Do You REALLY Know Your Business Model?

Do You REALLY Know Your Business Model?

Clarity is a repeated theme of mine and The Disruption!, whether in regards strategy or how you make money. Listening to Josh Kaufman discuss his “Five Parts of Every Business” and the need to define your business model while presenting this information clearly magnified the point.

 

What Are The “5 Parts of Every Business”?

Kaufman says in every business model there are “5 Parts of Every Business,” each of which flows into the next:

  1. Value Creation: A venture that doesn’t create value for others is a hobby.
  2. Marketing: A venture that doesn’t attract attention is a flop.
  3. Sales: A venture that doesn’t sell the value it creates is a non-profit.
  4. Value Delivery: A venture that doesn’t deliver what it promises is a scam.
  5. Finance: A venture that doesn’t bring in enough money to keep operating will inevitably close.

 

Value Creation

Kaufman defines Value Creation as “Discovering what people need or want, then creating it.”

Most customers don’t know what they need or want. As has been pointed out many times, people wanted a faster horse, not an automobile. However, whatever they want, in reality, they are just seeking a solution to a problem. Therefore, the critical issue is determining “What problem you are trying to solve?” Or, as Clayton Christensen said, “What is the job the customer is hiring you or your product to do?”

Defining this is often hard, as many companies don’t know what job their clients are seeking them or their products to provide. I have discussed this before. However, as the adage says, “people aren’t buying drills, they are buying holes.” This is a vital part of your business model.

So, working with your team to determine “the job to be done” and your “Core Customer” is well worth the effort because you can better describe what you do, and all your employees will better know what you do and how what they do impacts it.

 

Marketing

Kaufman’s definition is “Marketing is defined as attracting attention and building demand for what you have created.”

In today’s digital world, with Google, Facebook, Linked In, and Instagram, marketing separating yourself from the masses is hard, especially if people don’t understand the product and service. Therefore, by focusing on the job to be done or the problem you are solving, it easier to stand out among the crowd.

Also, as you identify what the “job to be done” is, you can better identify your Core Customer. Remember a Core Customer is:

  • An actual person with needs and wants. If you sell B2B your core customer is still a person because you have to convince a person to buy.
  • Who buys for the optimal profit.
  • Who pays on time, is loyal, and refers others.
  • Has a unique online identity and behavior; and
  • A customer who exists amongst your clients today.

Build Direct started as a company supplying contractors. However, it soon realized that while contractors were a key customer component, they were not the company’s Core Customer; instead, Build Direct’s core customers were young female DIYers interested in the products and education. Build Direct focused its marketing according to that recognition and started providing much educational content for young female DIYers. This specific marketing drove much better brand recognition and engagement.

Also, South Shore Furniture in Canada identified their core customer as “Sarah.” Sarah is so vital that there is a mannequin of Sarah in all meeting rooms, so no one forgets whom they are seeking to serve.

Besides, marketing to the correct demographic is easier and more fruitful if you know your Core Customer. Without this information, the marketing section of your business model is just hope, not a strategy!

 

Sales

Kaufman defines sales as “Turning prospective customers into paying customers.”

However, as Jeffrey Gitomer, put it “People don’t like to be sold, but they love to buy.” So the key is how do you move prospects into customers? Businesses have to earn their prospects’ trust and help them understand why it is worth paying for the offer. Another way of looking at this is, “What is your brand promise?”

Companies need to know what their brand promise is. For example, Starbucks is “Love your beverage or let us know and we will always make it right.” Some organizations may have supporting brand promises to prove more definition of the brand promise. Your brand promise must be measurable, because as Peter Drucker said, “What gets measured gets managed.” So if it is measurable and measured, the organization can ensure that it meets its brand promise, which provides more assurance to the prospect. Finally, with a clearly defined brand promise that is measurable, the organization ends up saying “No” more than “Yes” to opportunities and ideas since they will damage the brand promise.

Since no one wants to be taken advantage of, Sales is about educating the prospect to identify what is essential to convince them you can deliver on your promise. A clearly stated brand promise that is measured and quantified increases the ability to persuade the prospect to purchase from you. It amazes me how many business models don’t have a brand promise.

 

Value Delivery

Here Kaufman defines Value Delivery as “Giving your customers what you’ve promised and ensured that they’re satisfied.” With this, I have no issues. Anyone who doesn’t deliver what they promised is effectively a “scam artist.”

To ensure you that make the customer satisfied, you have to exceed the customers’ expectations. A popular way to determine customer satisfaction is through Net Promoter Score scores which we see more and more (if you are looking for help with NPS surveys of your customers, contact me). You want more promoters and detractors. However, the NPS score tells you what the customer thinks after experiencing the service or product. Companies need to develop systems that ensure the service or product is exceeding expectations.

A great example is the Ritz Carlton’s policy whereby any Ritz-Carlton employees can spend up to $2,000 per incident, not per year, to rescue a guest experience. This policy ensures that the customer is getting a great experience because it empowers employees to fix problems and provides the customers’ concerns are solved quickly. As David Marquet says, “Move the decision making to where the information is.” That is what Ritz is doing, and it is empowering employees and making customers happy.

Companies that have outsourced many functions to cut costs, so any customer has difficulty reaching the people they need or have to spend five minutes going through a phone tree to contact some is already failing at this.

Ensure your business model tracks customer satisfaction and you have ways to ensure that customers are happy.

 

Finance

Kaufman defines finance as “Bringing in enough money to keep going and make your effort worthwhile.”

As I have pointed out, this is key, and many people don’t realize the situation because of flawed analysis and lousy modeling. However, the key for any organization must be a well-defined “Profit/X.”

Many organizations don’t have a well-defined Profit/X, but there is a lack of discipline that ensures good financial performance without it. Profit/X is some unit of scale, and profit can be gross profit, net profit, EBTIDA, or EBIT. Examples that I have seen are:

  • profit per airplane
  • profit per job
  • profit per customer
  • gross margin per delivery
  • profit per employee

There is no correct Profit/X, just the one that works with your business. One organization that did deliveries chose Gross Margin/Delivery, which focused on reducing the cost of delivery to maximize profit. Once Profit/X is selected, the entire organization must seek to meet or exceed it; thus, everyone needs to understand it and how they drive it. With that focus and discipline, the organization is more likely to meet its financial goals and objectives.

 

Summary

In summary, the organization needs to be able to define its business model by the following:

  • Define the problem its products or services solve or, more precisely, what job they do.
  • Who their Core Customer is so they can market to them effectively?
  • What is their brand promise, and how is it measured?
  • That their customers are satisfied, returning and recommending.
  • That they have identified their Profit/X so that they are profitable.

Doing this work is an excellent exercise for any leadership team to help bring clarity to your organization. If you need assistance doing it, contact me. Good luck, and may your business grow.

 

 

Copyright (c) 2021, Marc A. Borrelli

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We all know that a large amount of business has moved online, but many companies have yet to fully pivot to the point they can provide both information and delivery of their products and services in an online format that meets or exceeds their customers’ expectations. During a recent conversation with an executive of a training company, he was discussing how they working to move all their training online, but dealing with the challenges of how to deliver it in a way that the attendees got its full and would enjoy the experience. In my own business, I know many clients are getting tired of Zoom calls and want to return to in-person meetings, but only when it is safe. The challenge is how to make it interesting and keep people engaged?

If we look across the economy, many industries are finding the delivery of, and demand for, their products are changing. We all experienced the toilet paper shortage when the lockdown started. Why? From my understanding, the toilet manufacturers had most of their production set up to service commercial clients, the biggest users. However, with the lockdown all that commercial demand transferred to residential demand, which the manufacturers were not set up to produce or deliver.  Likewise, with the liquor business were sales were transferred from restaurants to retail, again disrupting supply chains.

A recent article in Bloomberg noted that:

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  • Mondelez International Inc. said that sales at its gum and candy division plunged 33% primarily due to falling sales of gum. Why? Gum consumption is very dependent on people being away from their homes. It is used to freshen breath for meetings or first dates – activities have been effectively halted for the moment. Thus, demand has evaporated.
  • Starbucks announced that U.S. traffic slumped 52% from a year earlier; however, the average total bill, rose 25% over the same period. The reason was that shops were closed and people are not out, but when they are they are bundling orders for everyone at home. While bundling of orders makes the economics of delivery orders more attractive, it requires skill to allocate labor and tailor operations to ensure big-batch orders are fresh and hot.
  • Molson Coors Beverage Co. reported revenue down 23% over last year. During the COVID period, party-friendly kegs sales disappeared; however, sales of 12-ounce cans exploded. The issue for Molson was getting enough aluminum for the cans to meet demand, which causes the fall in revenue. The company is working with suppliers to ensure the availability of the packaging materials needed to accommodate the stay-at-home lifestyle.
  • As we all know U.S. tourism has been hit badly with COVID, but this is taking a toll on many retailers that have tourist-centric locations, e.g. Tiffanies and Macys on Fifth Avenue. However, it is also affecting stores like Carter’s Inc., the baby, and kids’ clothing chain that has seen tourist-centric locations revenue fall by 20% while non-tourist centric locations saw a rise in revenue of 15%. The issue for Carter’s is that tourist-centric locations account for about 20% of revenue. Thus the company is facing issues with delivery and is working closely with retailers like Wal-Mart, Target, and Amazon.com to help offset the decline.

Therefore, if you are experiencing either an increase or fall in revenue, spend time to understand why? Is it that customer tastes/requirements or channel delivery has changed and plan accordingly. As I have said before, I expect us to be living with COVID for at least a year, so be prepared for the long haul and recognize that many customers’ behavior changes may not revert when it is all over.

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A further complication for B2B companies selling internationally. How do U.S. companies sell in Europe where they are barred from traveling, while their European competitors can move around freely? This will pose problems and could result in a loss of market share unless companies develop new tactics to counter the lack of face to face interaction.

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  • Cash is critical. Total Contract Values are lower, and there is a 30% drop in upfront cash, as actual payments are delayed or deferred.
  • Significant drops in the sales pipeline. Hardest hit are those with companies have sales-led prospecting and have direct multi-stage sales + implementation.
  • Increased involvement of execs, e.g., CFOs, in deals and procurement process
  • Channel is more critical. The proportion of deals coming from channel and renewal rates relative to bookings are both up.

Andreesen Horwitz provided six strategies for selling during COVID.

  1. Build pipeline through targeted virtual events. With everyone WFH and easier to schedule, including executives, figure out how to leverage your C-suite effectively. Don’t just rely on webinars with large numbers of attendees featuring execs, but use smaller events focused on specific topics of interest where you can get your CEO or CTO in front of essential buyers. The loss in quantity will be exceeded by what you gain in quality and higher intent. However, as much of this new, the pipeline from virtual events may progress differently from a traditional pipeline. Thus it is critical to understand and monitor the conversion rates of your virtual event funnel. 
  2. Get creative with your Business Development Representatives (“BDR”). If customers can self-serve initially, that will provide marketing qualified leads for BDRs to follow up on. However, to enable customers to self serve, you need to ensure that your website correctly explains and sells your product. If you have insufficient warm leads for your BDRs, consider switching BDRs to customer success managers (CSMs) focusing on adoption, retention, and renewal, since the two talent pools often overlap. Especially in a SaaS business, where the CSM is essential because customer success drives adoption, and adoption reduces churn and drives up renewal rates. Many SaaS companies used this tactic during the 2008-9 recession, and it often helps BDRs better understand customers.
  3. To renew customers, be flexible on all levers, except the price. It’s always easier to retain a customer and renew, or even expand, an existing account than to acquire a new customer, especially during a downturn. Extending flexibility to customers, when you can, will win customer loyalty and referrals in the long-term, assuming you can deliver successfully. Your current prices will determine your future prices, determining your total addressable market (TAM), so any reduction now has long term effects. Further, once you start negotiating on price, you have become a commodity. When renegotiating or changing contract terms, if possible, look to levers beyond price, such as flexible payment terms or additional professional services. 
  4. Implement a deal desk. If a salesperson gives something away to close a deal, that incentive can quickly become the new standard for all sales. Implement a deal desk, usually in the form of a mailing list or a chain of sign-off for deals over a certain threshold, to maintain deal structure around incentives and discounts. A deal desk will prevent reps from giving away too much.
  5. Manage the psychology of your salespeople, as well as your quotas. Set expectations that are achievable and realistic, not only because people need to get paid, but because great salespeople need to win. For great salespeople, much like for a top athlete or prizefighter, confidence is a big part of their game. The way they get confidence is they win and have the attitude, “I never miss a number. I usually blow it out. I never lose to a competitor.” Sales numbers feed that psychology, so what if you maintain your sales numbers based on life before COVID, and now, your top salespeople are not getting paid and are losing confidence. Eventually, their psychology will get to the point where they start making silly mistakes. “They don’t listen carefully.” “They’re not patient.” “They press too hard.” You need to support your sales team in keeping their confidence high, and that starts with a reasonable plan and then having an understanding of what’s going on in these cycles.
  6. Look for channel partners with strong customer relationships and pull from the field. Partners who don’t have to do prospecting but can pull you into existing relationships are the better partners right now. You have to shift your channel strategy from scrappier, more boutique channel partners to more established players who have the relationship and account control. Behavior follows business, so look for the pull from the field sales team to evaluate a partnership and know that it is strategic. Once you see that pull from the field, you can match up your sellers with their sellers, identify the accounts they’re in that want your functionality, and then do the integration that the salespeople want.

Of course, this is just the start. Other questions:

  • What metrics should you watch right now?
  • How do you qualify leads?
  • How do you evaluate the risk v. opportunity of channel partners?

See this Andreesen Horwitz article for a discussion on many of these questions.

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