Chapter 5:

Business Model Linchpins

From a vacation beach chair in 1976, Citibank CEO John Reed penned a vision to transform the retail banking business model. His “Memo from the Beach” was a handwritten call to action to replace a deposits and loans business with one based on customer experience.1 The memo, which went from words on paper to trigger the reinvention of retail banking, continues to circulate today among Citi alumni.2

Mastercard global board member Steve Freiberg joined Citi under Reed’s leadership. Steve says about Reed, “Here was a guy who was young but senior. He went to his boss and said, ‘I’ve got a great idea. I am going to take a machine and stuff $50,000 into it and leave it in the lobby of a bank branch. Over the weekend after we go home people can come and go, and take money out as they please.’”3

The guys in suits, starched white shirts, and pricey silk ties sitting on executive row must have thought Reed’s vision was crazy. But he persisted, and moved Citi to disrupt the sleepy model of Monday through Friday, 9 a.m. to 3 p.m. branch banking. In so doing, Reed defined the business model parameters for what is now a given — a twenty-four/seven banking experience where people bank when, where, and how they prefer. Mobile devices, artificial intelligence, voice recognition, and other capabilities continue to expand what “anytime, anyplace” means, advancing the vision seeded over forty years ago.

Reed’s vision would not have become real without a viable business model. Nor would his then-daring aspirations have been possible without being able to execute massive transformation. Creating a new relationship between banks and their customers meant:

A complete front-to-back view

Imagine drawing a business model visual on a wall-sized panel, not as a financial model, but as an implementation path reflecting many levers and interconnected cranks. Some levers and cranks are controllable. Others only change as a result of impacts several times removed.

The nirvana state is to foresee and influence the movement of any lever or crank. Doing so depends upon having a complete front-to-back view of the business model — one that goes all the way from having a strategy for serving a market, to executing plans and achieving results.

The business model for twenty-four/seven banking came to life as the service experience in the ATM channel, the customer service platform, and in the brand tagline: “Citi Never Sleeps.” Once twenty-four/seven banking went live, learning continued about customer segments, preferences and behavior, how each impacted revenues and expenses, and how best to deploy technology and data. The business model became a live, evolving ecosystem.

To set up the possibilities for your business model, start by answering these six questions:

  1. How do you plan to make a significant difference for the people you intend to serve?
  2. What is the size of the market? How many users and buyers are there?
  3. How do sources of revenue connect to your point of difference?
  4. How will you execute the strategy, manage the business-model levers, and maintain your point of difference?
  5. What resources are required?
  6. How do plans translate into financial statements, organization design, policies, processes, and infrastructure?

The business model design should capture how the business operates. A concept cannot become a business without a business model. Great ideas, even those that users love, are of no value by themselves. Being able to articulate the business model is a test of readiness, and exposes the holes that must be filled to move ahead.

What are the inputs to create the business model?

The business model synthesizes the work and thought invested to:

  1. Gather insights from users and buyers
  2. Assess trends and make assumptions about their future directions
  3. Establish purpose and positioning
  4. Muster resources
  5. Prototype, listen, observe, adjust, and iterate

Perspective of a corporate CEO

Having benefited early in his career from John Reed’s leadership, Steve Freiberg instigated and sponsored an innovation “skunk works” operation within Citi’s credit cards business. His direction to the team: challenge norms, innovate the experience, aim to execute at scale. His exact direction when he asked me to lead the effort: “Make us more innovative.”3

The skunk works team fostered ongoing dialog about game-changing business models spawned by customer insights and technology trends with a focus on:

Many concepts never went beyond whiteboards. What mattered, even when concepts died, was the healthy debate each fueled. I was lucky enough to be a part of these efforts so I learned lessons about the impacts of culture, leadership, focus, and diversity on innovation in the field.

Getting to the business model: Culture and leadership

Leaders work through internal obstacles to change especially when a culture is so proud of its past that letting go is hard.

All fingers point to culture when things don’t go well on corporate innovation teams. To paraphrase a common diagnosis, “Incredible idea, great research results and plans. But the culture …”

Culture derails corporate innovation more often than lack of resources or skills. But the problem with pinning the blame on culture is that individuals get to sidestep accountability. That makes failure inevitable. Culture is called out as something separate, with a life of its own. But, a culture is the sum of decisions and choices, words and actions made by the people who belong to the organization, as well as those they choose to invite in. Culture is set by the top executive, and then carried out by how people choose to behave and treat others based on what they see at the top. The finger-pointing people are part of the culture.

Getting to a viable business model demands experimentation. If the team does not have the leadership backbone to create space for failures, that new model will not be found. Sponsorship is essential, but the daily dynamics of the culture are throughout the team, and help others persist against odds, show guts, and act with urgency.

Be the culture and lead others instead of debating culture and leadership. Stay centered on:

Apply these principles and you will leave the competition flat-footed and bewildered.

Referring to the introduction of ATMs, Steve says, “No matter how smart you were as a competitor, you could not make the old process efficient enough to compete with twenty-four/seven banking.” Three factors working together created a complete paradigm shift, and an experience that overtook traditional competition from the start:

  1. Twenty-four/seven access to physical cash;
  2. Twenty-four/seven customer service;
  3. The “Citi Never Sleeps” message, which drove awareness and understanding leading to adoption.

The only limitations, overcome on a widespread basis in the mid-1980s, were interstate banking laws that had early on limited Citi’s efforts in New York State.

People make a business model, not numbers

Can an established enterprise incubate and launch new business models?

Well, it depends.

The “yes” odds are higher when the organization invites in outsiders who are not wedded to traditions, who bring metaphors from other sectors, and who are able to connect the dots between old and new. Outsiders break through orthodoxies. Other conditions:

Take the example of the credit cards industry.

How were credit cards purchased in the pre-digital era? Up until the late 1970s, customers went to a branch, requested and completed a paper application, and waited six weeks for an approval or rejection to come by mail.

The change to direct, virtual customer acquisition at category behemoth Citi happened only when people were hired who knew nothing about the credit cards business or, for that matter, about banking. But they understood two things: multivariate scoring to drive underwriting, and how to envision a national versus state-based footprint.

These outsiders figured out that by using credit bureaus, people could be preapproved for credit. They envisioned and put a preapproved application into the mailbox, with the single requirement that the applicant sign their name. No surprise, iterations were required to get the process — and the financials — working. But within a few years, outbound direct-to-consumer marketing became the category’s dominant source for new accounts. This innovation proved to be a stepping-stone to the digitization of the sector that picked up momentum in the 1990s.

A founder’s perspective

Listen to Diane Hessan, chairman and founder of C Space, part of global agency Omnicom. Diane’s litmus test to build a successful business model: “To dream about solving a very big problem in a unique way. You know you are doing that if people will pay for it.”4

The business model takes market findings and assumptions a big step forward by translating prototype results, bets, and trend outlooks into what they mean to every aspect of implementation and financial assumptions.

In sharing the C Space story, Diane says, “When we started, we wanted to build something clients would love so much they would keep coming back. We wanted to help big brands get insights they never had before.”

C Space became a respected provider of online communities to gather insights for global brands. The company is a case study in how to leap from prototype to business model, and from business model to big business. Stories within the C Space story show how the team set aside market research orthodoxies, and in the process defined a new product category.

Making a bet on trends

The team assumed the Internet would change the relationship between customers and brands — including how brands would learn about and from users. A “cut and paste” to digital channels of the existing models for market research would deliver faster, but not better.

Instead, C Space aimed to capitalize on trend predictions and potential client insights to create what had previously been an unimaginable level of value for clients.

Pricing and offer duration

Early on, the business model anticipated a fixed fee and a three-month minimum. C Space assumed that three months would be sufficient to demonstrate value and motivate contract extensions.

But during client pilots, the team realized that substantive value began at four months, and increased the longer the community ran. This led to three key offer and business model decisions:

  1. The base offer was moved up to four months. As value grew, the offer was expanded to a one-year minimum with monthly billing.
  2. This longer duration resulted in a c-suite dream come true: predictable financials. Two-thirds of the following year’s revenue was projectable on December 31.
  3. The offer and pricing strategy strengthened the business model. When clients saw value, C Space was rewarded with growth. This was not a business built on the downhill slope of slippage where sellers win short-term financial rewards when users stop using. It was a “we win/you win” model.

Defining and winning the target market

The C Space team wanted to work with big brands, and set out a sales and distribution strategy to open doors to decision makers.

“We knew that we would not sign big brands with a bunch of kids in a call center cold-calling for appointments. We stayed far away from that strategy. Instead we took a look at what kind of executives we would need to call upon, and hired a small, senior sales team with the presence and knowledge to engage with these prospects,” says Diane.

Of course, this choice supported large-client revenue assumptions, and the associated expenses for account staffing, compensation, and sales force incentives.

Deciding the offering scope

One of the biggest decisions was whether to remain a technology platform or to wrap consulting services around the technology.

Two stakeholders saw two different answers.

Venture capital investors believed a services line would drive down margins and create unpredictable financials.

But clients had a different perspective. The company was selling the platform, but then leaving clients to figure out how to activate and leverage their communities. Clients were recruiting participants on their own, determining and administering incentive payments, and synthesizing hours and hours of community participant input.

This delivery model created at least two risks:

  1. A more complicated decision to buy, and
  2. The possibility that weak implementation by clients could lead to dissatisfaction and defection.

“Anyone can facilitate a community, but most people don’t have the time to do it well,” Diane says. “Clients were starting to tell us, ‘do you know how much I would pay if you would do this for me?’”

The answer turned out to be a lot. Consulting services helped C Space grow faster by removing the barrier of having to figure out all of the implementation tasks. By stepping in to set up and manage the communities, C Space assured a quality experience. In the end, the company added services to its offering, doubling average revenues, and increasing client satisfaction in the process.

The C Space story is an example of how client experience and strategic and operational decisions inform the business model. Sorting through the options to get to answers forces a shift from big picture concepts to financial and execution consequences.

How investors assess business models

A short answer from an anonymous investor: “How do I know how a good business model? It is a little like pornography … I know it when I see it.”

For the head of a new venture, accepting funding means becoming accountable to investors, whether the business unit head within a company, family and friends, seed investors, or venture capitalists buying your pitch.

Head in another direction if you believe you have an amazing concept and path to market, and potential investors evaluate your business model through the lens of the past. A rearview mirror can be useful, but is crippling when misapplied. Be clear about how investors interpret your business model’s potential, and the criteria that play in to their decisions.

What do investors cite as the biggest business model downfalls?

The venture head will make or break the business

Bill Benedict, managing director for Alpine Meridian Ventures, says, “Whatever the business model may be, far and away the most important factor is the CEO’s ability to roll it out and to change it.”5

And that CEO must be heavily involved in the sales process. They are selling the product or service every day. They are hearing, “this is a really good product, but what I really need now is …” and they adapt to the customer’s need.

Other investors support Bill’s viewpoint. A strong business model depends on the core value to users, and as a result, the appeal to buyers. In businesses such as social networks, value is created for a user group who may be paying nothing (although arguably they are “paying” insofar as they are giving up data and privacy). The buyers are sponsors and advertisers. Their needs must be satisfied and their pain points also addressed.

Test and pivot, and don’t put energy into elaborate presentations

Kauffman Fellow Jonathan Hakakian cofounded and co-leads SoundBoard Angel Fund with partner Richard Magid. He looks for how companies have evolved as he evaluates investment opportunities.

“Success,” Jonathan says, “always comes with evolving. There are always changes that need to be made.”6 He looks no further than SoundBoard itself, which began as a consulting firm assisting entrepreneurs with their special needs, to then take on developing and managing the Fund along with an investor-driven screening and due diligence process.

Jonathan sees continued change from any founder’s early concept as a positive. He says, “When I think about the companies in our portfolio that have been there the longest and are hitting success milestones, the entrepreneur’s business today is strikingly different than what it was when they started with when we invested. This reflects their ability to react, be coached, and roll with the punches.”

Putting together a presentation with slick visuals, theories, and secondary source market data is relatively easy. Substance materializes by entering the market, even on a small scale, and figuring out how to produce the revenue behind the slide deck promises and assumptions. “Don’t spend time on fifty-page presentations,” Jonathan says. SoundBoard, like their peers, looks for execution under real market conditions.

Talent

Execution only happens with talent. There is stuff that just needs to get done. When it comes to skills:

Former iNovia Capital Partner Geoff Judge says, “If the CEO cannot sell, run.”7 The CEO is the chief revenue officer for a very long time. A technical CEO must bring in a partner whose core skill and passion is selling. And, it is hard to recruit great employees if you cannot sell.

Jonathan says, “Some people bring a product pitch for a solid business. But they have no sales background, and no technology skills. These founders bring very little to the party. Execution is ninety percent. The idea … eh. Later, as the company grows, sector knowledge takes on more importance.”

The biggest risk to getting the business model right is making the right hires, deciding who is accountable for what, and how to lead and motivate. Know up front that you will make hiring mistakes, recognize the inevitability of doing so, and be fast about taking action.

Diversity still gets a lot of lip service and too little action, in spite of the evidence that gender and ethnically diverse teams deliver better results from early stage to legacy. People of different backgrounds and experiences coming together in a culture of open dialog and listening do a better job, plain and simple.

What story is told by the lineup of team photos under your company’s “About Us” website tab or on corporate organization charts? Homogeneity of any type is a yellow flag.

Telling and selling the business model story

A business model is the story of serving a group of people who face a challenge. You see what is going on in these people’s lives because you have stopped to listen to them. You have figured out a way to help them — touching their emotional needs and the day-in, day-out requirements to solve their problem. There are risks, obstacles, and breaks in the story.

Now you are the narrator of this story, and the audience you want to engage includes friends and family, investors, employees, and of course, users and buyers. Across this diverse group objectives will not always be consistent.

When you see the business model as a story and yourself as the narrator, you set yourself up to connect with — and persuade — the audience. Tell your story as a narrative that plugs into how the audience sees the world, not how you would like it to be.

Why does storytelling matter, anyway?

For starters, think about communications as a tool that helps you get what you want. How does it feel to have someone trying to sell you something with the stereotypical zeal of a sales person who won’t take no for an answer? Haranguing potential customers with messaging about your product’s greatness is a short-lived strategy. Much more welcoming is messaging that conveys a desire to serve and commitment to solving the user’s problem.

Next, recognize that the power lies with your audience, not with you, to close a deal.

The secret is focus

Heather Thomas helps people build high growth businesses. Her track record at digital agency Critical Mass, where she led her team to a 70 percent win rate versus a category average of 25 percent, speaks for itself.8 Heather’s telling and selling tips:

  1. Start with the audience and work back. There are two angles to this advice — first, be hyper-focused on what kind of clients you want to serve. Says Heather, “During one period we got 250 inbound calls from prospective clients, we turned down 90 percent, but won 70 percent of those we pitched. We knew what we were looking for. We practiced the art of focus and knew that to grow big we had to think small.”

    The team knew whom it did not want in a client as much as it knew whom it wanted. The same applies to choosing investors.

    The second dimension is to have empathy for what people need, not what you want them to buy. Most people get nervous when delivering the pitch. But Heather says, “When you are in the room you may be nervous, but realize you are there to give your audience a gift — you are there for them. You are committed to them and to meeting their needs.” Adopting that mindset reduces the pressure.

  2. A well-framed and highly focused problem makes for a more memorable story. Figuring out the problem you are trying to solve is basic. Here’s the replay of what this means in action in a dialog Heather had with a client. Watch how the problem Heather’s client says he solves shifts from generic features  — “We build websites and create banner ads” — to how he optimizes the checkout for luxury goods ecommerce sellers with sales impact:

    Heather: “What do you do?’

    Change maker: “We build websites and create banner ads.”

    H: “What are you good at? Experiential sites, transactional sites, or informational sites?”

    C: “Transactional sites.”

    H: “So, are you a new house builder or a remodeler?”

    C: “A remodeler.”

    H: “So, you are remodeling transactional websites. These include awareness, consideration, and checkout. What part of the process are you best at?”

    C: “Well, we are really good at checkout. In fact, we optimize the checkout, and we know what conversion rates should be in the luxury goods space in particular.”

    H: “Great, then what you are saying is that your story focuses on why you are the people who refresh and refine the checkout process for luxury fashion brands. You do a diagnostic to figure out how you can help, then you do your magic.”

    Voila. There is quite a difference between redesigning websites — an expense whose value gets challenged by the CFO — versus improving the checkout experience for luxury fashion brands — which translates immediately into: “We make money for you.”

    Make the heart of your story how you solve the problem from your target audience’s perspective. If you understand what will touch your audience you will stand out.

  3. Think like a trial lawyer. When a trial lawyer goes to court, what are they thinking? “I have to make a persuasive argument to a skeptical audience that my case is right,” says Heather. Sounds like what change makers have to achieve, too. She continues, “Work under the premise that there is always a competitor out there — opposing counsel whom you are up against.” This means understanding not only selling messages, but as well what the barriers are.
  4. What is holding you back may not be communications. I once led a team whose communications skills did not stack up. A communications expert ran a writers workshop, designed just for the team. Afterward she came by my office. “How did it go?” I asked. “Well,” she replied, “here’s the thing: sometimes bad writing is a sign of bad thinking.”

A problematic story may be a symptom of poor market fit. Or the audience definition may require refinement. Or the offer itself may be weak. Listen for the substantive issues that can be fixed versus signals that it is time to pivot. Sometimes the best feedback is within the questions the audience asks in the course of listening to the story.

The Three Cs of Business Model Linchpins

Capabilities:

The most useful business model capability in my personal toolkit is one my team crafted into a process driven by two questions we always had to answer to justify innovation investments to the CEO.

The process is simple, which is why it so useful. But don’t be deceived. It can involve cycles of experimentation, demands critical thinking, and depends upon active listening.

The two-question construct: Can you identify the unit profit model and then figure out how to scale? What would you have to believe for the business model to work?

#1. The unit profit model

What is the unit of profit driving the business model? Is it customers? Accounts? Products? Transactions? Transaction size? Customer relationships? You should be able to answer if you know how the business works, and how you envision outcomes being created. Test assumptions to make sure you understand the unit of profit, and the connected drivers.

What will scale require? Can scale be achieved, given sales, marketing, and manufacturing assumptions? This means:

The process works when you can identify and assemble the variables that together answer these questions, and test out each one precisely enough to support decisions — not more, not less. Examples of variables commonly on the list:

#2.What would you have to believe?

Answering this question is vital to judging unprecedented concepts, where no amount of intellect or expertise overcomes unknowns. Attempting to build a detailed spreadsheet with no factual basis for assumptions is an exercise in false precision. False precision kills concepts that may well have merit. A focus on “What would you have to believe?” avoids fruitless search for nonexistent data. It’s a way to calm naysayers and those who dislike ambiguity.

Recommended approach:

Connections:

The NAG effect

“NAG” is Heather Thomas’s method to influence and win over an audience to the merits of a business model:

Get focused by embracing the mental model of the trial lawyer. You are always up against some friction point. Take three steps to incorporate the NAG method into the story’s substance and delivery:

  1. Outline what the competition’s strengths are and how you offset them.
  2. Emphasize your advantage.
  3. Explain how you preempt competitors’ relative weaknesses.

Beware: Investors are wary of change makers who claim they have no competition. Show awareness and forethought about who else has a claim to the audience you seek to serve.

Connecting with your audience’s mindset

A lot of energy goes into setting meeting dates and writing presentations. What drives the people you are trying to persuade? Professional labels — titles, roles, and brand affiliation — are good to know. And behind these labels there is also a person — an individual who has needs and wants, a life beyond your pitch, and who responds to empathy, including in B2B contexts.

Free or low-cost diagnostic tools are available to learn more about decision-making styles that affect selling and influencing. A basic search on phrases like “self-assessment tools for leadership behavior” will bring up a variety of such tools. These can be useful in identifying ways to increase impact as a leader and storyteller. As in any self-assessment, the value depends upon self-awareness, listening, and willingness to accept feedback. A mentor or other trusted adviser willing to provide guidance is invaluable.

Continue to use the user/buyer/payer/influencer model introduced in Chapter 1. Just view investors as the buyers of the business model.

Culture:

Cultural attributes for successful business model development include:

Chapter summary

Notes

1. John Reed, “Memorandum to: Messrs. Long–SVP, Kovacevich–VP, Phillips–SVP, Tozer–SVP, Re: Consumer Business,” March 9, 1976.

2. Citi Turns 200: “Focus Shifts to Retail Banking,” blog.citigroup.com, September 7, 2012.

3. Steve Freiberg, senior executive, adviser, and board member, in discussion with author, December 2016.

4. Diane Hessan, founder and chairman, C Space, in discussion with author, December 2016.

5. Bill Benedict, managing director, Alpine Meridian Ventures, in discussion with author, December 2016.

6. Jonathan Hakakian, cofounder, SoundBoard Angel Fund, in discussion with author, January 2017.

7. Geoff Judge, partner, iNovia Capital, angel investor, in discussion with author, January 2017.

8. Heather Thomas, CEO, Winsome and Business Builder, in discussion with author, February 2017.