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The Idea of the Business: Building the Right Business Model
Last month's Insights examined the process of creating an effective value proposition tailored to your target market's specific needs and concerns. In this final installment of Insights "The Idea of the Business" series, we look at the finishing step in forming the core of the business strategy: defining a business model that will deliver this value proposition to target customers in a way that meets their needs and fulfills their expectations, while maximizing cash flow and profits for your business.
The process of building the right business model, as with all aspects of the "Idea of the Business," consists of careful planning, testing, and refinement. Early-stage technology companies in particular face unique challenges in building a profitable business model, due to the nature of their new, innovative, and often unfamiliar products and services. The following principles can help early-stage technology companies build a business model that allows for refinement and experimentation while focusing on generating profits as quickly as possible:
- Quickly develop a repeatable revenue and gross margin model. The revenue and gross margin model is how the company prices and delivers its products and services. Figuring out a model that works successfully should be one of the primary short term goals of the early stage business. Steps toward developing such a model include:
- Exploring options to generate "annuity" type revenue streams rather than project-based revenue.
- While attending to individual customer needs, seeking out ways to standardize processes and deliverables to maximize efficiency.
- Experimenting with different pricing, deliverable, and process options to maximize gross margin
- Refining your value proposition through experience to eliminate features that drive substantial cost and complexity to deliver, but do not generate proportionate value for customers.
- Carefully defining the limits to your core solution, and if needed, bring in partners to develop other components of the value proposition.
- Focus on a core group of customers. In the initial stages of the business, most resources should be devoted to finding and truly meeting the needs of a foundational group of core customers. You can then use this group as a real world "laboratory," in which to test, develop, and refine your value proposition and business model.
- Begin by using tightly focused, low cost marketing tactics (such as direct, online, media relations, and speaking opportunities) to share your vision, build a reputation, and initiate relationships with core target customers.
- Next, assign sales responsibilities to your senior team, and train them in a sales process based on identifying and then solving customer problems. Delay building up a sales team until your sales model is firmly in place.
- Once customers are brought on board, focus all key internal resources on building an excellent relationship with these core customers, and doing everything possible to deliver a great customer experience.
- Conserve cash. In the race to break even and profitability, it is critical to design your business model to minimize overhead costs. Key elements include:
- Conducting research and development through professional services engagements focused on solving actual customer problems.
- Minimizing pure management costs - in the early stages, all key managers should have functional responsibility for either finding or delivering value to customers.
- Minimizing administration costs by outsourcing functions such as finance, HR and IT as much as possible to maintain a flexible cost structure.
In summary, to maximize success early-stage technology companies must get the idea of the business right. This comprises three clear elements: a tight market focus on a specific customer problem; a strong value proposition that solves that problem better than all alternatives; and a business model that maximizes cash flow and generates profits as quickly as possible.
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