Every one of us has an idea on one’s minds that we want to materialize into a business venture. It is difficult for a common person or even working professional to fully understand the dynamics of launching a business/startup. That is why 80% of the startups fail in the first year and the remaining 15% fail in the first 3 years. Only 5% of them take off into profitable ventures. The origin of success, failure or stagnation lies in understanding and validating your idea with business model canvas (BMC), which provides a bird-eye view to the whole business model and offers flexibility in evaluating all the assumptions into a concrete workable business model.
What is a business idea?
Any unique idea that one thinks would make some money when materialized is generally based on assumptions, observations, and hypotheses. Traditional businesses require only a huge amount of investment and previously established, tested and tried business models to launch and run. Banks also recognize such business models for investment. We are discussing startups in particular that have totally different dynamics than that of traditional businesses, supported by an ecosystem where the investment is done by the Incubation Centers, Angel Investors, Venture Capital Firms.
What is business idea validation?
Whether the idea would actually be liked by the customers and other people or turn out to be another nuts idea? No one can tell this beforehand. The only solution is to find some data of relevant business happening in the same market or elsewhere abroad, for instance, Airlift used data from similar bus service from Egypt to project the viability in Pakistan’s market. The second way to validate is progressive elaboration using the lean startup approach. BMC is a live document that gets updated every now and then with what works and what doesn’t.
Business plan vs. Business Model Canvas (BMC):
A business plan is known to everyone which is used in large scale investment portfolios where there are dedicated teams responsible for formulating the plan based on research which is done by another team of market experts, in a nutshell, a business plan is very large comprising hundreds of pages. However, BMC is just a one-page plan made for startups where the founders of startups have to do multiple tasks by themselves, they wear multiple hats due to resource constraints: team, equipment, and capital. BMC serves the founders best due to its flexibility. They keep on updating it with what brings the most results to the business.
The lean approach to startups:
The lean startup approach or methodology is all about flexibility and adaptability in one’s startup with a special focus on understanding and fulfilling customers’ demands. Moreover, this methodology is about starting fast, failing fast and starting over again burning minimum resources, energy, and motivation. Failure is nothing to worry about, it is the part of success. Failure helps in learning two sides: the supply side which is inhouse production or service capacity, and the demand side which is related to the customers. In other words, BMC helps have these basic answers to the following questions:
- Do we have the capacity to produce that certain product or service?
- Does the market demand our product/service?
- Should we produce it?
- What will be the revenue streams?
- What is the initial capital required?
- What would be the running cost?
Elements of BMC:
a) Value Proposition:
A value proposition is the actual business idea “what value do we really want to add to our customers’ lives?” Our business will make money for sure If it adds some value through its product or service. For instance, Skechers shoes provide the best comfort to the wearers for a very nominal amount of money compare to Nike or Adidas that are premium brands. Further, for a service sector industry, such as sales training that helps the executives meet their sales target as well as generate more revenue for the organization, in return, organizations pay for the value the sales training service delivers.
b) Key Partners:
It is good to determine the value chain in business particularly, the suppliers for product-based business, and the key partners with strong professional linkages.
c) Key Activities:
BMC puts special focus on the activities required to produce the product or service, develop a relationship with customers and other businesses, and overcome problems and potential failures.
d) Key Resources:
An idea can only be materialized when it is provided with the required knowledge, skills, and funds.
e) Cost Structure:
Every business has mainly two types of expenses, initial capital and running capital. For startups to succeed, both initial and running costs must be reduced to a minimum. In this lean startup approach, founders do experiments and they spend minimum cost for producing different versions of a minimum viable product (MVP).
The following elements of BMC deal with aspects of customers:
f) Customer Segments:
The customer segment is the trickiest part of every startup life cycle. In the beginning, every other person for B2C or business for B2B looks like the buyer of one’s business. One’s actual customer segment is only revealed after substantial market research or the launch of the prototype in the market. Finding the actual customer segment of your product or service is a great success. It is considered an important milestone following achieving the MVP. For example, a company is producing gents wallets, the wrong and right calculation of customer are as follows:
i) Wrong calculation
The wrong way of calculation (people often calculate their customers this way): there are 200 million people in Pakistan and the Urban population is 36% which is around 72 million people. Half of them are the only male that becomes 36million. Then 65% of them are mature people who can use wallet excluding the children, makes it around 23.4 million prospective wallet users. Now pessimistic estimates say that only 1 percent of these young buy our product (wallet) which is 234,000 people. And one wallet costs Rs.500. This one percent customer base can give us 117 million rupees for every 6months. Sounds good? This is totally wrong to calculate one’s customers.
ii) Right Calculation:
The right way to estimate your customers is to specify a particular segment of people however small it may be. Calculate the traffic at your touchpoints: Website, Mobile App, office/store, etc., using the best traditional and digital marketing techniques. For instance, you manage to get 10,000 people on your touchpoints and 10% of them become your customers. Now the revenue can be calculated as follows: Rs. 500 x 1000 = Rs. 50,000. That makes sense.
g) Customer Relationship:
Marketing and sales are all about establishing a relationship with your customers. Your product or service determines the type and nature of the relationship that you establish with your customers. Fast Moving Consumer Goods (FMCG) companies have a succinct buying cycle that requires relationships based on emotional understanding. Contrarily, products or services that have long sales cycles require a personalized focused approach to customers either in person or through advance Artificial Intelligence (A.I) and intent-based technologies.
In this era of technology, it is the need of the hour to find out a pertinent channels to reach out your prospective buyers for instance, above the line (ALT) marketing campaigns are generally used for FMCG related ventures where the sales cycle is fast and below the line (BLT) marketing is used for B2B requiring long sales cycles.
i) Revenue Streams:
A profitable business model starts from one revenue stream and scaling up to as many as possible.