About a year ago the BMI Lab posted a very interesting blog post. We would like to reproduce this in excerpts below.
A business model consists of four dimensions:
- (WHO) is the target customer and what his/her needs,
- (WHAT) is the value proposition and with the help of which products and services is it generated,
- (HOW) is the value proposition delivered and
- (WHY) is the business model profitable?
Important criteria for the WHO dimension are, for example, market growth, the relevance of the customer problem or need, or the strategic importance of the targeted customer segment for the company. Evaluation Criteria for the WHAT dimension include, besides the added value per se, aspects such as the scaling or further development potential of the products/services offered. The maturity of the technology used, existing synergy effects, and the customer’s own share in the value generation are criteria for the HOW-dimension. The customer’s willingness to pay and the needed investment to introduce the idea to the market are criteria for the WHY dimension.
Digital business model ideas typically have higher scaling potential and a broader range of payment models that are accepted by customers. However, for companies that do not consider IT as their core competence, highly digitalized solutions are often associated with additional organizational challenges: different development processes and invoicing schemes as well as a change in service provision, since the focus is often on the delivery of digital services instead of product sales. This requires the acceptance of longer implementation periods, an increased willingness for change in top management and, in addition, often an adjustment of the corporate culture and employee capabilities.
The approach: Assumption-based business model development
The next step focuses on validating the selected business model ideas as effectively and quickly as possible. For many companies, the underlying uncertainty of new business model ideas is the main difference to their usual way of doing business. Since the ideas are often outside the company’s core market, new customer segments or existing customers must be acquired in a different way in order to implement the ideas. As a result, companies are confronted with challenges for which they have little or no experience and for which reliable forecasts are difficult or impossible.
A proven way to systematically validate and implement business models in this type of environment is what we call assumption-based business model development. This approach reduces the inherent uncertainty of the business model by checking the most critical assumptions at each step. The iterative process is executed with the least possible investment of time and resources and allows the concept to be adapted to what has been learned or, in case of doubt, to be stopped early.
These assumptions concern, for example, internal aspects such as the technical feasibility of the solution, the required resources, the implementation times or available capabilities. However, the most important assumptions in the early development stages always concern the customer.
The approach can be divided into 5 steps according to the most important milestones for implementation. With each step the uncertainty is reduced as the company learns, adapts the business model and ultimately decides at each step whether it is worth pursuing the idea or not.
Step 1: Problem/Solution-Fit
The first step after detailing a business model idea is the so-called Problem/Solution-Fit. This is where the assumed problems and needs of the customer are validated. In addition, the early customer interaction allows to evaluate whether the imagined solution can satisfy the needs or solve the problems and whether the customer in interested in learning more about it. In this phase the company must focus on qualitative aspects to learn as much as possible from the customer and develop a suitable solution. At the same time, it is important to narrow down the market and identify the customer group that has the biggest problem and is therefore most interested in the solution.
If the most important assumptions are not confirmed, the analysis of the learnings helps to understand why there is no fit and what previously unknown problems the customer is facing. It is important to note that the right approach is critical for the success of this phase. Companies must iterate and repeat the steps accordingly. This is valid for all steps of the approach. If the results indicate that the solution (or even any solution) is not needed, the concept should be killed as quickly as possible. This is one of the goals of the whole process: quickly find what doesn’t work and move on.
Step 2: Product/Market-Fit
Once the fit between customer problems and solution is validated, the Product/Market-Fit phase checks whether customers are interested in the business model as a whole, including the mix of services, products and its features. The main objective is to identify the “must-haves” and the overall desirability of the solution. This can only be achieved through visualizations, Minimal Viable Products (MVPs) and direct customer interaction. It is crucial to incorporate what has been learned directly into the solution and to verify the improved version again.
Step 3: Willingness to Pay
This third step is about deep diving into the revenue model. Many companies find it very difficult to not check the willingness of customers to pay until this step, as this is the crucial aspect from their point of view. Ultimately, however, the direct interest of the customer, which is checked in the previous phases, is the most concrete indication to this point that a profitable business model can be developed. A reliable assessment of the willingness to pay can only be achieved once the value proposition and its related product and service offerings have been defined so exactly that any customer can understand it. Otherwise, companies run the risk of overestimating unspecific approval from previous phases and risk too much too quickly.
Step 4: Value Delivery Phase
As soon as the willingness to pay has been validated and pilot customers have been identified, the Value Delivery Phase can be used to map and develop the production and logistics processes needed, which cooperation partners are necessary and how the exact cost structure will look like.
Usually, engineering companies have troubles to wait until this stage to start working on this dimension of a business model. Again, this comes down to the business-as-usual, where the optimization of the HOW dimension is the key to improve performance. What we often see is that teams try to assess how the concept they generated can be turned into reality, which typically either results in the abandonment of the idea as it is deemed as too difficult, or in a rush towards the technical realisation of the concept. In doing so, companies ignore the basic idea of the approach, which aims at quickly and cheaply testing business models, especially in the early stages, where there is no validated value proposition and clear solution designed: as long as uncertainty is high, the concepts often change tremendously – which in turn changes the technical requirements. The usual result is the development of a product or a solution that no one wants to buy.
Step 5: Scaling & KPIs
In the last step prior to the (pilot) market entry it is necessary to determine how the success of the business model actually looks like and how this can be measured. Here, typical growth and financial key figures may be enough, but due to the strategic character of new business models, aspects such as synergy effects and scaling potential are also important factors. In addition, after this step, the business model turns from a project into a product that needs to be managed accordingly. Thus, either the handover to the main organisation or the foundation of a separate entity needs to be planned.
Conclusion: The 5 major takeaways
- Understand and solve your customers problem and needs first, then think about technology.
- A digital business model does not necessarily imply a purely digital value proposition.
- Developing digital business models happens under great uncertainty, rely on data and facts instead of opinions to reduce it.
- A lean approach makes it easier to abort the project if necessary, in order to pursue one of the many other ideas.
- All parties involved need to understand the importance of developing and testing new business models and create enough organizational freedom to allow for it.
