Business Model in Design Thinking
As mentioned earlier, the business model is the most crucial and perhaps the most difficult part of designing a business. It involves all aspects of the business, from customers to operations to partners to funding and revenues. There have been numerous frameworks that have gained popularity over the last several decades. These frameworks range in complexity from highly sophisticated analytical models to basic napkin-sized versions for quick-and-dirty analysis. The framework that I’ll describe here lies somewhere in the middle and can be used by anyone starting a new venture. It neither requires complex analytical skills nor is too simple to have meaning.
Check the Business model framework below:
A business model is all about one thing – VALUE.
We have so far discussed the value your solution will bring to your customers by solving their key problems in the context in which the problems are most relevant for the customers. That’s how we have been able to craft the value proposition for your target customer demographics. Up until now, we have been focused on discovering the problem, prototyping an experience vision that would solve that problem and validating the approach with key customer stakeholders. This has resulted in having a good grasp of the value proposition for the customer.
The value proposition makes the core of the business model. Regardless of whether all the other components work out or not, if the value proposition doesn’t work out, the whole business model collapses. The value proposition could also be considered as the foundation of any business model.
There are six key components to a business model.
◾ Value Proposition. The first component that we have been discussing so far focuses on understanding what problem is being solved, for whom and why it is worth solving.
◾ Value Delivery. How will the customer know about the product or service being offered, and how will the value be delivered to the customer?
◾ Value Creation. How will you build the product or service and what capabilities are needed to build the solution?
◾ Value Partnering. Who do you need to rely upon throughout the value chain? Who are the external players you need to partner with in this
◾ Value Capture. How will you generate revenue from customers? Who will pay for your solution? How much will you charge?
◾ Value Funding. From where will you get the funding to support your venture through the early stages and scaling aspects?
Although any sequence could be followed to complete the Business Model Map, a logical sequence would be the following sequence:
◾ Value Proposition
◾ Value Delivery
◾ Value Creation
◾ Value Partnering
◾ Value Capture
◾ Value Funding
1. Value Proposition
You must have realized by now that from the start of this journet so far, the key focus has been to understand the value proposition to the customers – the inner circle of the map. Value proposition essentially answers the question: “WHY is the venture worth doing and whether the problem is worth solving for the key customer segment?” In this section, I’ll be giving guidelines on the remaining five components of the Business Model Map.
2. Value Delivery
The quintant of value delivery in the Business Model Map corresponds to accessing customers. Key questions to be answered in this quintant include the following:
◾ How big is the customer segment where the value proposition is relevant?
◾ What is the total addressable market (TAM)? TAM is the portion of the target market that the solution can deliver value to.
◾ What is the serviceable addressable market (SAM)? SAM is the portion of the TAM which can be serviced by the business.
◾ How will the customers know about your solution and your existence as a business?
◾ What channels can be leveraged to access customers? (Online, social platforms, industry forums and events, marketing, face to face, distribution channels, etc.)
◾ Are there any relationships with customer segments that could be exploited to convey value to customers?
◾ How can the value be communicated to the customers?
◾ How much value will the customer perceive of the solution?
◾ What will be the pricing strategy for the solution?
◾ Will the solution be readily usable, or will it require implementation services or guidance before it could be used?
◾ If additional services are needed to make the solution usable, how will those services be provided?
◾ How will customer support services be provided after
3. Value Creation
The
◾ How will the solution be built?
◾ What key features and capabilities will be needed for the first release?
◾ What will be roadmap items for future releases?
◾ What are the performance objectives for the solution?
◾ What experience will the solution enable? Rather, how will the solution enhance the customer’s experience?
4. Value Partnering
As a start-up, it is highly unlikely that you’ll be able to possess all the necessary resources to create and deliver value to your customers. The quintant of value partnering is all about looking for ways to partner with existing players who could help your business in the value chain and shorten the time to market so you could focus on building your core competency. What you do not want to do is to partner on core competency. Ask yourself following questions as you evaluate the need to partner with other entities.
◾ Can you leverage resources from a partner to build your solution?
◾ What’s in it for the partner to lend you its resources?
◾ Can you leverage some process expertise from a partner to expedite your solution creation? Examples of this kind of partnership may include manufacturing and quality assurance processes for a partner in Asia.
◾ What could the partner get in return for expending these processes?
◾ Can you use technologies from a partner to help you shorten time to market? Examples include Amazon Web Services and Microsoft Azure – these are cloud-based platforms which have become de facto standards
for all new start-ups to build their software applications on. Most tech start-ups use APIs (Application Programming Interfaces) from several providers to build their solutions. Some of the most commonly used ones include Google Map API, weather APIs, traffic APIs. In enterprise space, SAP Cloud Platform allows teams to build business solutions as well.
◾ What would it cost you to use these technology capabilities?
◾ Can you leverage resources, process or technology from a partner to deliver your product or service to your customer segment? Online retail platforms like Amazon and eBay allow start-ups to make their products and services available to consumers.
◾ Can the partner help you in gaining visibility in front of the customers who may be their customers as well? Advertising platforms from Google and Facebook are indispensable for reaching the right customer segments for start-ups. In enterprise space, SAP opens access to its 400,000
global customers for start-ups which build solutions on SAP Cloud Platform.
◾ Can you partner with a player to gain access to a key channel for exposing your solution to customers? For enterprise-focused solutions, there are specialized distributors who help in positioning the solution in
front of the right customer groups for a share of the revenue generated through this channel.
◾ Can you leverage existing relationships between a partner and customers to position your solution? This is most commonly seen in industries where an implementation services provider already has deep relationships with customers and could be leveraged for your solution as well where they could become exclusive implementor of
the solution.
◾ Can you partner with a financial institution to extend credit services for making it easier for value capturing?
Partnerships are all about finding mutual value. As you explore partnerships, think about the value this partnership will bring to the partner.
5 Value Capture
What experience has shown is that value creation and delivery isn’t as difficult for start-ups as capturing the value for your business. As you think about capturing value, think about the following aspects.
◾ Can you quantify the value of the problem you are solving for the customer with your solution?
◾ Does the customer realize and agree with your estimate of the problem scale?
◾ Can you quantify the benefit of your solution in solving the identified problem?
◾ Does the customer realize and agree with your estimate of the solution value?
◾ Does the customer trust you as a partner?
◾ What does the customer feel about the problem you are solving? Is there an emotional reason that the customer would be more or less inclined toward solving this problem? For example, if your solution brings efficiency advantage to a client’s IT organization that eliminates
the need to keep a significant portion of their team on staff, this will create significant emotional distress for the decision maker, not because he/she doesn’t want the efficiency gains but because he/she is worried about the well-being of the people who will no longer be needed. In addition, with a smaller team, the CIO’s realm of influence in the organization will also shrink – no leader wants to have a smaller team to manage.
◾ The customer is already continuing his/her business without your solution. How much does it cost currently to operate?
◾ What are the competitive alternatives a customer has at his/her disposal? How much do the competitive alternatives cost to solve the same problem?
◾ Does your pricing structure require
◾ Many online service providers offer a “Freemium” model which lowers the barrier to adoption by allowing customers to use the service before buying. The Free portion of the model may restrict advance features or may limit the duration of use, which is also called a “trial period.”
The premium portion of the model is where the value is captured from customers.
6. Value Funding
Finally, the quintant of funding is as important for a start-up’s survival as air is for humans. The graveyard of start-ups is filled with stories where start-ups did an amazing job in identifying a market opportunity, filling a real need and building the initial prototype to solve that problem
in a manner that created real value for the customers. They were also able to capture some of the value for their own operations as well, but, as the saying goes, they ran out of runway. Their burn rate (net operating cost per month) became unsustainable, and they weren’t able to
raise enough funds in time to save the collapse. At the initial stage, the handful of founders could bootstrap and bring the first prototype off the ground, however, to scale, make a production-ready solution and build a lean organization that could serve customers, they needed to raise funds.
There are many books that extensively cover the fund-raising aspects of a start-up as well as financial management, but here are some key points to consider:
◾ Fund-raising means giving a portion of the company to investors. If there is a way to make the start-up self-sustaining, try that first.
◾ Fund-raising is an exhausting process which takes
◾ Think of a way in which customers could fund the development of the product as well.
◾ Have a clear understanding of all components of cost and set milestones (aligned with the stages and steps described in this site to have a clear view of the sustainability of the operations).
Resources, Processes and Technology
As you traverse through the Business Model Map, in each of the quintants, discuss and document the resources, processes and technology needed.
Here are some of the questions to ask in each of the quintants:
◾ What resources are needed? These resources include people and assets.
– What skills are required?
– What tools, assets and raw materials are needed?
– How big of a team is needed to support operations?
◾ What processes need to be adopted?
– What are key activities the team needs to perform on a regular basis?
– What capabilities are needed?
◾ How could technology help in each quintant?
– Which online services help?
– What software and hardware will be required?
7. Business Model Framework Template
Use template below to work on your business model.
8. Guidance
Session Lead
Draw the template on the whiteboard (five feet in diameter) and as a team focus on the Value Delivery quintant. Consider all the questions mentioned about Value delivery earlier and fill in the section. Expect to have lots of questions and interesting discussions. Have a specifc discussion around resources, processes and technology that need to be considered for value delivery. Inevitably, discussion would highlight some partnership potentials, which should be documented in the partnership quintant.
. Continue the same discussion for Value Creation quintant.
. Continue the same discussion for Value Capture quintant.
. Continue the same discussion for Value Funding quintant.
Finally, review the Value Partnership quintant.
This exercise will give you insights on all aspects of the business model for your idea.
8.1 Document Assumptions
After the session, the session lead should ask the team to write down all the assumptions made and record those assumptions in assumptions template in Stage 4.
8.2 Review Prior Steps
Review the prior steps and adjust as needed with the consensus of the team.
9 Bringing It All Together
The figure below conveys the linkage between all the concepts highlighted to transform an idea into a business. At the core foundation of the business model is the user/customer and the problem you are trying to solve for him/her. In this framework’s lexicon, “Target to hit” focused on what job you are helping the user to complete, what goal you are helping the user to accomplish and what vision you are helping the user to realize. If you have not understood what the targets are, at not just the rational and analytical
level, but at an emotional level through building empathy with the user, all else is immaterial. So spend as much up-front time to uncover those insights as possible. Throughout your iterative prototyping, your goal is to validate that the targets you are helping the customer to hit through your experience vision and solution approach are the ones the customer truly wants to hit.
Understanding the user’s problem should be considered the foundation of your business model on which the value proposition of your solution is built. Understanding the value that a user sees in your solution approach is extremely important. Whether your solution will help the user hit the target in a better way, a cheaper way, a faster way or an easier way will dictate your competitive advantage and thereby your core competency. As you go through this stage, you’ll realize the type of advantage your approach has over existing ways of hitting the target, be it quality, cost, efficiency, experience or a combination of two or more of these advantages.
With a clear understanding of the value proposition comes the crucial stage of crafting the business model, where all aspects of the value chain – creation, delivery, partnering, capture and funding come into play. Most often, it is neither the problem space that helps you build a sustainable business nor is it the solution quality, it comes down to a business model. A business model, which is validated by the customers, proven through their wallets will determine whether your idea can be transformed into a sustainable business or not.
Finally, your business model is not operating in a vacuum. It is heavily and continuously being impacted by the business context you are operating in. Current and future trends – industry, technology, competitive, business model, macroeconomic and others – will shape your business model. Consider these aspects as you build your venture.
One more word of advice before you head to the final stage. As you iterate through all of the previous steps, your understanding of all the key stages would improve – understanding the problem, devising a solution and crafting a business. If you approach the space with an open mind, you’ll see that your idea has transformed into a business which is likely to be drastically different than what was originally conceived. This is very normal and actually a sign that you are finding your way through the entrepreneurial jungle. You’ll be doing many pivots before finding the right direction for your business. Be open, fail often and fail early. This framework will help you do just that.
