A definition of startup struck me for its expressive effectiveness:
“A startup is a small organization actively searching for a viable business model
(But this search is ongoing also for established companies…)”.
This sentence highlights the critical importance of implementing a business model, and even more so, of formulating it in the first place.
What is a business model?
The business model is a strategic tool that every entrepreneur must have. It represents how the company creates, delivers, and captures value. It can be seen as a large puzzle where each piece plays a fundamental role.
The individual pieces of this puzzle are:
• Customer segments
• Value proposition
• Distribution channels
• Customer relationships
• Revenue from the sale of products/services
• Key resources
• Key activities
• Key partners
• Cost structure
To make things clearer, we can group these elements into 4 macro areas:
Structure
• Key activities: the most important actions to implement the value proposition—what you want to offer customers
• Key resources: human, financial, physical, and intellectual resources
• Key partners: supply and partnership relationships essential to optimize processes and best realize the value proposition. For example, business alliances, strategic partners, networks of investors and collaborators.
Offering
Represented by the value proposition, which is what differentiates the company or startup from its competitors. The proposed offering is the reason why customers turn to your startup instead of others (products, innovation, image, meeting specific needs, cost reduction, etc.).
Customers
• Customer segments: It’s essential to identify which customers you want to reach and serve. Potential customers can be segmented based on different needs or characteristics. These choices will inform the marketing and sales strategy. Markets or customers can be classified as:
– Mass market: no segmentation
– Niche market: segmented based on specific characteristics or needs
– Segmented market: for example, by gender, age, geography, or other features
– Diversified market: serving different markets (e.g., Amazon)
– Multi-sided platforms: serving interdependent customer segments (e.g., credit cards serving both cardholders and merchants)
• Distribution channels: represent how the startup reaches its customer segments to deliver its value proposition. These can be direct (without intermediaries) or indirect (e.g., retailers, agents, wholesalers, distributors, etc.)
• Customer relationships: Commercial success depends on the kind of relationship you want to build with your customers. There are various forms:
– Personal assistance: direct customer-company interaction during and after the sale
– Dedicated personal assistance: relationship managed by internal company staff
– Self-service
– Automated services: like self-service but more personalized, based on customer preferences (e.g., Amazon suggesting books)
– Community: a network enabling customers to connect and share knowledge
– Co-creation: customers directly contributing to the final product or service outcome
Finance
• Cost structure: Business models can be COST DRIVEN (focused on minimizing all costs) or VALUE DRIVEN (focused on creating value through services and products). Cost structures may include:
– Fixed costs: do not change with production volume
– Variable costs: increase with production volume
– Economies of scale: total costs decrease as production volume increases
– Economies of scope: cost savings from jointly producing different products
• Revenue streams: originate from the sale of services and products and can include:
– Asset sale: sale of a physical good
– Fee: sale of a service
– Subscription: continuous service sales
– Rental/leasing: granting exclusive rights to a good for a set time
– Licensing: revenue from third-party use of intellectual property
– Brokerage fees
– Advertising
The structured format aims to provide a practical and immediate framework for formulating this crucial entrepreneurial tool. Understanding how to deliver your value proposition in the market, how to produce and capture value, is the foundation of every startup’s success.
Every successful startup has clearly identified each element of this framework. To generate profits and survive in the market, it must first have a clear value proposition, and consequently, know the clients it wants to serve, how to relate to them, its partners and suppliers, distribution channels, activity and resource structure, and financial structure for generating positive cash flow.
References
Business Model Generation (A Handbook For Visionaries, Game Changers And Challengers)
Alexander Osterwalder and Yves Pigneur. John Wiley & Sons, 2010
