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Business Model Alchemist


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Business Model Toolbox for iPad #BMTBox
Sep 14, 2011
7 Questions to Assess Your Business Model Design
Alexander s!er"alder
#l!i$a!el%, &us!o$ers are !'e onl% rele(an! )ud*es of %our business $odel+ ,o"e(er, e(en before %ou !es! %our $odel in !'e
$ar-e!, %ou &an assess i!s desi*n "i!' . /ues!ions !'a! *o "ell be%ond !'e &on(en!ional fo&us on produ&!s and $ar-e!
se*$en!s+
0irs! !'in*s firs!+ 1n order !o assess %our business $odel %ou s'ould s-e!&' i! ou! on !'e Business Model 2an(as ou!lined in !'e (ideo
belo"+ 1f %ou "an! !o -no" $ore abou! !'e 2an(as and 'o" !o use i! %ou &an read Business Model 3enera!ion of "'i&' .0 pa*es are
a(ailable for free on our "ebsi!e+
Assessing the basics
4(er% business $odel 'as a produ&! and5or ser(i&e a! i!s &en!er !'a! fo&uses on a &us!o$er6s )ob7!o7be7done+ 1 &all !'is !'e 8alue
Proposi!ion+ So before e(en !urnin* !o %our business $odel as a "'ole, %ou need !o as- %ourself so$e basi& /ues!ions rela!ed !o %our
8alue Proposi!ion and !'e 2us!o$er Se*$en!s !'a! %ou are !ar*e!in*+
0irs!, as- %ourself 'o" "ell %our 8alue Proposi!ion is *e!!in* %our !ar*e! &us!o$er6s )ob done+ 0or exa$ple, if a user of a sear&'
en*ine is !r%in* !o find and pur&'ase !'e la!es! 9i-e runnin* s'oe, !'e $easure of su&&ess "ill be 'o" "ell !'e sear&' en*ine 'elps
!'e user *e! !'is )ob done+
Se&ondl%, as- %ourself 'o" $an% people or &o$panies !'ere are "i!' a si$ilar )ob7!o7be7done+ T'is "ill *i(e %ou !'e $ar-e! si:e+
T'irdl%, as- %ourself 'o" i$por!an! !'is )ob reall% is for !'e &us!o$er and if s'e a&!uall% 'as a bud*e! !o spend on i!+
P;*ina 2 de . . <ues!ions !o Assess =our Business Model >esi*n Business Model Al&'e$is!
0551052011 '!!p?55"""+business$odelal&'e$is!+&o$5201150@5.7/ues!ions7!o7assess7%our7busines+++
Thats it as to the basics. However, even the greatest products are having an increasingly hard time to achieve a long-term competitive
advantage. That is the reason why you need to shift your focus away from a pure product/market segment oriented approach towards a
more holistic business model approach. Below are eight uestions to assess your business model design. !ank your business models
performance on a scale of " #bad$ to %" #e&cellent$ for each uestion.
1. How much do switching costs prevent your customers from churning?
The time, effort, or budget a customer has to spend to switch from one product or service provider to another is called 'switching costs(.
The higher the switching costs, the likelier a customer is to stick to one provider rather than to leave for the products or services of a
competitor.
) great e&ample of designing switching costs into a business model is )pples introduction of the i*od in +""%. ,o you remember how
-teve .obs heralded his new product with the catchphrase 'thousand songs in a pocket(/ 0ell, that was more than a product innovation
focusing on storage. 1t was a business model strategy to get customers to copy all their music into iTunes and their i*od, which would
make it more difficult for them to switch to competing digital music players. 1n a time when little more than brand preferences were
preventing people from switching from one player to another this was a smart move and laid the foundation for )pples subseuent
stronghold on music and later innovations.
2. How scalable is your business model?
-calability describes how easy it is to e&pand a business model without eually increasing its cost base. 2f course software- and 0eb-
based business models are naturally more scalable than those based on bricks and mortar, but even among digital business models there
are large differences.
)n impressive e&ample of scalability is 3acebook. 0ith only a couple of thousand of engineers they create value for hundreds of millions
of users. 2nly few other companies in the world have such a ratio of users per employee. ) company that has pushed the limits even
further is the social gaming company 4ynga. By building games like 3armville or 5ityville on the back 3acebook, the worlds largest
social network, they could benefit from 3acebooks reach #and scale$ without having to build it themselves.
) company that uickly learned its lessons regarding scalability was peer-to-peer communication company -kype in its early days. Their
customer relationship collapsed under the weight of large numbers, when they were signing up ten thousands of users per day. They
uickly had to adapt their business model to become more scalable.
3. Does your business model produce recurring revenues?
!ecurring revenues are best e&plained through a simple e&ample. 0hen a newspaper earns revenues from the sales at a newsstand they
are transactional, while revenues from a subscription are recurring. !ecurring revenues have two ma6or advantages. 3irstly, the costs of
sales incur only once for repetitive revenues. -econdly, with recurring revenues you have a better idea of how much you will earn in the
future.
) nice e&ample of recurring revenues is !edhat, which provides open source software and support to enterprises based on a continuous
subscription basis. 1n this model clients dont pay for new software versions because it is continuously updated. 1n the world of -oftware
as a -ervice #-aas$ these types of subscriptions are now the norm. This contrasts with 7icrosoft, which sells most of its software in the
form of licenses for every ma6or release.
However, there is another aspect to recurring revenues, which are additional revenues generated from an initial sales. 3or e&ample, when
you buy a printer, you continue to spend on cartridges, or when you buy a game console, youll continue to spend on games. 2r have a
look at )pple. 0hile they still earn most of their revenues from hardware sales, the recurring revenues from content and apps is steadily
growing.
4. Do you earn before you spend?
This one goes without saying. The more you can earn before spending, the better.
,ell pioneered this model in the computer hardware manufacturing industry. By assembling on order after selling directly they managed
to escape the terrible inventory depreciation costs of the hardware industry. !esults showed how powerful it is to earn before spending.
5. How much do you get others to do the wor?
This is probably one of the least publici8ed weapons of mass destruction in business model design. 0hat could be more powerful than
getting others to do the work while you earn the money/
1n the bricks and mortar world 19:) gets us to assemble the furniture we buy from them. 0e do the work. They save money. 2n the web
3acebook gets us to post photos, create and participate in conversations, and 'like( stuff. Thats the real value of 3acebook, entirely
created by users, while they simply provide the platform. 0e do the work. They earn the sky-high valuations of their shares.
*reviously mentioned !edhat crafted another smart business model based on other peoples work. Their entire business model is built on
top of software developed by the open source software development community. This allowed them to substantially reduce their
development costs and compete head-on with larger companies like 7icrosoft.
) more malicious business model in which others do the work is the one practiced by so-called patent trolls. 1n this model patents are
purchased with the sole intention of suing successful companies to e&tract payments from them.
!. Does your business model provide built"in protection from competition?
) great business model can provide you with a longer-term protection from competition than 6ust a great product.
*;gina < de = = >uestions to )ssess ?our Business 7odel ,esign @ Business 7odel )lchemist
"A/%"/+"%% httpB//www.businessmodelalchemist.com/+"%%/"C/=-uestions-to-assess-your-busines...
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Apples main competitive advantage arises more from its powerful business model than purely from its innovative products. Its easier for
Samsung, for instance, to copy the iPhone than to build an ecosystem like Apples appstore, which caters to developers and users alike
and hosts hundred thousands of applications.
7. Is your business model based on a game changing cost structure?
utting costs is a long practiced sport in business. Some business models, however, go beyond cost cutting by creating value based on a
totally different cost structure.
Skype, for e!ample, provides calls and communication almost like a conventional telecom company, but for free or for a very low cost.
"hey can do this because their business model has a very different cost structure. In fact, Skypes model is based on the economics of a
software company, while a telecom providers model is based on the economics of a network company. "he formers costs are mainly
people# while the latters cost include huge capital e!penditures in infrastructure.
Similarly, $harti Airtel, one of the worlds largest mobile network providers, has substantially modified its cost structure by getting rid of
their entire network and I". $y buying in network capacity on a variable cost basis from a consortium around network e%uipment
manufacturer &ricsson and I$', they can now offer among the lowest prices for mobile telephony globally.
(edhat, which was mentioned previously, also built its business model on a game changing cost structure) by smartly building its own
model on top of other peoples work.
How does your business model design perform?
*f course no business model design scores a perfect +, as to every single one of the above %uestions. Some might even succeed in the
market without scoring well at all. -owever, by asking yourself these %uestions and by scoring well on at least some of them you are very
likely to substantially increase the long.term competitive advantage of your business.
/ow all you need to do is test your business model with the real 0udge) the market. "he best way to do that is by turning to Steve $lanks
ustomer 1evelopment process, which fits perfectly with the $usiness 'odel anvas.
Some more info on my workshops, speaking, and projects.
PS) I will be running a series of workshops you might be interested in. Sign.up or pre.sign.up here. In Paris 23rench) Sept 456478, in
$oston 2*ct 456478, and in 'unich 29erman) /ov 4:64;8.
PS4) "hese days are your last chance to get your name into a book pro0ect that Im involved in) $usiness 'odel <ou. heck it out here.
PS=) I wrote this post as a guest post for the $usiness of Software conference where Ill be speaking in *ctober.
"ags) assessment, business model assessment, business model canvas, business model design, business model generation, business model
innovation, business model %uestions, design thinking, entrepreneurship, innovation, 0obs.to.be.done, strategy, video
6 esponses to !7 "uestions to #ssess $our %usiness &odel 'esign(
+. Erwin says)
September +:, 4,++ at 5),, pm
"hanks for these insightful %uestions.
I myself also use the following check.list) consistency 2and synergy8, scalability, fle!ibility, innovativity, simplicity and
repeatability. 2see also http)66fieltnotes.blogspot.com64,+,6,>6business.model.shift.or.drift.html8
4. Jitender Miglani says)
September +;, 4,++ at +,),5 am
1ear Ale!,
"hanks for writing this note. It is very helpful indeed. 3or sometime now, I have been looking for frameworks to test the robustness
of business models. <our note provides a very good perspective.
3ew months back, $ill 9urley 2? in Silicon ?alley8 wrote an interesting article @All (evenue is not create e%ual A "he keys to the
+,! (evenue lub. I used his +,.point criterion to evaluate the business model of Apple. <ou can check the details at
http)660itendermiglani.wordpress.com64,++6,76++6apple.business.model.score.+,.out.of.+,6
(egards,
Bitender
=. Alexander Osterwalder says)
September +C, 4,++ at +):> pm
&!cellent, Bitender. "hanks for the linkD
PEgina : de 5 5 Fuestions to Assess <our $usiness 'odel 1esign G $usiness 'odel Alchemist
,;6+,64,++ http)66www.businessmodelalchemist.com64,++6,>65.%uestions.to.assess.your.busines...
4. Business Model and Product Management Bits&Bobs says:
September 20, 2011 at 8:56 am
[...] business that need to be worked on. was !ust readin" one o# their $atest post on their b$o" about % &uestions to assess the
desi"n o# a business mode$. 'he(k out the )ideo, super simp$e and to the [...]
5. Seven Questions to Ask About our Business Model Best Practices !or Business says:
September 2%, 2011 at 2:26 pm
[...] *ou (an read the (omp$ete te+t o# ,sterwa$der-s b$o", entit$ed .% /uestions to 0ssess *our 1usiness 2ode$ 3esi"n,4 at
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6. " #reguntas #ara evaluar el dise$o de tu modelo de negocios %Em#rende&la says:
,(tober 5, 2011 at 6:16 am
[...] 8sta es $a )ersi9n resumida, te in)itamos a $eer e$ art:(u$o (omp$eto ;)ideo in($u:do< en 1usiness 2ode$ 0$(hemist. 'e$este
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