2.5
Finding the Right Business Model

Create Value for Your Customer and Your Business

A business that generates fewer revenues than it incurs costs will inevitably disappear, even with the most successful value proposition. This section shows how getting both the business model and the value proposition right is a process of back and forth until you nail it.

Are you creating value for your business?

Are you creating value for your customer?

The Business Model Canvas makes explicit how you are creating and capturing value for your business. The Value Proposition Canvas makes explicit how you are creating value for your customers.

Zoom out to the bigger picture to analyze if you can profitably create, deliver, and capture value around this particular customer value proposition.

Zoom in to the detailed picture to investigate if thecustomer value proposition in your business model really creates value for your customer.

Azuri (Eight 19): Turning a Solar Technology into a Viable Business

1.6 billion people in the world still live without electricity. Could innovative value propositions and business models around new technology offer answers?

Simon Bransfield-Garth founded Eight19 based on a printed plastic technology originating from Cambridge University. The technology is designed to deliver low-cost solar cells. In 2012 Eight19 launched Azuri to commercialize the technology and bring electricity to off-grid customers in rural emerging markets.

Finding the right value propositions and business models in such a context is not easy. We illustrate how it is a continuous back and forth between both on the following pages.

Azuri Business Model: version 0

1
Initial idea
An opportunity.

Developing low-cost solar technology and providing low-income people with access to electricity.

2
Observe
The Cost Barrier.

“A rural farmer on $3 per day struggles to afford a $70 solar power system.”

3
Design
What If?

Give the solar installations away for free to eliminate the hurdle of upfront investment.

4
Iteration 2
Idea for Business Model.

Lease the solar installations and collect regular subscription fees; it works just fine with conventional panels; get resources and partnerships for financing the installations.

Azuri Business Model: version 1

5
Observe
The no-banking barrier.

How can regular payments be recovered without any efficient banking system?

6
Design
Low-tech solution.

Combine mobile phone and solar technology with scratch cards to access electricity over a period of time.

7
Iteration 3
Idea for the Azuri Business Model.

Azuri provides solar-as-a-service, with Indigo, a pay-as-you-go lighting and charging system for which customers purchase weekly scratch cards: adapt the revenue model accordingly.

Azuri Business Model: version 2

So…

How does the Indigo value proposition look for a customer?

Buy the indigo kit (solar panel, lamps, charger).

Buy scratch cards, use SMS from a mobile phone, enter the resulting passcode into the Indigo unit, and use the installation for a period of time (typically a week).

Own your box after 80 scratch cards, or….

Escalate to a larger system and access more energy; continue to buy scratch cards.

EXERCISE
From Value Proposition to Business Model…

OBJECTIVE

Practice the connection between value proposition and business model with no risk

OUTCOME

Improved skills

Part A

Design the Full Business Model.
On page 96 you imagined a value proposition to commercialize an innovative compressed air energy storage technology. Now map out the remaining business model elements and sketch out the rough numbers (part A).

A1
Front Stage.

Prototype a revenue model, select distribution channels, and define the relationships that could be adopted with customers.

A2
Backstage.

Add the Key Resources, Key Activities, and Partners required for the model to work and use that to estimate the cost structure.

A3
Assessment.

Assess your prototype and detect possible weaknesses of the business model [->]

Part B

Revisiting the Value Proposition
Assess the weaknesses of your first full business model prototype (from part A). Ask yourself how you could improve or change your initial value proposition, maybe by shifting to an entirely different segment by considering the following five questions:

Tip

Follow up on your new customer assumptions by researching customers and producing evidence

B1
New VP?

Could there be another radically different value proposition for the same technology?

B2
New segment?

Will you keep the same customer segment, or will you shift to an entirely different, maybe larger, market segment?

B4
Change or clear your benefits?

Do you need to change or clear the benefits your value proposition created because the customer profile changed?

B5
Got fit?

Do you have fit between your new customer profile and the newly designed value proposition?

B3
Refine or clear your profile?

Could you refine your customer profile, or do you need to describe an entirely new one because you switched customer segments?

Stress Testing with Numbers: A MedTech Illustration

A great value proposition without a financially sound business model is not going to get you very far. In the worst case you will fail because your business model incurs more costs than it produces revenues. But even business models that work can produce substantially different results.

Play with different business models and financial assumptions to find the best one. We illustrate this with the medical technology illustration on this spread. We sketched out two models both starting from the same technology that enables building a cheap diagnostic device.

Prototype 1 generates $5.5 million in revenues and a profit of $0.5 million. Prototype 2 starts from the same technology but produces more than $30 million in revenues and a profit of $23 million with a different value proposition and business model. Only the market can judge if either model could work, but you certainly want to explore and test the best options.

Model 1: Sales of Medical Diagnostic Device

  • 1× transactional sales of device to primary care doctors in the United States for $1,000/device
  • 5 percent market share
  • Sales via third-party sales force -50 percent commission
  • Variable production costs of $225/device
  • Fixed marketing expenses of $1 million
CostsRevenues
Device Production, 1.2MDevice Sales, 5.5M
Sale & Marketing, 1M
Sales Commission, 2.8M
Profit 0.5M

Model 2: Recurring Revenues from Consumable Testing Strips

  • Each diagnosis requires a consumable testing strip
  • Recurring revenues from selling an average of 5 strips/month/device for $75 each
  • Variable production costs of testing strips of $7/strip
CostsRevenues
Device Production, 1.2MDevice Sales, 5.5M
Sale & Marketing, 1MTesting Strip Sales, 24.8M
Sales Commission, 2.8M
Testing Strips Prod., 2.3M
Profit, 23M

Profit

A quick sketch of the numbers provides us with a sanity check that this model is not very profitable, so we should go back and explore changes to the business model.

Profit

The same technology with a different business model now yields a much larger potential profit. Although these numbers aren't validated, it's clearly the more interesting prototype to take to the testing stage.

EXERCISE
Seven Questions to Assess Your Business Model Design

OBJECTIVE

Unearth potential to improve your business model

OUTCOME

Business Model Assessment

Great value propositions should be embedded in great business models. Some are better than others by design and will produce better financial results, will be more difficult to copy, and will outperform competitors.

Score your business model design by answering these seven questions:

Download “Seven Questions to Assess Your Business Model”

1. Switching Costs

How easy or difficult is it for customers to switch to another company?

My customers are locked in for several years.

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Nothing holds my customers back from leaving me.

Apple’s iPod got people to copy their entire music library into the iTunes software, which made switching more difficult for customers.

2. Recurring Revenues

Is every sale a new effort or will it result in quasi-guaranteed follow-up revenues and purchases?

100 percent of my sales lead to automatically recurring revenues.

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100 percent of my sales are transactional.

Nespresso turned the transactional industry of selling coff ee into one with recurring revenues by selling single-portioned pods that fitted only into their machines.

3. Earn Before Spending

Are you earning revenues before you are incurring costs?

I earn 100 percent of my revenues before incurring costs of goods & services sold (CoGs).

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I incur 100 percent of my costs of CoGs before earning revenues.

Personal computers (PCs) used to be produced well ahead of selling them at the risk of inventory depreciation until Dell disrupted the industry, sold directly to consumers, and earned revenue before assembling PCs.

4. Game-changing Cost Structure

Is your cost structure substantially different and better than those of your competitors?

My cost structure is at least 30 percent lower than my competitors.

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My cost structure is at least 30 percent higher than my competitors

Skype and WhatsApp disrupted the telecom industry by using the Internet as a free infrastructure for calls and messages, while telecoms incurred heavy capital expenditures.

5. Others Who do the Work

How much does your business model get customers or third parties to create value for you for free?

All the value created in my business model is created for free by external parties.

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I incur costs for all the value created in my business model.

Most of the value in Facebook’s business model comes from content produced for free by more than 1 billion users. Similarly, merchants and shoppers create value for free for credit card companies.

6. Scalability

How easily can you grow without facing roadblocks (e.g., infrastructure, customer support, hiring)?

My business model has virtually no limits to growth.

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Growing my business model requires substantial resources and eff ort.

Licensing and franchising are extremely scalable, as are platforms like Facebook or WhatsApp that serve hundreds of millions of users with few employees. Credit card companies are also an interesting example of scalability.

7. Protection from Competition

How much is your business model protecting you from your competition?

My business model provides substantial moats that are hard to overcome.

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My business model has no moats, and I
m vulnerable to competition.

Powerful business models are often hard to compete with. Ikea has found few imitators. Similarly, platform models like Apple with the App Store provide powerful moats.