Can a single model change my business?
More than likely, here is why and how based on our experience.
Thankfully, we have moved from mechanical to digital models since Lord Kelvin’s time. I think he would agree that they are much more versatile in useful in general. Kelvin loved models, though the particulars of this quote may be arguable. Your business should love models, too.
Kelvin certainly captured the understanding component of a model, but your business should value them for a broader array of reasons. Specifically:
- a model creates broader understanding of your business
- it simplifies complex processes
- it focuses attention on the “moving parts” that truly matter
- it allows you to experiment
- it becomes a framework that aligns technology and computer optimization with your goals
Case Study:
more of a career study, really…
For over two decades, I have built a career on analyzing complex businesses and developing simplified models to serve as frameworks for analytic development. My experience and my bank account attest to more than a dozen successful implementations of models that drove massive growth. These models enabled optimization, but they went far beyond.
The models had many things in common. They all married the business process with the customer life cycle. So many people worry about calculating an NPV or defining their revenue streams. Build a visual model first. Even if you only draw up a simple matrix, you will advance your cause a dozen fold.
Something as simple as this grid on the left is a decent starting point. It lets you organize your thinking and focus on key components of the business process. This matrix becomes even more effective as you populate it with key performance indicators — volumes and rates. Be sure to capture both perspectives — revenue & cost, company & customer, time & value, etc…
The Problem With A Matrix
If you can do nothing else, build a matrix. But if you can do anything else, leave this step for later. I have a resume that includes some of the world’s largest banks, major start-ups, and eCommerce’ finest (eBay, Paypal, Amazon). I have also consulted for major players from Harley Davidson to dating sites, from Progressive Insurance to supply chain software developers. Along the way I learned an easy but repetitive lesson, left to their own devices companies build matrices that test the limits of an Excel spreadsheet.
Remember — I said simple matrix. If your matrix isn’t simple, it isn’t a model. Models are often called scale models for a reason, but it is not just about size. Complexity kills. The more complex your matrix — the less you really understand your business. I prefer to start with something more simple.
If that seems overly simple to you, you may be catching on. This is the most synthesized model of a customer-centric business process that you can ask for. Point A — is the point of Acquisition. Point C — is the point of having a true Customer. I haven’t cluttered things up with prospects and attrition, with profitability or Net Promoter distractions. This is a simple model that focuses your efforts on defining Point B — your business.
For those who wince at customer-centric or whose focus is more toward production — here is a little secret. Call them point E and point A — from Entry to Asset. I often do, even when I am working with customer-focused organizations. It helps focus you on the actual mechanics and financials of the process. It may also allow those of you focused on building a great product to connect to this model more easily.
The Valuable Constraint Of A Node Diagram (Model)
Not too many people have the patience to map out a node diagram with more than a dozen steps. Please don’t. If you are getting that intricate and complicated, you really don’t understand your business. Get help! Even a dozen nodes is likely too far by half.
The goal of the node diagram is to find those major points in your business that truly matter. These will encompass the lion share of costs, the areas prime for waterfalls and conversion rates, and (hopefully) aligned with named processes in your business. If not, you have more work to do. A successful model must reflect the business. Think of it as a low resolution mirror.
Once the node diagram is complete, validate it. Any component that does not contribute one-fifth (20%) of your revenue, cost, or lost conversion is effectively pointless (for now). Aggregate those steps. Pull them together — push them into other more meaningful steps — simplify & synthesize. Now you are ready to translate this over to your matrix. It will be simpler and more effective.
Back to Customers
We’ve covered the process model and the columns of our matrix. No we need to tackle the rows, the customer model. First off, sick of “customer-centric” or not, if you fill in your product line — you are making a huge mistake. This will only reinforce internal bias and poor focus. Define your customers — then validate them against your products.
Next — this is not a demographic exercise. If one of your segments is Millennials, just stop! Get help. You need to define customers by who they are, by what they want, and by how you can best simplify their needs. Millennials need jobs — they don’t need coupons for prune juice. This is what defines a customer, not their age. It is their time, resources, priorities, and needs that matter most. And there is a more than good chance you are going to overthink this…
Use the one-fifth rule here, too. Every customer segment you define needs to represent 20% of your customers, your market, your revenue, or your costs. Note — this is not an AND it is an OR. It was above as well. You are not limited to five of fewer steps or segments — you are just limited to the number that are quantifiably meaningful. Finally, be sure that you can overlay your product sense against your newly defined customer segments.
Wait — they don’t perfectly align…
Likely true, although sometimes a company with good instincts manages to nail the comparison. This is an opportunity to rethink things. Did the segmentation miss? Or might you have multiple products serving the same segments? I find the latter is more likely. Either way, if you are only now defining a model of your business — this is all just coincidental.
Matrix complete. Customers segmented. Process flow outlined. KPI identified. Database architecture prototyped… wow!
Congratulations, you just built a powerful (if not perfect) business model that you can leverage to drive real and powerful growth. Along with the values above, you now have a framework for testing, optimization, and validation. You also likely have an inventory of processes, products, and customers that you left out… that is value, too.
There are even more powerful next steps that you will need to pursue. Reporting, accountability, forecasting, data modeling, organization, etc — you are far from done. But if you followed along this process, you are likely stunned by the implications and outcomes of such a simple modeling process. And guess what, you can now do it all again just one level down. It is a process model process that just keeps on giving (within reason).
Thanks for reading. Need help building out your business model? Consider:
