5 Reasons Why a Business Model is an (In)dispensable Tool for Success

Business Model

The construction of a business model is intricately linked to the creation of a business strategy. A successful model determines the way a company sells its products and elucidates how it creates and delivers value to its customers. This makes it an indispensable key which determines how long a company will survive in a competitive market.

Peter Drucker described it as an answer to the following questions: Who is your customer, what does he value, and how do you deliver that value at an appropriate cost?

To know more about various types of business models, you can read here.

Executives must understand how a business model works for their organization to survive. The economic slowdown in the developed world is forcing companies to modify their business models to a large extent. Moreover, innovation in technology is reshaping industries and transforming the way companies create and capture value through business models. For instance, Kodak had to change its business model from film sales and printing to digital printing centers.

Why do you need a business model?

When managers set up and follow a business model, every initiative or  decision is taken keeping a close eye on profits. If it fails, you need to re-examine your model. For instance, when Euro Disney opened its theme park in Paris in 1992, it borrowed from the model that worked perfectly for the US. They assumed that Europeans, like Americans, would spend the same amount of time and money per visit on food, rides and shopping for souvenirs. However, this proved wrong and finally the key elements of the original business model were tweaked to suit the European set up. Gradually, things started looking up.

Therefore, it is highly imperative to have a model as a starting point– a spreadsheet with detailed analysis of every major item that you can pull apart, every sub-component that you can test and try. In brief, a business model is absolutely mandatory.

What does a successful model do?

A successful model:

  1. Allows companies to tie their marketplace insights to economics. In short you can assume people’s reaction/response to your business. It can be tested like any scientific theory and revised when necessary.
  2. Offers a unique value promise that is hard to replicate.
  3. Is capable of generating huge profits.  Competitors cannot easily copy the models due to their low cost structure and meaningful benefits.
  4. Sets up new platforms of growth. Gradually the stocks of the company’s key assets grow and over time expands its value creation.
  5. Can weaken or destroy new entrants.  At times even rivals with different models can partner with each other for value creation.

Business model is not synonymous with strategy, though both are often used interchangeably. To explain it in simple terms, if business model is the car, strategy is how to design and build it—both inter-related but completely different.

A good business model allows all employees to align themselves around the value of the company and work towards the larger goal. In this sense, it is a powerful tool steering the company towards success.

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When Is It The Right Time To Launch a Startup – A Beginner’s Guide

Startup Launch

There may be tons of literature on how to launch a startup, to-do checklists, how to raise funds and marketing techniques, but no one will tell you when exactly is the right time to launch your own startup. Actually, there is no ‘right’ time for the go-ahead but yes, some things have to be in place when you seriously plan to launch your startup. Andrew Weinreich, an entrepreneur in NYC and founder of 7 companies, elaborates on 4 steps that you need to carefully think about before you decide to quit your current job to begin a new career at your own startup— a strong idea, enough funds, business plan, and cash flow projections. (Details can be found here).

Ultimately there’s only so much planning that you can do. At one point, you have to set the ball rolling. Here are some tips on timing to get you started:

Don’t wait forever:

If you have an idea and have done your homework well, talked to a bunch of potential customers, don’t wait for too long. But yes, this does not mean that you can go ahead with a subpar product or a mediocre company. When you feel you have information enough, it’s time to move ahead with the launch in an informed way. As Matt Lerner, the CEO of All Star Deals, puts it, “If you have an idea for an App, do it now. Throw it up online…Worry about quality later…”

Set a Launch Date:

Setting a launch puts you on a leash and forces you to focus on the task at hand. We’re all human and no matter the level of motivation, you are likely to enter a tangent that you can’t help but explore. A solid date on your calendar will deter such urges and make things happen faster.

This date should be decided on the basis of the amount of work that needs to be done keeping mind your capacity for executing these tasks with a buffer period.

It’s best to launch with MVP. Don’t over do it.

Release your MVP and let your customers lead you to the next step:

You don’t know your users, so it’s not safe to guess what they want/like. Rather, release something and let them give you  feedback. Launching early makes you know if something major’s not working and you can fix it. Dropbox learnt it the hard way– before launching, the co-founders used 0-budget hacks, yet they had to put something in their customer’s hands to generate traction. 

Generate some buzz:

Go ahead with some soft launches, promos, beta testing to generate some buzz and get some exposure. Timing will never be perfect for anything and the same holds true for the launch of startups too. Get the word out, and try to get people guessing.

Get the word out, and try to get people guessing. There is nothing like a little anticipation. Also, this lets you test how your competitors perceive you. Use this initial publicity to answer some key questions.

Look for the obvious signs:

If money is coming your way, whether revenue from a soft launch or money from a pre-sale,  don’t wait for a ‘good day for launch’. Anthony Sohoo of Dot and Bo says that when people started handing over their credit card details, they knew that the time was perfect for a launch.

Feross Aboukhadjeh took 3 hours to build YouTube instant, inspired by the launch of Google Instant. Overnight, the app generated tens of thousands of views and Ferros became a celebrity. Based on this, Christopher Beam, journalist, New Your Mag wrote, “You’ll never grasp what aspects of your site need more work and require adjustment until you actually put it in front of people. No amount of preparation will be able to act as a substitute for the learning you’ll glean from an actual launch.”

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The Evolution of Feedback

Feedback

This article talks about how feedback, as a business process, has changed over time for the better. It explores a lot of the current ways in which companies have adapted to great feedback methodologies. Starting with how it plays a role in business, today:

Feedback is the key ingredient in today’s work culture. We cannot go about our regular work without taking a break to review and determine if everything is moving ahead in just the way we want it to. Feedback is often mistaken for criticism. However, there’s a lot of positivity embedded in it, if you know how to give one. And for a startup to be successful, feedback from customers is crucial. When you decide to launch your own company, it makes sense to understand what people expect from your company and its products rather than going by mere self-assumption. That way, you can alter some plans even before the launch and tread safely.

In the days before technology took over every aspect of our lives, feedback was taken manually. Companies spent time talking to potential customers either in person or over the phone to understand them, their needs and expectations. People were asked questions and were made to fill up forms to put their thoughts on paper. Qualitative research is still the best tool to gather feedback, but it has acquired sophistication. It has and will always remain a way of doing business and has the potential to change the way you work. Eric Ries, through his Lean startup method proposed in 2008 claims that if startups invest their time in building products and services catering to the needs of the early customers, they can largely reduce market risk, initial project funding, and expensive launches.

Eric Ries, through his Lean startup method proposed in 2008 claims that if startups invest their time in building products and services catering to the needs of the early customers, they can largely reduce market risk, initial project funding, and expensive launches.

Let’s look at some techniques that most successful companies incorporate:

  • Interviewing-Asking the right questions and listening. Earlier interviews were conducted face to face. Video calls via skype or WhatsApp has altered interviewing remarkably.
  • Conducting a survey online with short, but relevant questions. For this, tools such as Google forms, Survey Monkey, Qualtrics, Wufoo are used.
  • Social networks and blogs -These immensely useful tools were not available to companies earlier. It works wonders to engage customers, listening and responding to them at any time of the day just by the click of a button. Tools like UserVoice and GetSatisfaction allow you to leave ideas, questions, suggestions, vote on posts and make it easy for users to leave a feedback.
  • Chad Halvorson of the ‘When I Work’ scheduling app says, they follow a policy of ‘Observe. Listen. React’. Basing on the feedback of a single customer, a company cannot alter the features of its products. Rather, he said, they track all feature requests and if the same request is repeated at least 10 times—then it’s time to change.
  • ‘Get 10,000 Fans’ used a tool called Qualaroo, recommended by Neil Patel (entrepreneur and co-founder of Crazy Egg) to collect various kinds of feedback from customers without being too invasive. They use this feedback to develop a new product or service which has resulted in amazing strides in customer satisfaction.

Times have changed and the so have feedback methods. What remains unaltered is the role of feedback to change a product, a business, or the way companies think and act.

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How To Set Your Pricing – 6 Ways To Consider Pricing Your Product or Service

Pricing a product is one of the most challenging tasks startups face. Most of them initially want to keep it low to attract an impressive customer base and never raise it for fear of losing valued customers. You will often find a correlation that suggests that growth is stunted due to monetization.

While your competitor’s pricing strategies are a good indicator, it may not necessarily be what is right for you. Assess your product and create an impressive strategy that facilitates the revising of your product/service prices periodically.

Now this is easier said than done, invariably there are a lot of factors to take into account. Operations, resource usages, sub-costs, competition and plethora of parameters will ultimately affect your cost.

Therefore, it is usually best to not put all of your eggs in one basket, but instead opt in for a number of tried and tested pricing strategies, before you strike gold.

In order to adopt these strategies, it’s best to look at things with a broader perspective:

A successful strategy is a combination of marketing techniques, Web messaging, PR, sales pitch and above all your intuition, leading to increased sales and happy customers. You need to be sharp, intuitive and analytical to figure out what suits your company and its products. Here are some examples of tested and effective strategies:

  1. Introductory: This is often followed by companies that are exploring a new market and in this the price is usually kept low to understand customer needs and behaviour.

Example : Uber’s first ‘free’ ride. The personal transport aggregator offers a free ride (usually a discounted ride up to a certain amount, but calls it a free ride) to its first-time customers. This allows for the customer to solely focus on the services and it’s advantages without weighing them against the amount of money paid.

  1. Skimming: In this, introductory price is high but is gradually reduced. This is often noticed in the case of hi-tech products (phones, tabs etc.) which initially start with a high price but are gradually lowered, when competitors raise their price bar. Margins are often reduced to create a better flow of stock.

Example : Commonly seen with mid to high range smartphones, the price of a leading model with the topmost specs is lowered when an upgraded version of the phone is released. This ensures that the next set of adopters are able to stay in the tech wave rather than missing out because of expensive pricing. In turn, they continue to aspire for the higher range of technologies and  repeat customer cycle is established.

  1. Odd-ending: Sometimes, you notice prices set at $2.99. This has an impact on the buyer’s psyche and compels purchase. This phenomenon is called psychological pricing. You will see a very high rate of adoption when it comes to this strategy – In 1997, a study published by the Marketing Bulletin suggested that over a little over 60% of advertising material mentioning costing had the ending digit as 9 i.e. .99 is some way.
  1. Once price for all items: As observed in the dollar store, all products are set at the same price. Even Amazon has the 99, 199, 299, 499 store. This allows for customers to create a mental value system in relation to these products. Sometimes, a product that they perceive is out of their budget will sell, just because it is placed with other products with the same price.

 

  1. Bundling: In this you form combos and make them cheaper than when purchased separately. Examples are abundant at all eating joints. This helps increase average sales. It’s also a great way of reducing the strain on the customer when it comes to making choices. You would also be able to promote your products and see what your customer makes of it.

 

  1. Competition-led: Observe your competitor’s strategy and set up prices to pull your customers away from the competitors. You can set your prices higher in case your products are distinct or lower if they are the same. It is important to understand the value your product holds in the minds of the customers, referred to as the perceived value.
    If the sales are slow, it doesn’t necessarily mean that the prices need to be slashed. It could also mean that the gap between the price and its perceived value has increased.

 

Remember, no two customers will view your products equally. In fact, while making a purchase they fall back on a judgement they’ve already made rather than analysing too much on buying something new (snap judgement). Therefore, you may think it is overpriced, while others may be willing to pay extra for additional features. Understand how customers use your product and what compels them to pay for additional features. LinkedIn, for instance, introduced power search and ability to contact other members as part of it premium account plans which brought in huge profits for the company.

 

The list of pricing strategies is exhaustive and one needs to use a combination over time to achieve success. The key however, is planning. Make sure you understand your customers well—their perceived and snap judgements well before taking the plunge. This will ensure that your business thrives.

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Cash Flow Optimization – 5 Tips To Keep Cash Issues At Bay.

Cash Flow Optimization

Cash flow optimization is the process of regulating the burn rate to ensure an extended and safe runway period. Startups are almost always cutting closer to the edge, so it’s always useful to have a number of fail-safe strategies up your sleeves.

For a startup to be successful, it is imperative to have a compelling product and coordinated team that initiates maximum sales, but there is one thing that most CEOs tend to sideline which is very vital for the survival of the startup—creating a reliable cash flow system. This is sometimes even more crucial than their ability to deliver.

Research shows that 82 percent of businesses are forced to shut shop because of their inability to raise funds to feed the increasing valuations. Alarming as it maybe, the good news is that it can be averted with smart financial management.

CEOs must be alert enough to:

  • Understand cash flow, plan, identify risks, look for ways to mitigate them and try to raise cash to match the milestones.
  • Analyze cash flow and spot problem areas.
  • Develop a cash flow budget to understand the pattern of cash flow for the coming months/year.
  • Improve cash flow by accelerating inflow and delaying outflow.
  • Borrow money when needed to fill cash flow gaps.
  • Invest surplus cash to make profits.

 

All these bring home one point: good cash flow management is of primary importance. This can neither be ignored nor delegated to anyone else. As an entrepreneur, one should have a sharp eye to limit unanticipated payment delays and unplanned cash outflows. If this balance can be maintained, the company is bound to survive. Sounds simple, but is practically quite a daunting task. Let’s take a look at 5 simple ways to optimize cash inflow:

 

  1. Keep a watch on the cash flow management. Stop focusing too much on the profit. Rather, spend your energy by keeping an eye on the cash flow vs. spending.
  1. Making your invoices in advance so that your customers have no excuse for late payments. If possible, make them “due immediately” and not extendable beyond 15 days. Follow up on the outstanding invoices, sometimes by collection services if the situation demands. Save your spreadsheets with utmost care; if possible use cloud storage so that information can be accessed anywhere, anytime.
  1. Don’t extend free trial offers to create a strong customer base. This does not work in company’s favour always and the loss incurred in the process and cost recovery is not easy.
  1. Have a clear budget and be accountable. Make sure that each expense is valid and necessary. Hire an accountant or a CFO to make things easier. Resist the temptation to hire multiple employees.
  1. Be prepared for fluctuating seasonal sales, unanticipated expenses and emergencies. Sometimes, even a regular customer can delay payment, bankers may withhold funds just when you are in dire need or unexpected growth may call for additional amenities. Always be ready with plan B. If necessary maintain a cash reserve.

Running your business without paying attention to cash flow is like paddling upstream with an oar. You will either not reach your destination or be so exhausted upon arrival that you will have no stamina to carry on further.