You canâ€™t succeed in business without an operational model that delivers value to customers at a reasonable price, with an underlying cost that allows you to make a profit. There are no â€œoverridesâ€ â€“ for example, businesses donâ€™t thrive just because they offer the latest technology, or because everyone wants to be â€œgreen, or because their goal is to reduce world hunger.
I expect that should seem intuitive to all entrepreneurs, but every investor I know has many stories about startup funding requests with major business model elements missing. The most common failures are solutions looking for a problem, lack of a defined market, and giving away the product.
There are dozens of sources to help you construct your business model, and a good example is a recent book by venture capital investor Elizabeth Edwards, simply named â€œStartup,â€ which is really designed as a handbook for launching a company for less. I support her assertion that a business model consists of at least the first seven of the following ten basic elements:
- Value proposition. What is the need you fill or problem you solve? The value proposition must clearly define the target customer, the customerâ€™s problem and pain, your unique solution, and the net benefit of this solution from the customer’s perspective.
- Target market. Who are you selling to? A target market is the group of customers that the startup plans to attract through marketing and sales their product or service. This segment should have specific demographics, and the means to buy your product.
- Sales/Marketing. How will you reach your customers? Word-of-mouth and viral marketing are popular terms these days, but are rarely adequate to initiate a new business. Be specific on sales channels and marketing initiatives.
- Production. How do you produce your product or service? Common choices include manufacturing in-house, outsourcing, off-the-shelf parts. The key issues here are time to market and cost.