5 Tips for Defining a Viable Business Model for Your Start Up
One of the most overlooked elements when starting a company is figuring out AND VALIDATING a viable business model (or if one even exists). Founders tend to be very enthusiastic about their product and industry which understandably causes their attention to gravitate towards a product-centric view of the world. I have been guilty of that myself. A very successful entrepreneur, Jay Haladay, told me “Many people that start businesses are product-oriented, as you are. It is quite common to watch them fall into the pattern you mention. Remember, the highway to success is littered with great products that have curved off road into the ditches”.
I hope this post can serve as a helpful perspective for entrepreneurs and early stage companies who are grappling with the questions of how to build a viable business. This can be a daunting question and given that you are often walking into uncharted waters, the uncertainty associated with figuring it out can be very unsettling. The best favor you can do for yourself is to address these questions as early as possible with an open mind. The faster your fail, the faster you can learn and adjust. This is usually an iterative process (just like most things start-up).
Start Thinking About This Now.
I know I mentioned the fact you should be thinking about your business model as early as possible in my notes above, but I mean you should REALLY start thinking about it. Not just brainstorm a few half-baked ideas that you think will sound good to investors. My opinion is that product, sales and marketing are all intertwined to a significant degree and the sooner you can establish a thesis in terms of your business model, the more clarity you will have in terms of building the right product to fit your sales and marketing process. This will also allow you to measure, test and learn from your theory more quickly and effectively. If you are just floundering when it comes to your sales and marketing strategy, it becomes a lot harder to determine the key business and engagement drivers you should be thinking about in terms of what success and progress look like for your product(since you don’t even know what your business is).
Financial Models at an early stage are bullshit. But they are also really useful.
I used to hate making financial models because I thought they were bullshit at such an early stage of a company. I still think they are pretty much nonsense when it comes to making long term growth projections or multi-year forecasts. However, I have evolved to believing they are an ESSENTIAL tool in thinking through various sales & marketing approaches that you might choose to pursue. They are the most effective way to assess whether a certain approach may be economically viable and they can also offer insights into why your competition might have chosen a counter-intuitive business model (or not the one that might seem glaringly obvious on the surface).
An oversimplified example of this might be analyzing whether you should pursue a freemium model, drive leads and use a large inside sales team, focus on selling to enterprise customers or attempt a pure eCommerce play(ie no sales people), etc. By modeling different strategies out, you can a) what you believe you can actually execute b) figure out what type of pricing makes the business work (and also if customers will pay that price) c) create a plan to test relevant marketing and distribution channels.
Test Your Assumptions as Early as Possible.
The reality is you are probably wrong about 90% of your initial assumptions around your business so the sooner you figure out WHY you are wrong, the faster you can figure out how to be right. A lot of founders get too attached to their vision and are scared to do things that might prove parts of it wrong. Peter Thiel put it best in his book Zero to One when he said a lot of businesses fail because the people operating them are not being truly honest with themselves. Be honest with yourself and test your assumptions. Even if you don’t like the outcome.
Understand Your Channels.
There are a lot of different ways to sell a product. By performing the two steps listed above, you should be able to generate a few different business model ideas. At this point, the name of the game is being aware of the tools and channels available to you so that you can intelligently test an approach and understand how to best measure it.
A common approach to looking at the sales process is in terms of a funnel (ie generate leads, qualify them as prospects, take them through your sales cycle until you close them). This definitely makes sense and is is a good way to measure performance at each stage of your sales process. I believe a very powerful exercise that can help fill in the details and also more tangibly illustrate the connection between sales and marketing is by creating a Channel Map. The purpose of this is to lay out all of the marketing and sales channels available to you so you can evaluate if and how they might play a role in the business thesis you are testing. It can be very tempting to just throw up a few Facebook or AdWords Ads or start posting to Facebook, LinkdedIn or Instagram (depending on the type of business you are pursuing) but by creating a Channel Map, it allows you to more systematically think through a wider ranger of possibilities. Given that acquiring customers for less money and generating more money from each on of them is the lifeblood of a business, it pays to be diligent when thinking through all of the various ways you can reach your target customers.
Don’t Underestimate Sales People.
In the past 10 years, we have come such a long way in terms of web frameworks, computing infrastructure, hosting, etc that many of the popular consumer and SAAS products we use everyday aren’t necessarily defined by their groundbreaking technical innovation but more commonly a strong sales and marketing strategy. It is really hard to build a product that will scale and become sustainable based on a purely automated freemium or ad supported revenue model. It is easy to be tempted by this approach given the success of companies like Dropbox, Slack or Instagram but just keep in mind that the odds are stacked heavily against you. Your life will be far easier if you can figure out a business model that supports sales people. This often makes it easier to forecast revenue, sell much higher value products and takes some of the pressure off of finding that perfect marketing formula right away. The counterargument is that sales people don’t scale as well as automation. That is true, but a different question is whether you want to be able to sleep at night and if you’d prefer to figure out your automation challenges with growing revenue and a road to sustainability or when you are just an early stage startup trying to find your way.