3 Smart Strategies to Build a Lean Business Model
We’ll get down to business in a second, but first, let’s play a game. Think about Instagram’s role in your life, from scrolling through friends’ photos to posting special moments of your own. How often do you use the app?
Based on what I learned from a survey of my Facebook friends, I’d guess you use it at least once a day.
“I’m totally willing to own up to my Instagram obsession,” one said. “I use it more than any other social media and check it probably 3 times a day.”
We use Instagram as much as we do because it meets our photo-sharing needs in a delightful way. Before it launched, Instagram honed its offering by creating mock-ups, experimenting, gathering data from real users, and pivoting based on what they learned. Its biggest pivot was from a check-ins application to a photo-sharing one.
Back to the game: Given its heavy presence in your life, how much would you be willing to pay to use Instagram?
My survey showed that over 90% of people who use Instagram multiple times a day would not pay money for it.
It’s surprising, isn’t it? Here’s this product that is entrenched in our daily lives, but most people are not willing to pay even a cent to use it.
It’s a moot point for Instagram, which was purchased for $1B by Facebook in 2012. With efforts focused on improving its offering, Instagram famously did not worry about making money. Today, Instagram has ads, but when it was acquired, it had 30 million downloads and no revenue.
We can all agree that Instagram’s story is an exception. For most new businesses, millions of users with no revenue is a problem. Building a product with the goal of being acquired by another company is one path, but it’s a low-probability, high-risk gamble. If you don’t make money off your product, you haven’t yet built a self-sustaining business.
If your goal is to build a self-sustaining business, perfecting your product is not enough. You need to come up with an effective business model, too.
Business Model Experimentation In The Wild
Just like your product, your business model can and should be rapidly tested in market. This process of business model experimentation doesn’t need to distract you from developing your product. In fact recently, some of the best examples of business model testing come from companies that leveraged their business model to inform and improve their product, and vice versa. ClassPass and Groupon are two of them.
Example #1: ClassPass
When fitness membership ClassPass first launched, it was as an online service for booking fitness studio classes. They made money when people paid for classes on the site. This was Business Model #1.
Despite heavy traffic to the site, few people actually booked classes. Most people just wanted information about studios and classes. If ClassPass had optimized their offering solely based on this insight, they might have gone on to create a Yelp for fitness classes.
Instead, the team used this product feedback to test a new business model. They introduced a 1-month, 10-class pass for participating fitness studios. The pass was $49 and the goal was for people to sign up for membership at their favorite studio by the end of the month. This was Business Model #2.
When the second month came around, the team was surprised to learn that people didn’t want to sign up for memberships. Customers wanted another 1-month pass.
The team used this feedback to pivot its product and business model once again and eventually launched its current offering: A $99 monthly subscription to unlimited fitness classes at participating fitness studios in your city. This was Business Model #3.
While ClassPass is still validating the long-term benefits of this model to fitness studios and for its bottom line, its two-pronged approach of experimenting and pivoting on product and business model has allowed it to rapidly grow its business.
Example #2: Groupon
Despite industry speculation around its strategy, Groupon, one might argue, is still in the conversation because of its continual experimentation with its business model.
At its start, Groupon offered one daily deal with date restrictions and a participation threshold. The company learned that this model, while driving traffic for merchants during off-seasons, had a high barrier for customers. This was Business Model #1.
It changed the model by releasing these restrictions and offering deals in various verticals to be redeemed at any time. While this positively impacted Groupon sales, it negatively impacted merchants, who were faced with high volumes of short-term customers during peak seasons. This was Business Model #2.
Today, Groupon continues to experiment with e-commerce, travel experiences, and most recently, food-delivery startup.
Designing Business Model Experiments
The Business Model Canvas is a simple tool to visualize how pieces of your business fit together. It’s always helpful to fill one out, but if you’re really in test mode, brainstorm ten different ones. What are all the possible approaches for building a business around your product offering? From here, you can design experiments to validate or invalidate each business model option.
Here are three lean ways to test business models while developing your product:
- Put A Price On It
Best for: Early offerings
Unless you have over 100 years of strong brand, it’s almost impossible to start charging for a historically free product without changing anything about your offering. By starting out free, you bury the opportunity to charge for the same product later (like in the example of Instagram). This forces you to rely on a strong freemium model or third parties to build your business. If this isn’t your desired strategy, start by attaching some perceived value to your product early on.
Before it was acquired by Facebook, messaging service WhatsApp charged a $1/year subscription after a one-year free trial. By setting the expectation of payment early on, WhatsApp eased millions of people into using its product, got them hooked, and made renewal the following year a no-brainer.
Taking a “pay-as-you-wish” approach, Radiohead released its 2007 album In Rainbows as a free download with the opportunity to make a donation. The band later reported higher profit on In Rainbows than that of its previous album.
When asked the right way, people actually want to pay more than $0. Once you have a value proposition that makes target users reach for their wallets, you can explore other models to see if better ones exist.
2. Create Competition Between Your Business Models
Best for: Established products
Rely on customers to help you hone the best model for your business. After identifying desired business outcomes, consider different models that can help you achieve these goals. Should you be online or in store? Should you charge customers a one-time fee or a monthly subscription? Put them in direct competition. If you have a hypothesis around the best one, guide people toward it.
If your head’s about to explode, take a look at meditation software Headspace. Currently, it offers a tiered pricing plan with four different options including an evergreen model or a one-time transaction. No matter which option you choose, you get the same product. This pricing buffet will enable the team to measure real customer behavior for each model before deciding which ones to eliminate.
3. Build A Model Before A Business
Best for: New market validation
Clever market testing can prevent you from wasting resources where there’s no demand. Dry landing pages and crowdfunding platforms have become common ways to pressure test a value proposition before having much else.
Dry landing pages are often disguised as beta sign-up pages or destinations for social media shares, and allow teams to track and analyze referrals, encourage engagement, and collect contact information for further research or beta invites.
Crowdfunding campaigns allow you to gauge interest, customer base, market opportunity, and willingness to invest. Designing the perks and marketing for your campaign is an effective way to play out your business on a small scale with low risk.
In 2013, US-based Everlane launched a crowdfunding campaign to test market demand in Canada. The company set a crowdfunding goal and planned to expand north only if and after it hit this goal. Notably, this campaign was not to raise money, but to test market demand. Funders received perks like Everlane credit equivalent to their contribution, enabling Everlane to further test demand for actual inventory.
Everlane was transparent with these intentions:
So many retailers enter new markets with little knowledge of whether there’s excitement there. As a young company running a lean business, we want to tread carefully and be smart about our next moves.
Everlane surpassed its $100,000 funding goal, thus validating its hypothesis around market opportunity in Canada, and launched shortly after.
Mind Your (Entire) Business
Though this process of experimenting is often associated with product development, it is not restricted to it. The “build-measure-learn” cycle is effective for testing and validating the entire business ecosystem.
The same way you test user flows and copy, experiment with multiple business models in scrappy ways. Test early, often, and alongside your product experiments. If not, you could end up paying for it later.
How might you build a business — not just a product — that customers love?