Every company is based on an idea and thus has a business model per se. In practice, however, the chaff quickly separates from the wheat, and the better business models from the worse ones. The question is therefore: How do you develop a business model from a first idea?
Not only start-ups do well to spend a lot of time on business model development – this is also a good precursor for classic start-ups to the business plan. We will show below how to develop a business model in 11 steps.
What makes a successful business model?
An idea is far from enough to build a successful company. It is only the first step. In the second step, a business model should be developed from the idea. The business model outlines the main factors of the company and thus shows why, with what and how the company will make money. Accordingly, the most important questions in business model development are:
- What is the offer?
- Who is the target customer and what is the benefit of the offer?
- How are sales generated?
The business model discussion is often focused on innovative start-ups. In our view, however, this is too short-sighted. The development of the business model also plays an important role for classic business ideas such as trade, services or crafts. And even if you have already grown beyond this stage, you should periodically review and test your business model.
Why is the business model so important?
In the past, business models were relatively simple and clear. The baker who sells his buns, the hairdresser who cuts his hair or the cinema that shows movies. Today, there are discount bun stores, Starbucks, feeling an oversupply of hairdressers, and in cinemas operas are running from the Met, while Netflix and Amazon bring the latest movies to the tablet.
This shows that business models, and thus the way companies make money, are subject to continuous change. And those who do not change also disappear. And even business models of large corporations suddenly no longer work, as the examples of past years show (Nokia, Leica, etc.).
11 Steps to Develop a Model
11 factors are taken into account in the development of the business model. Accordingly, we recommend the following outline if you are developing a business model:
1. Start with the vision
Only if a company makes sense, i.e. solves a customer problem or meets an important need, can it be successful in the long term. So answer the question why you are doing something you want to do and what vision You pursue your idea – where do you want to be with your company in the long term, i.e. in 8 to 10 years? One or two concise sentences are enough at this point.
2. Founder (team) and skills: central factor
An idea remains an idea forever if there is a lack of implementation. That’s why the founder or the founding team plays such a big role in young companies. Because until the business model is established and the idea is accepted on the market, everything stands and falls with you. They fill the idea with life, initiate the decisive steps and accompany the implementation.
As part of the development of the business model, you should answer the following questions:
- What skills are needed to implement the idea?
- What skills do you have as a founder(team)?
- Where are the remaining deficits or what skills are still needed?
- How can these gaps be filled? (e.g. find other team members, employees or external service providers – see also point 11 – resources)
3. Customers and their needs
Who is your offer aimed at? Who is your target customer? Next, it’s your goal group definition when you develop your business model. A fundamental difference in the definition of the target group arises from the distinction between Private customers (referred to as B2C) and Business customers (called B2B market). For example, the description of target customers in the B2C environment includes demographic factors (such as gender, age, origin) as well as lifestyles and values (among others). For business customers, however, it is factors such as industry or company size that characterize your market.
But whether in the B2C or B2B environment, the following question is identical in every business model. What are your target customers’ needs? Often, potential needs can arise from existing problems, which can be (better) solved with one’s own offer. Tip
When defining your target group, you should not just rely on your gut feeling or leave it at a rough idea. Create personas for your ideal customers, and work towards them.
4. Idea: Which relevant customer problem will be solved?
In the next step of business model development, you show how your idea meets the needs of customers in detail. First, simply list the basic needs or problems of the customers. Then describe the specific products or services that solve the problems. This makes it clear for your business model that what customer benefits offer you with your offer and what customer requirements you meet.
- Example: If young parents want to go to a café with their young children, they usually do not offer suitable snacks or cakes for the little ones. However, since many parents now attach great importance to a healthy diet, they have to bring something themselves, as the cake is not suitable for young children. For example, a café can now respond to this with a special offer for toddlers and set itself off from the competition.
Once you’ve done this, your business model already shows you how to stand out from your main competitors – what makes you unique? In this context, the USP (Unique Selling Proposition) of a business model is often referred to.
5. How attractive is the market?
You have already taken a first look at the competition at step 4. For the development of the business model, however, you should take a closer look.
However, this aspect is preceded by the market and the question of how large it actually is. Based on the defined target customers, try estimating to the market volume and market development to develop a business model: Do you expect market growth or do you expect a consistent market volume in the next few years? Show which trends will affect the market in the future. You may even have found a gap in the market. Then you can be the first company to benefit from this, but you have to expect competitors to follow quickly.
You don’t have competitors? This statement is mostly false and an alarm signal for investors. And you too should beware of this assumption. Identify the three to five main competitors for your business model as part of the business model development. In the course of the competitive analysis, create a strength-weakness profile of these competitors so that your positioning is quickly clear compared to the competition.
Finally, for this area of your business model, you should put together the three to seven most relevant factors for your target customers’ purchase decisions.
6. Validate your assumptions
Already in the planning process of your foundation, it is helpful to validate the assumptions made as early as possible to develop a business model. Market research represents the classic way to do this. Create a questionnaire (there are now numerous survey tools for this) and reach out to your presumed target customers. The questionnaire should cover the following areas:
- Customer needs and problems: You can use a questionnaire to find out whether the identified issues and customer needs are actually present and perceived as such.
- Factors of purchasing decision: What motivates the target customers to buy, have you determined the right factors?
- Assessment of the competition: Are there still competitors that you have overlooked and do customers share your assessment of competitors? Or do competitors might have quite different pluses that you haven’t seen before?
- Willingness to buy: Are your target customers willing to buy your offer – especially if the price is above that of the competitors, for example?
Analyze the results of the survey accurately. You can take up negative feedback to either improve the offer or change the target audience for your offer.
If the feedback is positive, you can validate the market. To do this, you need the following key figures:
- Size of the target group
- Purchasing frequency
- achievable price
- Predict your market shares
This results in the sales potential of your company.
Excursion: test the business model directly in practice
In the context of market research with questionnaires, you primarily collect opinions and views. These may, of course, differ significantly from the actual subsequent purchase decision. Using the following methods, you can test your product or service in a real environment at a very early stage.
Lean Startup
The lean start-up stands for a quick market entry with a “slim” prototype, which can be improved and matured based on customer feedback.
MVP
If you’re launching with a minimum viable product, start with the simplest version of your product, which still adds value to customers.
Pop-up store
A pop-up store is a retail store that you open temporarily to test how your offering arrives with a manageable budget and low risk.
7. Determine the optimal positioning
An important point in the business model is your positioning in the market and the associated strategy. Price and quality are among the classic cornerstones of positioning. Are you a price leader or quality leader in your market? And what is your competitors’ position? In addition to the factors of quality and price, you can also use other components for positioning. However, these should always be relevant to the purchasing decision of the customers.
8. How do you want to attract customers?
In particular, the topic of Marketing and sales are important right from the start. Even during the development of the business model, you should determine the main marketing activities. Depending on your target group, there are big differences in the marketing concept for the B2B or B2C range. List the main marketing activities. And appreciate how expensive it is to acquire a customer. This helps you to make a reliable calculation of the marketing budget. Compare the advertising efficiency of individual marketing channels: For this, too, we have a free tool.
Also define the main sales channels and Acquisition measuresthat you aspire to. This may include, for example, the following points:
- Sales in-store or online shop vs. sales via Amazon
- Listing in supermarkets
- Use of sales representatives
- Telephone acquisition (internal or via a call centre)
It is much easier and, above all, cheaper to retain a customer than to attract a new customer. Therefore, customer loyalty measures also belong to the area of marketing and sales of your business model.
9. Revenue model: How do you make money?
Record the main revenue items and provide information about your income model. For example, do you have a subscription model or do you sell products directly to the customer or do you earn a commission on the sale of certain products, such as insurance? It is also conceivable, for example, that you have a freemium model, where you only earn money later as part of the use of your offer.
Then make initial forecasts of sales development. Characteristics that you have to determine in this context and depending on the specific yield model include average sales per customer or shopping cart, the frequency of purchases and the duration of the customer relationship. The revenue in your business model is followed by expenses.
10. Record the main expenses
First, you calculate the start-up costs and investmentsthat go hand in hand with the implementation of your business model. With the start of the company, operating costs are added. Which material cost items result from the ongoing business. These include the direct costs that can be attributed to their revenue carriers, including marketing expenditure in particular, as well as classic cost items such as rent, insurance, wages and salaries.
In the comparison of revenues and expenses, you can now make statements about the margin and profitability of the business. Determine the expected break even and the capital requirementsnecessary for your offer to be successfully placed on the market.
11. What resources are needed?
After all these considerations, it is finally a matter of showing which essential resources are necessary to implement your business model. This includes, for example, capital, employees, the equipment for your store, the first warehouse, the online presence or upcoming technological developments.
However, key resources to develop a business model often include important partnerships that determine success or failure. This includes suppliers, sales partners or development partners, among others, if you cannot represent important elements in the company for this purpose.
What happens next according to the business model?
Business
In your business plan, you can take many elements from your developed business model, but you can present them in much more detail. A business plan software helps.
Budget
The financial plan shows your business development in figures and gives you information about whether your business idea can be worthwhile. Use a tool to save yourself unnecessary work.
Pitch Deck
If you are looking for investors, you can already create a pitch deck with the developed business model and thus present your idea appropriately.
Conclusion on business model development: stick to it
The idea alone is not enough to build a successful company. When you develop a business model, you should outline the key factors of your company and show why, with what and how the company will make money. In addition to the vision, this also includes the founder or the founding team, the target group, the idea as well as the market and competition and the validation of the market. As part of a business model development, also check strategy and positioning, market and sales as well as finances and resources.
Even if you are already beyond the idea and planning phase, it is relevant to develop a business model. Because markets are changing at an unprecedented rate. New competitors are joining, new marketing channels emerging trends sometimes radically change purchasing decisions.
That’s why your business model isn’t set in stone. Existing companies should continue to work consistently on their business model and always question it. Of course, you should not constantly change your strategy or other elements completely. But there will always be improvements, adjustments or even complete innovations (in the start-up language this is also called disruption). So stay tuned – only in this way can you ensure that your successful business model will continue to be successful in the future.
By the way, the company Leica, which we mentioned at the beginning of the article, has managed to avert the bankruptcy and become successful again by adapting the business model.
