Assessing Your Business Model Design: 7 Key Questions to Consider
In the realm of business, customers are the ultimate judges of your model’s effectiveness. Before you test your business model in the market, you can evaluate its design through a series of insightful questions that go beyond just products and market segments.
Understanding the Basics
At the heart of every business model is a product or service that addresses a customer’s specific need or job-to-be-done, known as the Value Proposition. Start by evaluating the following fundamental aspects related to your Value Proposition and target Customer Segments.
1. How effectively does your Value Proposition fulfill your target customer’s need? For instance, if your business involves a search engine, assess how well it helps users find and purchase specific products, like the latest Nike running shoes.
2. How large is the market for this need? Determine the number of potential customers or businesses with similar needs to gauge the market size.
3. How critical is this need for your customers, and do they have the budget for it? Assess the importance of the need and the financial capacity of your customers to address it.
While these basics are crucial, they only set the stage. To gain a competitive edge and achieve long-term success, consider shifting your focus to a more comprehensive evaluation of your business model. Here are seven questions to help you assess its design
1. How do switching costs impact customer retention?
Assess the extent to which switching costs—such as time, effort, or financial investment prevent customers from moving to competitors. For example, Apple’s iPod created switching costs by encouraging users to integrate their music with iTunes, thereby increasing customer loyalty.
2. How scalable is your business model?
Evaluate how easily your business model can grow without proportionately increasing costs. Look at examples like Facebook and Zynga, which scaled effectively with minimal additional costs.
3. Does your business model generate recurring revenue?
Determine if your model includes recurring revenue streams, such as subscriptions or ongoing service fees. Companies like Red Hat and SaaS providers exemplify this approach.
4. Do you earn before you spend?
Consider whether your model allows you to generate revenue before incurring significant costs. Dell’s direct-to-customer sales and build-on-demand model is a classic example.
5. How much do you leverage others to do the work?
Evaluate how effectively your model uses external contributions. IKEA, Facebook, and Redhat are examples of businesses that benefit from others’ efforts, reducing their own costs.
6. Does your business model offer protection against competition?
Assess whether your model provides a competitive moat. Apple’s ecosystem, for instance, offers protection beyond just product innovation.
7. Is your business model based on a disruptive cost structure?
Determine if your model operates on a fundamentally different cost structure that provides a competitive advantage. Examples include Skype’s low-cost communication model and Bharti Airtel’s cost-efficient network strategy.
Evaluating Your Business Model Design:
No business model will excel in all these areas, but scoring well in some can significantly enhance your competitive advantage. Once you’ve assessed these aspects, it’s time to validate your model in the market using Steve Blank’s Customer Development process, which complements the Business Model Canvas.
