions with customers until you find the right business model to scale.

The Case Study

Let me outline the three phases above with a case I often use in my business model innovation workshops. It is an example of a Swedish organization that developed a single-use toilet bag, the Peepoo bag for the so-called Bottom-of-the-Pyramid market of over 2 billion people who lack access to proper sanitation.

Peepoople, the company behind the Peepoo bag, is a particularly interesting case because it combines a journey for the right business model with a quest for meaningful impact. No easy task. At this very moment Peepoople is on its search for the right business model: one that is financially viable, and scalable in terms of growth and impact.

Now let us look at the three phases outlined above through the lens of the Peepoople case.

Designing a starting model

Many entrepreneurs and intrapreneurs underestimate that a great new technology, product or service can be insufficient to build a successful and sustainable business. Because of their trust in a technology’s, product’s or service’s superiority they fail to spend enough time exploring alternative business models. They often go with the first model they come up with. Yet, entrepreneurial history is littered with great technologies, products and services that bombed.

Entrepreneurs and intrapreneurs could greatly improve their success chances by spending more time with searching and finding an empowering business model. Every technology, product or service can be brought to market by several alternative business models. The challenge is to find the best and most scalable one.

Peepoople, for example, has a proven product/technology that works and was tested – the Peepoo bag. However, the company acknowledges that this is only a starting point. The management team knows that it has to think through several possible business models in order to find one that is sustainable AND has a substantial impact.

So let us use the product (Peepoo bag), its characteristics, and the context as the starting point to develop alternative business models:

• A single use toilet bag: it is designed to be conveniently used with any type of recipient and it effectively prevents odors;
• Self sanitizing; it inactivates organisms that produce diseases and are found in faeces;
• Biodegradable: it is made of a high performance degradable bioplastic
• Turns into fertilizer: the treated faeces constitute a high value fertilizer with a considerable market value
• Low production cost (numbers confidential);
• Aimed at substantially reducing the sanitation problem in the world;
• In many developing markets people already pay for (limited) access to sanitation (e.g. public latrines in slums)

Based on the above we can map out several different alternative business models for Peepoople’s product. Here the emphasis is on “mapping”, which means putting a Business Model Canvas poster on the wall to quickly develop conceptual prototypes. Let me just mention a few possible ones:

• Not-for-Profit Model: Traditionally, an organization like Peepoople would seek donors to fund the distribution of Peepoo bags to beneficiaries. Like myself, the management team of Peepoople doesn’t see this as a sustainable business model nor as one that will achieve the most impact.

  

• Cross-Subsidy Model: Peepoople could sell the bags to a premium segment (e.g. to hikers in the Swiss Alps, or as military supplies) in order to fund the free distribution of the bags to beneficiaries. Financially this model already looks more robust than the first.
• Sales/Retail Model: Why not try to sell through traditional retail among the mini-shampoo bottles sold to the BoP market. Sanitation is a basic need and there is already a market for public latrines.
• Micro-Finance/Micro-Entrepreneurship Model: Another powerful way to bring the bag to the market could be an alliance with a micro-finance institution which would finance micro-entrepreneurs to buy bags. The entrepreneurs would then resell the bags.

  

• Licensing/Franchising Model: Peepoople could go down a completely different path and simply license its technology to different institutions. Alternatively, it could build a franchise model to quickly scale its growth.
• Resource Model (Fertilizer): Fertilizer is a very valuable good in BoP markets. Why not give the bags away and even pay people to bring them back full. Revenues would then be come from selling the fertilizer to farmers.

These are just some of the potential business models for the Peepoo bag. Others could include white labeling the technology, building brand alliances (e.g. distribution with mobile phone prepaid cards), advertising on the bags, and many, many more. What is important is to spend some time with quickly mapping out alternative business models before defining the criteria to select the one to go with. Selection criteria can be growth potential, risk, impact, etc.

An essential part of this first design phase is to carefully observe and understand (potential) customers. The business model alternatives you come up with should be informed by deep customer knowledge. Steve Blank nicely describes this as Customer Discovery, the first of four steps in his Customer Development Process

you need to leave guesswork behind and get “outside the building” in order to learn what the high-value customer problems are, what it is about your product that solves these problems, and who specifically are your customer and user.

Iteratively adapting your starting model to customer/market feedback

When companies have spent substantial time, effort, and money searching for a business model (e.g. for a new product or service) they are often under the illusion that they nailed it. Yet, a “starting business model” is just that: a starting point – based on a number of assumptions and hypothesis. Even with the most elaborate design phase, the smartest people, and the largest budget, it is pretty rare that entrepreneurs or intrapreneurs immediately get the business model completely right.

The Customer Development process assumes that many of the initial assumptions about your business model are probably wrong, which you will find out in the second step of the process, Customer Validation. It is only when you start testing a business model or aspects of it with customers that you will find if your hypothesis were right or wrong. Hence, the Customer Development Process builds in an iteration loop to fix the shortcomings of your business model. Eric Ries, who built on Steve’s work, coined this business model iteration loop the Pivot.

The Business Model Canvas powerfully supports this iteration and pivoting process through visualization and structuring. Steve nicely described this as keeping score of your pivots.

Peepoople is just now entering the iterative phase where they are testing business models in Kibera, a slum in Nairobi, Kenya. The challenge will be to continuously search for the most powerful business model and only settle when they found a scalable one.

Scaling it when you nailed it

It is probably only after several iterations and pivots of your business model that you will really “nail it” and find the right one. That is when it is time to scale. In the terminology of Customer Development this is called Customer Creation, when you start “creating end-user demand and drive that demand into the company’s sales channel”. Only at the very end should you focus on Company Building “where the company transitions from its informal, learning and discovery oriented Customer Development team into formal departments with VPs of Sales, Marketing and Business Development”.

Unfortunately, I’ve seen too many companies get caught up in this last (operational) step when they haven’t even “nailed” the business model.

As to Peepoople, I’m pretty curious to see how the company will manage business model iterations and pivots. It does have a great technology to start with, but only a scalable business model will allow it to have an impact. However, I have great confidence in Karin Ruiz, its CEO. She combines private sector experience, a passion for impact, and the knowledge that only the right business model will allow Peepoople to make a difference in the world.