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.
Alex, the customer discovery process is key in all business development, since the only reason why a business exist is to satisfy customers that are willing to pay for the service.
In my opinion we go often too fast to the value architecture of a business model. We talk about products, channels. The key to a great business model is the value proposition. And all great value proposition start with a deep understanding of the customers’ and partners’ deeper needs. In the case of peepoo it is important to understand if there are customers that are willing to pay for use of peepoos. They could be different from the users and that is where the business modelling is coming in. You can discuss the different potential solutions. Discuss all the different potential value propositions. But the prove has to be the reality and that is often quite different from the original thoughts.
But as a starting point you have to have customer insights to develop the right value proposition. You have to observe the people, not asked them. Build prototypes to test your model, adapt it to reality. This customer adoption takes time since people have to change their behavior.
As a Swiss, you might also be interested in the Swiss low-tec version for water disinfection, transparent PET or glass bottles exposed to sun. Check Sodis at http://www.sodis.ch/index_EN
Alex,
Excellent discussion, and very timely. We are in the process of going through this with a startup non profit/social good business. I am both a follower of Steve/Eric as well as your Bus model stuff and its nice to see discussions combining the two.
Kevin, great that you appreciate the combination. Steve and Eric’s work indeed and ours are indeed very complementary.
Patrick, I couldn’t agree more and as you point out, in this context it is even more important: we want to know “who” is really willing to pay for “what value”. In the “traditional” not-for-profit field we too often base our business designs on unverified assumptions…
Customer discovery must be part of the journey throughout. That is why I drew “continuous customer interaction” (and observation, to be more precise) into the first diagram. In fact, that addition is a result of an exchange with Steve discussing at what point “you get out of the building”…
Hey Alex,
This is my debut post on your blog.
My partner is an entrepreneur enthusiastic about customer development (http://twitter.com/ericnsantos) and I’m currently managing the sustainability team of a multinational (www.embraco.com.br). In that context, I’ve been thinking heaps about how to use customer development to test different ideas for social benefit inside a corporation.
As odd as it might sound, it’s actually been very useful and effective. I’ve been testing what services I’m supposed to offer to different internal areas (R&D, operations, procurement, HR, etc) so they add value to what the areas do (their goal) while integrating sustainability into their processes (my goal). Same thing is applicable to external stakeholders – suppliers, media, community.
I’ve been realizing this approach invests less money, offers a clear differential and has an exit strategy, I mean, can be transformed into mainstream and liberate my efforts and budget for more advanced initiatives.
Well, please keep sharing your thoughts about social entrepreneurship. It’s a growing sector and can bring double benefits to society (prosperity and social/environmental positive impact).
Regards,
Gabi Werner.
Gabi, great to hear about your efforts around sustainability. Social entrepreneurship is indeed an important and growing part of the economy and one I’m extremely excited about!
Hi Alex,
I love your blog. Can I ask what you use to draw your handdrawn semi-translucent diagrams in this post?
Hey Alexander, great post.
A bit of criticism (I hope positive): I’m also a big fan of Steve’s and Eric’s work but the way you put it in the post sounds like Customer Development is the only, or at least mayor, source for pivot in your business model, ignoring all the segments in your canvas not related with customers. I think is fair to point out that Customer Development will be your first source for pivots, but even when you have a strong product you may not realize a profitable business model. For example in the Micro-Finance/Micro-Entrepreneurship Model you have to go to check the suppliers (not customers) side and the channel to see if (and how cheap) can you develop a distribution channel and if there are MicroFinance institution in all you targets (at least in Mexico this is just starting).
I also have to say that I’m amazed by the simplicity and power of your BM Canvas! It’s just great to have an option to express BMs in a simple and visual form, it really helps to understand and visualize the missing links.
Martin, the images were sketched with Ideas from Adobe. Check out this image for all other possibilities to sketch/take notes/make visual recordings on the iPad:
http://www.flickr.com/photos/ninmah/4853668813/
Erich, very good observation. I fully agree that “customer validation” is not the only source of pivots. It is when you “test your model” in the market in a more general way, that you learn what works and what doesn’t.
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Great article. When you have a product with versatility power. Time, perseverance and networking will be in charge of finding success. I will love to test paying people to bring their used peepoo bag and pay them.
Recyclable PEEPOO.
Thanks for this article Alex, it really made me sit up and think what I have been doing all these years. I designed a disposable sanitary bin, a low carbon footprint model which now hangs on the wall and comes without those costly commercial contracts. I’ve struggled for years finding the right path to market, but now realise of course there are many paths, but just which is the best performer? Maybe some of your marketing terms are what I have been doing intuitively all this time.
I will print off your article and use it as a reference as I explore some of the terms and options you present. Thanks again, well done!
Helen, I wish you good look with your venture!
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Hi Alex,
I am from Peru. We do not have your spanish version of Business Model Generation book neither the English language version.
I can not find much information and graphics about the three layers during the hipotheses, testing and final canvas.
Could you please send me the right slideshare address to get it?
Luis, this is the presentation that Steve Blank and I put online:
http://www.slideshare.net/Alex.Osterwalder/successful-entrepreneurship-5747012
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