Why you should iterate your new product idea and business model simultaneously
With low-cost access to technology and an open market of startup support such as crowdfunding platforms, it’s easier than ever to create a new business.
If you’re lucky, you discovered a group of customers who like your value proposition, and you have evidence that they would be willing to pay for it. You secure the funds to develop the minimum feature set and start the long and iterative journey towards product/market fit.
The problem I see too often is an overemphasis on the product or service with no strategy to validate the elements of the business model. Often the effort to develop the business model comes too late and results in a high cost in capital and time. Figuring out how to deliver the value to the customer — and to retain value and revenue while doing so — are the key issues in designing a business model. A great product or service without a great business model may mean suboptimal financial success or may even lead to failure. Your new product or service can’t succeed without an operational model that delivers value to customers at a reasonable price, with an underlying cost that allows you to make a profit.
Design thinking, Lean Startup, and other innovation methodologies apply an iterative and low-cost build/measure/learn approach to empirically validate assumptions typically found in long static business plans. The twenty-five-page business plan I created for my first two startups had many assumptions that turned out to be false. If I had pivoted sooner on my pricing model and initial customer segment, I could have saved capital as well as time to market.
The solution is to apply the same build/measure/learn cycles to your product and business model at the same time. The following two reasons illustrate why you need to iterate your new product idea and business model at the same time.
1. The road to a profitable and scalable business requires both market and business model fit.
Market fit
According to Alex Osterwalder (twitter.com/AlexOsterwalder), a value proposition or product has market fit when you have evidence that your product or service creates customer value: you validated that customers have a problem and that they are willing to pay for your solution. Since many of your early ideas simply won’t create customer value, finding market fit is a long and iterative process.
Business model fit
Business model fit is when you have evidence that your solution can be embedded in a profitable and scalable business model. If your customer segment is not delighted by your business model (e.g., the distribution channels), then your reach and sales strategy will underperform. If the business model is not viable for your organization (e.g., your operations costs are too high), the margins will not be sustainable.
It’s not a linear process. You don’t create a great product that customers love and then create a business model to support it. You need a great product that’s embedded inside a great business model. Building a profitable and scalable business model is not something you back into after you get good traction with your product. Rather, you need to perform build/measure/learn on the product and business model at the same time.
2. The initial goals are to prove the value hypothesis, growth hypothesis, and de-risk assumptions.
The initial goal is to optimize around learning so that you can decrease risk and uncertainty around your new idea as quickly as possible. Innovation can be expensive if you don’t de-risk with empirical customer data. Using iterative data-driven methods, you can quickly and systematically reduce risk by proving what’s working and what’s not.
Just like with your product idea, there are many unknowns in your original business model. It’s often the case that the right business model may not be apparent upfront, and adjustments will be necessary. It’s best to think of your original business model as provisional, one that will have to be tested and retested, adjusted and tuned as evidence to the original assumptions becomes clarified.
“Everything that goes on an initial business model are
assumptions and hypotheses that require validation for the business to succeed in the marketplace” — Steve Blank
Where is the uncertainty in your new product and business model? What are your assumptions regarding the various elements of your business model? There are many critical questions you need to answer before you waste precious capital and time. Since value is the primary driver in setting a pricing strategy, how can you set the price if you’re in the process of validating how much value your new product delivers to the market segment? Can one business model apply to all the customer segments you plan to serve? Can you create channel synergies by simultaneously serving all customer segments?
From day one, you need to start performing cycles of build/measure/learn on the business model so that you can assemble the evidence needed to validate your assumptions about willingness to pay, costs, competitors, distribution, and suppliers.
In summary, the process of business model testing and validating doesn’t need to distract you from developing your product. In fact, business model testing informs and improves the product, and vice versa. Apply the same iterative, data-driven approach to the business model as you are applying to your product in order to evolve the business model towards profitability and scalability.
