Creating a Business Model that Scales
Starting A New Business: The Ultimate Guide
Chapter 4: Creating a Business Model that Scales
Table of Contents
Create a Business Model that Scales
Let’s start at the most basic level with this. What is a model? The dictionary defines a ‘model’ as being ‘a thing used as an example to follow or imitate’.
And there you have it, a business model is a thing that you’ll follow to get stuff done.
Now let’s dig a bit deeper.
Business models are all the rage these days, how business models emerge and how business models work varies considerably. And so does the makeup of a business model.
Most companies, (around 7 in 10) are attempting to create innovative business models, and the vast majority, circa 98%, actively modify and review their existing ones.
What is a Business Model?
At the simplest layer, your business model should answer the following:
- Who you are selling to.
- Why they will buy from you.
- What you are selling them.
- How you are going to sell it to them.
- How it will make you a profit?
This represents a solid starting point. These same questions relate just as well to a business model for startups, as they do for considering what business model Starbucks uses or what business model Amazon uses.
We can present this in more depth – Harvard Business School suggests that a business model consists of 4 primary elements:
- The value proposition to the customer (what)
- Your key resources (how)
- Your business processes (how)
- The methodology for making a profit (what)
The detail required in your business model will depend on the scale of your business. A business model for consultancy services is likely to be lighter than the one needed for how to plan a supermarket business. And yet, the key questions will still need to be answered.
Your business model is your company’s primary strategy for building a profitable business and it should be able to account for how you take your inputs of your time, resources, products and services and convert them into a healthy profit.
Which Business Model Should I Choose?
Creating a business model is all about a series of choices.
We can see these opportunity costs as: if you pick A, you don’t pick B. The cost of doing A is not having B and so on.
When deciding on the business model to use, you’ll want to consider the impact of changing certain elements of it.
Let’s say you sell ice cubes. These are the single best ice cubes that can be created. They are all perfectly formed and maybe come in a range of sizes to fit different sized glasses. The business model you choose should constantly be addressing the questions posed earlier in the article (who, what, how, why) and seeking to answer them in the most efficient way.
People love your ice cubes as they are priced just right, your product addresses the customer’s need of wanting to cool their drinks down, but you aren’t going to be very successful if you sell online to consumers. By the time your product arrives it will be water. You will have unhappy customers and not much repeat business.
The task is to make choices for your business model that will deliver profit at the end, whilst optimising how you address the fundamental business model questions.
Larger companies
Larger companies will make different trade offs to a smaller business. We all know about banks or phone companies that, when we call them, we get through to a call centre and deal with a different person each time. Computer says ‘no’ etc. That, by any fair assessment, is a lower quality of service to the customer than the personal experience of a small business. But the services that the larger business can offer may provide sufficient value to us (access to finance, our mobile phones) that we derive sufficient value from the end product to tolerate the poor service when we interact with it.
You’ll need to think about cost when it comes to making choices about your business model too. It would be great to offer 5,000 products with guaranteed next day delivery, but if that means your model requires significant up front capital to buy and hold stock, then you might need to look again at your value proposition.
Identify your Target Market and Specific Audience
Be as specific as you can to build a buyer persona. This will help you ‘walk a mile in their shoes.’ Document their challenges and the problems you solve for them. You might be able to get what you need for your home DIY project from Screwfix, but they are mainly aimed at the trade market and they are created with this market in mind.
Here at Go Impartial, the stats show a wide variety of people find us and read our articles and resources. But the people that access our services are all in need of some form of accounting help and the site makes addressing that need easy.
Document your Business Processes
Map out the steps that need to take place for the creation of your product or service all the way through to delivering it to your customer.
More detail is better than not enough detail at this point.
If you sell a physical product, what’s the steps involved for ordering from your suppliers? Where will you store your products? What’s the process for sending them to your customer? How will you know when you are low on inventory? How do you collect feedback from the customer once the product is delivered?
If you’re a service based company, how will you allocate time? What paperwork needs completing? How will people book you?
At this stage, you can start with a series of questions that need to be answered – How your business processes will work. Then re-write them as a series of statements. For example, if you identified the question of ‘how we will order from our suppliers?’ Reframe this as a step that needs to go somewhere in a process – ‘Order stock from suppliers.’
Once you have your list of statements
Once you have your list of statements of tasks that need to be completed for your business processes to work, sequence them in a logical order. It follows that ‘ordering from your supplier’ is likely to come before ‘delivery to customer.’ You should be able to create a pretty comprehensive sequence of the processes that need to take place.
As your business processes become more thought through in your model, you’ll realise that some steps in your business may need to be invoked at different stages. Reordering items you are particularly low on, should probably happen as soon as it needs to. And not, for example, on a monthly basis.
At this stage, you might want to consider the use of some flowchart drawing software. There’s plenty of good ones out there and a handful of them are free. We like this one, called Visual Paradigm, which will let you create dependencies between steps in your business processes and to review visually what needs to happen and when.
Identify Necessary Business Resources
If your business processes answer the question of ‘what?’ Identifying the required business resources addresses the question of ‘how?’
If your ‘what’ and ‘how’ can get along with each other well enough without one of them thinking that the other is completely unreasonable. Then you might have the start of a plan.
Imagine you have a step in your business processes that involves hand delivering your products to every customer that orders. Because you believe this will massively increase the value proposition. Then you’re going to need considerable resources to do this – staff, vehicles, logistics software etc.
In this scenario, the ‘how’ makes the ‘what’ completely unviable.
Go back through your list of business processes and work out how you are going to deliver on them.
Your list of resources is going to include the capital you need for each step, you can take that as a given.
It will also likely include digital resources, such as the website, social channels, online marketing. Physical resources such as premises, vehicles, stock. Human resources such as your time and the time of people you’ll employ. Service resources such as phones, computers. Non tangible resources such as any intellectual property you’ll need, datasets, marketing assets.
You’ll get brownie points if you add to your flowchart a connection between the business process steps and the resources required. You’re in the elite brownie point club if you connect costs up at this point too. At this juncture, we’re drifting into business plan territory, which is covered in depth in another chapter.
Consider the Competition and Wider Market
Thinking about what the competition does for a business model is important. It can help you avoid potential pitfalls, narrow in on unique selling points and ultimately could allow you to entirely usurp the market place with fresh thinking.
Your business model, at its very core, is an idea. Nothing more than a concept really. It was Stephen Covey who created the idea of stage 1 and stage 2 creation. Stage 1 being in mind (everything starts with an idea) and stage 2 being in reality. Think of the example of cars. Go back just 150 years and everyone was commuting on horses. Then someone imagined cars and they steadily increased in number, everywhere. Or think back to (or look up) life before the internet. Then Tim Bernards Lee thought it up and brought it into existence. Your business model is no different. It does not (currently) cost anything to have a thought and you can explore mentally, by yourself or with others, some different models. A great place to start is with the competition and market place you plan to be involved in.
Fast food. Yum. A great tasty treat. But can you believe that your local fish and chip shop don’t deliver? No, neither could Deliveroo or Just Eat. They’ve made a transformative business by adding in local delivery services to all sorts of businesses that don’t have that capability.
There’s lots of examples of complimentary additions to existing markets you could factor into your business model. Cloud storage services, such as AWS or Microsoft Azure have stacks of potential for businesses, but many companies don’t have the internal expertise to navigate and configure them. That’s created a marketplace for expert companies that offer complimentary services for businesses looking to access cloud technologies.
Find your USP’s
More often than not though, factoring in your competitor’s business model is about spotting the opportunities and finding your USP’s.
It’s an obvious example, but look at the business model of Amazon, they have turned commerce on its head. It’s not a stretch to imagine the shopping list on your Alexa device being automatically delivered to their own supermarket in the coming years. At that point, the existing model of lots of physical buildings and retail staff may prove to be a disadvantage for the incumbent supermarkets.
Examine what the marketplace does well, what they do badly and think about that in the context of being a model. How can you improve upon it, or avoid making the same mistakes?
Develop your Value Proposition at Every Opportunity
What makes your product or service unique in the marketplace? What are the problems that you solve and the headaches you make go away? Why should your customers love doing business with you?
Here’s a big secret, your value proposition doesn’t have to be fundamentally different from your competitors in each and every way. It just needs to be distinguishable, so your customers can have an idea about why they should use you, rather than one of the million other companies that do something similar. In practice, if your core business is selling socks, or providing telephony services, then there will be common elements between you and your competition. So where does the value proposition come from?
Ask yourself if you are cheaper, faster, better, more informed, more up to date, have wider variety, are more responsive, have specialist knowledge, do things differently or a variation that no one else does.
Build it into your model
Once you have an idea about where your value proposition comes in, build it into your model. If you aim to be faster, make sure your delivery and service times are going to match. If you hang your hat on specialist knowledge, make sure you stay up to date. Remember, the downside to being clear on your value proposition is that if you get it wrong, the customer will notice that even more. If you’re selling on great service and hit someone with long unexpected delays, they are going to feel that and they won’t like it, as it will have formed part of your unspoken agreement about what they are getting into.
Make part of your model following up with customers to solicit feedback, in a way that reinforces your value proposition. By asking how well you did for service/price/knowledge.
Don’t Forget to Turn the Taps On: Creating Demand
It’s all very well having a model that meets a specific need, does it in a slick way and looks set to turn a profit on paper. But remember, if no one is buying your product or service, then all you have is a model without the accompanying business.
There’s an entire guide we could write on this topic alone, but the basics boil down to how will customers find you and how will you convert their initial interest into a sale when they do?
You can spend millions of pounds achieving this and you can also start with little more than a telephone and a desire to achieve.
Some fundamentals to think about though, when someone comes to your website, make it clear what you want them to do. Have one clear objective for each page. That objective might be the same, for instance booking a meeting, sending you an email, picking up the phone etc. The idea is that you should make it as simple as possible for the customer to get in touch once they’re on your site. This forms part of your business model, because if you’re not converting interest in business, then you can’t put the rest of your model into place.
Cut your cloth accordingly and decide what you can realistically do and what is sensible to do. If you have the budget, think about paid search for your site, you can also consider cold calling, email marketing, networking and social media campaigns.
Iterate or Die
Your business model is a living breathing thing, just like your business. If you’re old enough you’ll remember Woolworths, the high street shopping chain. Do you remember their website? No, nor us. Businesses that are too slow to evolve their business models can miss market opportunities and risk failure in the long run.
Nintnendo famously started its life in 1889 making playing cards. 130 years later they are globally renowned for their games consoles. And in 130 years time from now? Who knows? It’s a great example of updating business models as your business progresses.
When you are starting out, you have the freedom to explore and experiment with different models almost as fast as you can come up with them. There’s no bureaucratic decision making or heavy consequences to consider. Therefore, enjoy that freedom in the early days of a business, because when it grows there can be consequences to changing your business model.
When considering consequences of updating your business model, ask yourself 4 things:
- Who will be affected?
- How long will it take for the effects to show?
- What will the impact be?
- How long would it take to change it back?
Think carefully about how a small change could impact your customers.
Measure your Business Model Success
How can you tell if you have the right business model? One measure of success in the early days will be whether it does the basics of what you need it to do – deliver the right services / products to the right people at the right time and price.
Could it be improved though? Could you deliver faster, or could the business be more profitable?
You can measure your model’s effectiveness in two categories – input measures and output measures.
Input measures are the steps in your business mode, delivery time, call answering time, stock replacement time, range of items available. Can you be better, faster, cheaper?
Output measurement is understanding how profitable you are. A good unit of measurement is gross profit, which is a common measure that potential investors may look at. Your gross profit is what’s left of your revenue after you knock off your cost of goods sold. A good gross profit points to a well run business. A level deeper than this is cash flow net income, which takes your gross profit and knocks off your operating expenses – this is a more real life measurement of how profitable your business is.
Don’t be fooled by thinking that all changes to your model must lead to higher profits immediately. You might take the view that paying more for faster delivery or more staff to answer calls will reduce your gross profit at first, but should enable you to take on more customers later, leading to higher profits down the road.
Business Model Canvas
The business model canvas is a structured way of thinking about your business model. It includes 9 key segments and now you’ve read our guide on the wider topic, you might find it helpful to structure your model.
The 9 elements are:
- Customer segments
- Value proposition
- The channels to reach customers
- Customer relationships
- Revenue streams
- Key resources
- Key activities
- Key partners
- Cost structure
You can read more about business model canvas on the wiki page and download our template for a business model canvas here. `
You should now have all the tools you need to form your business model. One of the areas covered in this guide is about understanding your target market, which is a topic in its own right. And that’s what we’ll be diving into in chapter 5.
