Almost every week I find myself in a conversation with someone where we’ve meandered towards the question of their business model. Sure, maybe it’s my tendency to want to understand the “system” behind how a company works, but you’d be surprised at how many decisions stem from the core of a company’s business model.
What’s more surprising than the fact that I engage in these conversations often, is that when push comes to shove, a lot of the people I’m talking with start getting a bit sheepish about talking about their business model.
It’s not because they don’t have one. Instead, it often boils down to the fact that they’re worried they’ll be considered an impostor if they highlight how much they don’t know about their own model, or what parts they’ve missed.
But there’s no reason to be shy about what we don’t know when we’re in a community that helps one another learn daily.
One great tool any small business or freelancer can use is the business model canvas. For those that haven’t been exposed to it, I’d like to cover some of the basics here.
Question number one: What customer segments do you serve?
Let’s assume you build or design WordPress websites. In that space maybe you focus on a single segment, like local restaurants. Or let’s assume you build plugins. Maybe in that space you serve multiple segments, like customers who use your plugin on their own site, and developers who use your plugin to build sites for others.
Knowing who you serve, in what market, and how to differentiate between them is the first step in understanding your own model. It also helps you decide many things.
Question number two: What are you offering that segment?
In the first case above, your offering might have been a complete restaurant website—with a menu, easy access to directions, phone numbers, and more.
In the second case, your offering might be a simple way to create forms on a person’s website. But in that second segment, the offering isn’t just a tool.
That’s where a lot of people can make a simple mistake. Just because your value proposition in one segment is a tool or feature-rich solution, doesn’t mean your value proposition has to be the same in a different segment.
In the second case, for site developers, your toolset may be a way to earn a lot of revenue easily and quickly. That is a very different value proposition than simply letting developers put forms on sites.
Question number three: How are you selling your offerings?
This is often called your “channels.” In the online world we often see the same channel being used for every segment. But like before, you don’t have to have the same channel for every segment you serve. You could offer your product online for the lower end of the market, and offer sales reps for the higher end.
Question number four: What kind of relationship will you have?
I purchased Basecamp for my company seven years ago. To this day, even though I pay monthly, no one has ever called me to check in and see how I’m doing. Of course I never assumed they would—because the entire process was self-serve and never hinted that they wanted to know me.
On the other hand, a couple years ago I signed up for Aweber, even though it was more expensive than MailChimp. I received a personal note in my mailbox (not my digital inbox, my physical mailbox), and a call a week later.
You need to know how “personal” you want your experience to be—and understand the costs associated with that approach. It doesn’t mean you can’t have a high-touch experience. It just means you’ll need to price things accordingly.
Question number five: How much do I expect to earn?
In every segment, for every offering, via every channel, you can expect to generate revenue. That’s the fun stuff. It’s what most people talk about, when I bring up business model.
Again, your revenue streams don’t have to be the same across segments. In one segment you may not offer a particular service, and in another, you might (at a premium, even).
Sometimes people think—okay, this means I just have to charge bigger companies more. But charging more is always harder than charging less. So one way to think about things is to say, for a particular segment, I’m going to charge less.
A great example is web hosting. Some companies charge non-profits (a particular segment) a reduced monthly fee because of their corporate status.
Questions number six & seven: What staff am I going to need? Doing what?
Now this doesn’t always have to be staff—it could be other resources (like servers)—but often, with the folks I talk to, the biggest resource they need to account for is staff.
So the question becomes—if I want to offer these particular value propositions, what kind of staff do I need to be able to do it? And will that scale?
This is often where companies make mistakes in their business model. They often copy a part of someone else’s business model without understanding the entire model.
Let’s say you notice a competitor is offering a customization service that lets a client pick a baseline theme, and then does all the customizations for them, for $500 (it’s their “white glove installation” service).
Do you want to copy them and offer the same service? Not necessarily. What if you find out (by digging deeper) that they have a few offshore developers that cost them 30% of what your staff cost you? What they can offer at $500 (and earn profit) may break you.
So think carefully about your value propositions, pricing and then ultimately the resources you need to provide that value proposition.
And question seven (what key work will they have to do?) goes hand in hand with question six. Because the work you need to do, to offer the value proposition, is what guides the kind of staff you need, and how long they’ll have to work.
Question number eight: Will I use partners to help me?
Not everyone has a key partnership involved in the delivery of their business, but many do. If you provide websites, do you also offer to host them? Then your host would be a key partner.
In that case, understanding what they’ll do, what they won’t do, and what it will cost you for them to do it, all will be critical to modeling out how your business will work.
Question number nine: What will your costs be?
A lot of the people I work with know their core recurring costs pretty well. But when we get into costs that don’t appear monthly, things get a little messier.
You’ll want to monitor your one-time costs, your year-end costs, costs related to getting help when something goes wrong, marketing and sales costs, and more.
The Business Model Canvas Explained
Below you’ll see a video explaining the business model canvas – a one sheet version of these nine questions – that can help anyone think more clearly about their products, services, and business from a different perspective than they may normally do.
And if you want to go deeper, you’ll want to check out this great book on the same material.
What tools do you find useful for your business model?
Chris Lema is the VP of Software Engineering at Emphasys Software, where he manages high performers and oversees product development and innovation. He’s also a blogger, ebook author and runs a WordPress meetup in North County San Diego. His coaching focuses on helping WordPress businesses, or businesses wanting to leverage WordPress.