Business Model Generation - Book Summary

Ever wonder how you can transform your brilliant concept into a thriving enterprise?

If the answer is yes, then it's time to draw up a blueprint for your business model. This critical tool should not be overlooked, as it sets out the who, what, where, and how of your business — defining your customer base, identifying the market landscape, understanding collaborations, assessing costs and revenue streams, and elucidating the value you bring to your customers.

In this series, we dive deep into the foundations of a business model, exploring key factors you need to address when birthing a new enterprise. We look into empathizing with your customers to craft innovative ideas that meet their needs.

As we journey together, we'll discover:

— The importance of understanding your customers' inner dialogue;

— How crafting short narratives can stir up creative business ideas; and

— The secret behind Skype's free service.

Building a robust business model: Identifying your customer segment, defining your unique value, and pinpointing your market channels.

Contemplate the myriad businesses that surround us: indulgent Nestlé treats, stylish Nike gear, or even the brand of undergarments you're currently wearing. Regardless of their differences, these businesses are united by a crucial principle — they generate and deliver value to their patrons.

At the heart of this process, leading the way, is a well-defined business model that articulates a clear market populated by customers who derive significant value from the product on offer. Indeed, customers are the lifeblood of any thriving business model — an enterprise simply can't function without them.

Businesses primarily fall into two sectors: the mass market or niche market. The mass market caters to a large consumer base with homogeneous needs — think necessities like paper towels or dairy products. Conversely, the niche market services a select group of consumers with distinct tastes — consider a purveyor of classic vinyl records.

After pinpointing your market, the next step is to clarify your value proposition. Essentially, your value proposition delineates the customer problem your product solves, or the need it satisfies. Crucially, your value proposition should accentuate the merits of your product over potential rivals.

The value in your product can be derived from a multitude of aspects. Remarkable design can add a visual allure to your product that trumps the competition — Apple products exemplify this. Alternatively, consumers might be attracted by the promise of risk mitigation that your product offers — a quality often associated with IT services. Or it could be that your product's superior performance is its main selling point — think of a computer that promises greater speed and power.

After defining your market and value proposition, your business model requires clear channels to communicate with and engage your customers. You can opt for direct channels, such as a physical store, a website, or a dedicated sales team. Alternatively, you can create channels through business partners like a store that stocks your products or a wholesaler.

With these initial three components of the business model under our belt, let's press on to examine the subsequent elements.

Nurturing customer relationships, identifying revenue streams, and harnessing key resources - key components of a robust business model.

Beyond simply defining the channels for engaging customers, it's vital to consider the tone and style of your interaction. This is where your customer relationships come into play in your business model.

The nature of your relationship with customers is pivotal, shaping their perception of your company's value. Will you add a personalized touch to your communication, or lean heavily on automated correspondences? Perhaps a blend of both would work — consider an IT company, for instance, where customers facing a specific issue might need personalized attention, while routine customers receive automated updates on upcoming offers.

Alternatively, you can adopt a self-service approach, a method employed by Ikea, or even a co-creation model where you join forces with your customers to add value. Amazon provides a perfect example here, with customers writing book reviews that enhance value for other buyers browsing online.

Once you've strategized your customer relationships, it's time to chart out your revenue streams. Picture your customers as the heart of your enterprise and your revenue streams as the blood vessels that keep everything in motion. There are three primary methods to generate revenue: transaction revenues, recurring revenues, and usage fees.

Transaction revenues arise from one-off payments, like buying a newspaper. Recurring revenues come from regular payments, such as monthly subscriptions for services like Spotify or Netflix. Usage fees are variable, depending on the extent of service utilization by a customer — the more data you consume on your phone, for instance, the higher your usage fee.

In addition to customer relationships and revenue streams, your business model should also stipulate how your company will tap into the resources it needs. Consider these resources as the vital nourishment your company requires to flourish. Access to three types of resources is crucial: physical, human, and intellectual resources.

Physical resources encompass the materials, equipment, or properties you need to run your business. A small boutique might need a storefront and cash registers, while retail behemoths like Walmart and Ikea require expansive warehouses.

Human resources refer to your workforce — the individuals with the specific skills, experience, and qualities that can drive your business success. For instance, an advertising agency depends significantly on the creativity of its staff. Lastly, intellectual resources comprise copyrights and patents — assets that are invaluable to firms like Microsoft and IBM.

Crucial business model components: Key activities, strategic partnerships, and defined cost structures.

Just as human survival depends on vital functions like eating, breathing, and sleeping, the existence of a business hinges on executing a set of key activities. These activities fall into three broad categories: production, problem-solving, and network and platform hosting.

Manufacturing a smartphone or cooking a pizza serve as instances of production activities. Consultancy exemplifies a problem-solving activity, where innovative solutions and recommendations are developed. Internet companies like eBay and AirBnB thrive on network or platform hosting activities.

Running in parallel to these key activities are the crucial partnerships that constitute an integral part of your business model. To efficiently run your business, collaboration is key. Partnerships are pivotal even for some of the world's most renowned brands — consider the partnership between Apple and Foxconn, which enables the production of iPhones.

Moreover, partnerships can be a strategic way to mitigate risk. As an example, consider the development of the Blu-Ray data-storage format. Multiple electronics companies chose to jointly develop a standard format, providing each of them with relative security. Had each company pursued their own format, they risked being outclassed by competitors, rendering their format obsolete.

A well-defined cost structure is another requisite element of a business model. This structure outlines the origin and type of costs incurred by your business. Some businesses operate on a cost-driven model, while others employ a value-driven model.

Cost-driven models aim to minimize costs as much as possible. This can be achieved by decreasing the level of customer service provided through the use of automated systems — EasyJet operates on such a model.

On the other hand, private airlines exemplify a value-driven business model. This approach focuses less on cost reduction and more on offering a high-value product that justifies the higher price for customers.

Having delved into the vital elements of a business model, we're now ready to explore how you can start crafting your own.

Dive into the shoes of your customers to uncover their hidden needs.

Being an entrepreneur requires a leap of faith into uncharted territories. Much like a fashion designer predicting the next big trend by creating an unprecedented piece, it's your job as an entrepreneur to conjure something that's not yet in existence. And while this seems challenging, there's a tool that can fuel your creativity — customer insights.

Understanding what your customers truly value can reveal untapped potential and hidden niches. Consider EasyJet as a case study. They identified the desire among lower-income customers to travel by air and capitalized on this overlooked segment by offering low-cost air travel.

Zipcar provides another compelling example of using customer insights to uncover new niches. By empathizing with their customers, they identified the high demand for low-commitment car rentals in urban areas. Consequently, they created a yearly membership that allowed customers to rent cars by the hour, bypassing the hassle of maintenance and insurance costs.

So, how can you gain such profound customer insights akin to EasyJet and Zipcar? The empathy-map method is one effective tool. Start by drawing a large "X" on a flip chart. At the top, jot down what potential customers might think and feel while using your product. On the right side, write what they see, and on the left, what they hear. At the bottom, note what they say and do. This simple exercise maps out every facet of your customer's experience.

Now, couple this map with customer personas. These are fictional profiles depicting your ideal customers, detailing their demographics, including age, marital status, income, and employment status. Armed with your map and your personas, you're ready to delve into key questions about what customers think, feel, see, hear, say, and do.

What emotions do they experience? What are their unspoken thoughts and feelings? What surrounds them, and how are they influenced by their environment and the people in it? What do they hear from their partners, friends, and colleagues? What do they communicate to others? And how do they present themselves in public?

Answering these comprehensive questions helps uncover needs and desires that your customers might not even be aware of. And surprisingly, these latent needs might hold the key to your business's triumph.

Ignite creativity for your venture by crafting narratives with your customer as the lead.

Just as a screenwriter pens down a riveting story brimming with intricate characters, you too can breathe life into your business model by constructing detailed business scenarios.

There are two primary methods to devise these scenarios. The first method involves developing simple scenarios that your customers could potentially encounter. Use your empathy map as a guide to write brief descriptions for each of your customer personas, capturing their needs, ambitions, objectives, and concerns. These scenarios should be concise — about 300 words each.

So, what's next? Say you're a telecommunications operator aspiring to revolutionize your GPS technology. You might create scenarios featuring your customers, such as: tourists exploring Rome without a pre-planned itinerary, depending on their GPS for guidance; or a budding entrepreneur managing a small home-delivery service, using her GPS to ensure smooth delivery to her clients.

The second method urges you to craft business scenarios by envisioning your customers' future world. For instance, if you're part of a tech firm, why not concoct a scenario about public transportation's future? Contemplate how burgeoning technologies — big data, artificial intelligence, and the internet of things — might redefine our commutes or our children's school drop-offs in half a century.

Will train drivers still be needed, or will intelligent systems take the reins? Will Wi-Fi become a staple on underground trains? Might new tools enable us to monitor our children's route back home from school? In constructing these future-focused business scenarios centered on your customer personas, you'll unlock inspiration for devising business models that address not only today's issues but also remain flexible enough to tackle those of tomorrow.

While creating business scenarios can ignite inspiration, established brands serve as another potent source of ideas. Let's delve into two exemplary business models in our next exploration.

Revolutionizing business with freemium and open-source models.

Imagine yourself in London and your sister has just relocated to Tokyo. How would you maintain contact with her? Costly overseas phone calls? The odd email? Most likely, you'd resort to Skype. But have you ever stopped to wonder why such a valuable service is free?

Skype's founders stepped into your shoes, deciphered your needs and desires, and constructed their business model accordingly — the freemium model. The freemium model allows customers access to a service for free, with the choice to pay for enhanced or premium features. In essence, the premium customers absorb the costs of the free users.

Skype operates precisely this way, with the majority of users enjoying the basic product for free. However, those willing to pay more reap additional benefits, like the capability to dial landlines. The freemium model suits web companies especially well but can be adapted to any business if the pricing is feasible.

So how can you ensure the freemium model will work for your business? You'll need to calculate the average costs generated by free users and the rate at which they convert to paying customers. These figures will assist you in determining the optimal price for premium options to keep your business profitable.

The open-source model presents an ingenious twist on the freemium model. Take the software company Red Hat, for instance. They realized they could build a robust business around free, open-source software by offering customer support and malware testing to complement it.

Today, Red Hat provides free software developed by their community of dedicated open-source developers. This software is available free as a self-service product. However, customers can choose to pay a yearly fee to Red Hat for their support, maintenance, and upgrades. The fundamental difference between Skype's freemium model and Red Hat's is that Red Hat's software is supplied by developers who work voluntarily.

There's another business model worth considering — the long-tail model. Let's explore its valuable lessons in our final exploration.

Long-tail models leverage robust platforms to foster a community of consumers turned creators.

Who hasn't heard older family members lament that life was better, and simpler, in bygone days? Back then, standard products catered to everyone. Today, however, an enormous variety of brands offer a dizzying array of products.

A strategy you can consider involves selling a narrow range of products to a broad demographic. This idea forms the foundation of the long-tail model, which aids businesses in securing a dominant position within specific industries.

Consider the book-publishing sector. Usually, a limited number of best-seller manuscripts are published and distributed in vast quantities to a wide audience. Recently though, platforms like Lulu have shaken up this model by publishing an extensive assortment of niche literature — albeit on a smaller scale. This method keeps inventory costs low by printing books on demand, in turn, keeping revenue high.

Long-tail enterprises can flourish if they have a robust platform for reaching customers. In the case of Lulu, the authors submitting their works also became customers, reading other books available on the platform. Lulu crafted a close-knit online community where authors could publish, distribute, and sell their books, as well as discover and purchase others' work.

Another case in point is Lego. The company offers customers the opportunity to design their own characters, structures, and vehicles — they can even design the packaging. For this concept to take off, Lego established an online platform and community where customers could design their products and place orders for pre-existing products.

By democratizing the means of production and distribution, these long-tail businesses demonstrate that today, anyone can be a designer, author, and creator.

A concluding reflection

Prosperous enterprises are founded on business models that consider every facet, from your clientele and pricing to your communication strategies and resources. By putting yourself in your customers' place and exploring inventive twists on various business models, you can unearth the inspiration necessary to craft a blueprint for a business that enhances your customers' lives.