Your Model 1.0: Testing your idea
Business model templates such as the Business Model Canvas are very useful frameworks for helping new businesses to clarify and communicate their business model. However, these frameworks are purely qualitative and so on their own they tell you almost nothing about your business’s chance of success. An idea which looks great on paper may simply not work, due to a host of reasons that are not immediately obvious without crunching the numbers.
This is why you need to quantify, or simulate, your idea. And this is the purpose of Your Model 1.0. We take the elements from your business model canvas and quantify them — everything from your staff, your customers, your customer relationships, your suppliers, your marketing and R&D spend, your cash flow, and beyond. Crucially, we also quantify and visually represent the cause and effect relationships between all of these resources: for example, how marketing drives the customer acquisition rate, and how customers drive not only revenues, but also more customers (through word-of-mouth) and a need for more staff. The result is a working quantified model that uses your assumptions to forecast how all of the resources in your business are likely to co-develop on a month-to-month, week-to-week, or even day-to-day basis. At the same time, Your Model also serves as a tool to help you visualise how each part of your business will work together as a system.
At this early stage, Your Model is essentially helping you to answer the question: ‘What kind of assumptions do I have to make in order for my idea to seem profitable in the long run?’ This breaks down into answering questions such as ‘Given the costs I am likely to face, how many customers am I going to have to win in order to turn profitable? How much will I need to spend on marketing in order to win those customers? If I win that many customers, how many staff will I need in each department in order to be able to cope? And if it turns out that my customers will only pay x for my product instead of y, what does that mean for the viability of my idea?’
If it turns out that you have to make unreasonable assumptions in order for your business model to be profitable within a reasonable period of time, then we can use that feedback to test alternative business models within Your Model. This is the value of Your Model 1.0.
Of course, forecasting the behaviour of a new venture is extremely hard, if not impossible. Nonetheless, the model at this stage still provides significant value by helping you to break down and make explicit every assumption you are making in order for your startup idea to have a potential for success (however you define that). It also provides an environment in which you can test alternative business models, and compare the different forecasts produced by these alternatives. For example, you might look at how a one-off purchase revenue model would compare with a subscription model, or how outsourcing certain processes/functions might produce different results to doing those things internally.
Yet even if you don’t believe in the value of this process, the development of the model is still justified by its value in Stages Two, Three, and Four, all of which will be discussed in our upcoming blog posts.
In the meantime, you can book a free demo to find out more about what Living Business Models can do for you, or go straight to taking our free questionnaire, which will help us to prepare a first draft of Your Model in advance of your demo.