Use the Business Model Canvas to Organize Your Idea

Introduction

When I launched my first company in 1999, it was all about the business plan. The advisers to our company were all about perfecting every last word in the plan, tweaking our presentation to highlight key objectives and claims, and constantly tweaking the pro forma financials. In this post I’ll talk about the business model canvas[1] as a tool for organizing the set of hypotheses[2] we call the business model canvas (#businessmodelcanvas). If you stick with this analogy, you’ll find that its not possible to make unsubstantiated claims about your business without “showing your work”. This means that you’ll need to test all 9 sections of the business model canvas before approaching customers more formally. We’ll come back to the business model canvas later but in this segment we’ll focus on some of the most important elements- functional prototype and pricing.

The Main Idea

Every element of your value proposition must be tested

Value propositions are not a new concept. Every undergraduate business student or MBA student knows what this term means. This value statement or proposition explains what your solution is and your proposed solution will create value for the customer. I was taught early in my career that profits are the result of providing excellent products and service, innovation, customer satisfaction, and managing your company effectively, and I am very biased in this way. Keithley Instruments founder, Joe Keithley Sr. institutionalized across the company as the acronym QSII- quality, service, innovation, and integrity.

Business Model 1- Your first draft.

The business model canvas (#businessmodelcanvas) is a tool for organizing all of the interlocking components of your business. This is done at the concept stage, not during product launch. Try it- open your business model canvas book and go through the 9 elements. Can you describe them? When I was teaching this material as a part of introductory course in entrepreneurship at the University of California at Santa Cruz, the students and I spent a lot of time trying to figure out how the various blocks of the model interact. These discussions were extremely valuable. I would often have a student pitch their value proposition and the rest of the students (50 to 100) would act as "consultants" and try and help improve the concept.

For example, if you plan to sell through distribution and not directly to customers then you need to state how and why your distribution channel will find customers and sell your product. If you sell direct, probably through the App Store or via a web merchant like Amazon, Etsy, Ebay and few others, you’ll need to tailor your marketing for that audience. As an example, my current agriculture customers don't really use social media that much or even go to the web to find new stuff. Its mainly word-of-mouth. So referrals and and reference accounts that will provide positive reviews are essential.

Business Model 2- Who does what

One of the goals of this exercise is to identify what your firm does and what other firms might do to help you along. For example, you are making a unique product and want to keep all of the manufacturing in-house. This is a very expensive thing to do. Perhaps you should find trusted suppliers that can manufacture PC boards for you, or make custom chemical compositions you might need. For example in my current firm, we found a nanostructured material that that we probably could have synthesized from scratch. Through a long process we finally found a supplier that was already making this material but had not publicly released it. Once we explained the size of the market, we generated enough interest for them to send us a small amount of the material for our prototyping work (BTW- it worked very well for us). We are moving forward with this project very carefully. We’ll explore this in much more detail in our post on open innovation.

You should consider looking at potential partners that are looking for new ideas or ways of doing stuff. This works very well if the potential partner sees your product as complementary to their existing business. Some caution is advised here. Remember that asking a larger firm to go into business with you in some way is fraught with risk for the larger firm. Any screwups by your team could damage the larger firm’s reputation or customer perceptions. But many larger firms are constantly looking to grow their business through finding new applications for their existing products, gaining market share against their competition, or my favorite- launching new products and businesses. You will have to manage this tradeoff skillfully to get into business with a much larger partner.

Business Model 3- All pieces must fit together like Legos™

The Lego analogy is quite useful. An outside expert will examine your business model (canvas) and begin by asking questions about each claim that you make. They will be looking for obvious or logical inconsistencies in your claims about how your business will succeed. You must be forthcoming with either “it works like this” or “ we don’t know yet”. The right consultants or outside experts can help you fill in the blanks or get data that will help you fill in these unknowns. Its probably a fool’s errand to assume that everything will be thoroughly tested and go as planned. The military forces around the world know that a battle plan to engage with the enemy forces is less helpful once the fighting starts.

The battle plan helps you get organized but it cannot anticipate what might happen once you engage with hostile forces. Just watch the opening to heart breaking movie “Saving Private Ryan”. The plan was to soften up the German forces arrayed along the coast. Bombers came in, destroyers pounded the beach from a distance. But when the allied forces hit the beach, thousands of soldiers were lost to the dug in German forces that were unscathed by the bombing phase. The troops landing on Normandy beach and others had to immediately adapt or die on the beach.

Just remember to set your expectations that once you supply that first product to the customer, be ready to dig in with immediate support and hopefully, you won’t have to attempt the dreaded “#pivot”. If critic Ambrose Bierce[3] were alive to today he might call the “pivot” the last gasp of dying idea.

Business Model 4- The Customer did not accept your prototype

You gave your ideal customer a prototype and they were not satisfied or happy with it. Disaster? Nope. Any salesperson knows that a customer objection is an opportunity sell the benefits of your product. You can use this setback to dig more deeply into the customer’s objections- these objections are some of the most valuable insights you may ever receive. If we assume that person who writes the checks is also the one telling you what needs to be changed, you are in good shape. The obvious example that might illustrate this point are switching costs. Lets say you are trying to knock out an entrenched competitor. While your product might be faster, cheaper, and smarter, the switching costs may force the company to think that switching to your product could be zero sum game where there is no clear financial or competitive benefit. There are other hidden barriers to customer acceptance. If you don’t have any experience selling similar products to what you are making, now is a good time to get some advice from a former marketing/sales colleague.

Business Model 5- The customer liked your prototype.

Success! You are close to validating a key part of your business model. With a functional prototype that does what the customer wants, you are now in a position to move the idea forward. In my experience, this is the time to revisit your initial business model canvas and rewrite some of the basic statements. Most of all, this is the time to start looking very carefully at the costs of your prototype, how you will scale the business up and the pricing. You can download any number of free spreadsheets for your P&L, balance sheet, and cash flow.

Business Model 6- Pricing depends on the business model and vice versa

When we launched Tailwater Systems in 2018, we had no information about what the customer might pay for our system. There were no competitive products even remotely close to what we were doing. Further, we had just filed a provisional patent on the first design (we had to wait 3 more years before the patent was awarded).

So how to price? We were unsure about how reliability or stability problems we might encounter. So we decided to use a subscription model. This turned out to be a wise choice. In a subscription model, you (the supplier) own the equipment and do all the maintenance and repairs and guarantee the outcomes. This also means that you don’t have to explain any of the clever bits you developed in the design of your prototype. However, the subscription model creates its own problems. The biggest- some customers want to “pay once, cry once” (per my neighbor, a former high end plumbing contractor). The equipment must show up as assets on your books if it falls into the category of depreciable assets- making your accounting a big more complex. Further, you must have a way to repatriate your equipment should the customer repeatedly damage it.

We came up with an initial subscription pricing model. Our monthly payment covered our routine maintenance and also generated a profitable service business. Our first customer accepted the model and pricing and we were off to the races.

But once our patent issued (2021), we immediately expanded our business model to allow customers to purchase, lease/subscription model, or acquire rights to build this system to a license to our technology. Hopefully this change to the model will allow us to configure a system with a pricing/ownership model that is very adaptive.

Summary

The business model canvas is an excellent planning organizational tool to help you test your idea before you put your heart into launching your amazing new product and business. In our experience, some parts of the business model are critical to success- the functional prototype. A successful test of your prototype can help you refine the business model and update your assumptions. An unsuccessful test of your prototype can help you re-define your product and update the design.

[1] As I mentioned earlier, there are a great many books, websites, and practictioners talking about the business model canvas. You need to buy the book, read it, and use it. https://www.amazon.com/Business-Model-Generation-Visionaries-Challengers-ebook/dp/B06X426D4F/ref=pd_sim_1/146-6389079-9624802?pd_rd_w=C5d1P&pf_rd_p=d9946c66-b1cb-486e-8910-b5930c8935b6&pf_rd_r=9HKF8TXWC4G35NNF82WR&pd_rd_r=382826ef-2299-4c55-af8c-f19ba5a8d494&pd_rd_wg=iRM9i&pd_rd_i=B06X426D4F&psc=1 [2] Steve Blank, a well known force in the Silicon Valley community defines a startup as a set of hypotheses that needs to be tested, or words to that effect. [3] Mr Bierce is best known by English students as the author of the “Devils Dictionary”- a collection of satirical stories and editorials written during and after the American Civil War (1861-1865).