Editor’s note: This post is part of a series featuring excerpts from the recently published book, The Startup Owner’s Manual, written by serial entrepreneurs-turned-educators Steve Blank and Bob Dorf. Come back each week for more how-tos from this 608-page guide.
It used to be that start-ups began with the “entrepreneur’s vision,” which was usually a highly product-centric idea for a company. Only much later–and after much agonizing–would the founder discover the idea itself didn’t amount to a complete business model.
That era in start-ups is over. Or at least it should be.
Using the Customer Development process along with the business model canvas first developed by Alexander Osterwalder, it’s possible to assemble a far more detailed version of your “vision” that includes the nine most important elements of any successful business (we’ll get to what those are below). With that in hand, you can validate your vision with the only possible “validators”–your potential customers. As customers applaud or pan elements of the business model, you iterate the model and pivot over time based on that feedback. The constantly updated business model becomes a “scorecard” for monitoring progress as you go through the Customer Discovery phase.
And that’s how you develop an idea based on more substantive stuff than just vision.
9 Most Important Elements of a Business
Osterwalder’s business canvas helps illustrate how a company intends to make money. It’s made up of nine key points that represent any company’s complete business (for much more detail, read either The Startup Owner’s Manual or Osterwalder’s Business Model Design (Wiley).
In step one of Customer Discovery, you’ll first summarize (and then develop a one- or two-page brief) about each of the following:
1. Value Proposition: the product/service, its features and benefits or uniqueness vs. competition; size of the market opportunity; and the MVP or minimum viable product that best illustrates the product as quickly as possible to elicit customer feedback early
2. Customer Segments: who your customer is and what problems the product solves
3. Channels: how you’ll distribute and sell your product
4. Customer Relationships: how you’ll create demand
5. Cost Structure: the fixed and variable costs required to operate your business
6. Key Activities: the tasks the company must perform to succeed
7. Key Resources: suppliers, commodities, or other essential elements of the business
8. Key Partners: other enterprises essential to success of the business
9. Revenue Streams: revenue and profit sources and size
In the earliest stages of business model development, it’s often most helpful to start with the first four elements at the heart of most businesses.
Testing the Model
Step two of Customer Discovery involves testing your above list of hypotheses with customers, preferably in face-to-face interviews. At least once a week, update the canvas to reflect any pivots or iterations, highlighting in red the changes from the last week. After you and your team agree on the changes to your business model, integrate them into what becomes your new canvas for the week (with accepted changes then shown in black). During the next week note any new changes again in red. Then repeat, repeat, repeat.
Don’t expect every customer or channel prospect you interview to have a valid opinion on every aspect of the business model. Some users will know a great deal about the features they’d like to see, and perhaps about competition. Others will know more about how the company buys products, some will know about how much the company might pay, or how serious the problem actually is. Most will offer good feedback about the way they learn about new products in their industry.
Your team’s job is to get as much feedback as possible using the Customer Discovery method to assemble a credible, validated “mosaic” that over time will affirm or validate all nine sets of business model hypotheses.
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