In the last post, I made the case that a startup has many good reasons to develop a formal business model early in the process. The reasons are plentiful, but a core reason is that it provides a way for the founder to investigate and, hopefully, validate the assumptions on how the enterprise repeatedly offers optimal value to the customer, a foundation for growth.
While any formal business model process will benefit founders, I advocate for applying Osterwalder’s Business Model Canvas as a templated steeped in lean startup philosophy and practice. This post will review the first two of the nine elements core to the Business Model Canvas. There are several templates on the internet that you can download to help you think about each element of your business. I am using the Osterwalder blank template with my content prompts added as a resource for you to review throughout this and future posts.
Where to start?
While there are several opinions on where to start, I suggest founders focus on Customer Segments and Value Proposition in the early brainstorming activity. These two elements are essential for illustrating the alignment between your customer’s needs and your product offering, often called the problem-solution fit or product-market fit.
As mentioned in my last post, many founders focus on an initial product solution that they assume is missing from the marketplace. While the original BMC is structured to support an early conception of the solution, I always advise entrepreneurs to take a step back and look at the customer need areas. The best practice is to start with a clear articulation of the customer needs, the problem, and the associated context.
Customer Segments. So let’s turn our attention first to the Customer Segments element in the BMC template. This BMC element focuses on the specific problem you hope to solve and who experiences this problem the most. I suggest that you highlight the following sub-elements in this template area. First, what problem is the customer trying to solve or underlying task they need to accomplish. You can think of this as the customer objective.
The Customer’s Objective. An excellent way to better understand what problems the customer is experiencing is to start with what they are trying to accomplish in the first place. We usually run into a problem or challenge while we are attempting to achieve a specific task. It could be a simple task like changing a lightbulb or something more complex like navigating a foreign city for the first time. Tasks can range from functional to social, from satisfying an essential need to something more aspirational. Whatever the job, and no matter the degree of challenge, there is usually some aspect to improve, making it easier or less costly in terms of money or time. So your first step is to consider the details of the customer’s task and the challenges experienced from start to finish.
Your customer segment description provides details about the problem to be solved or the job to be done. Additionally, you list the challenges or frustrations that the customer is experiencing while attempting to solve the problem or complete a task. These are the “pain points” that you hope to reduce or eliminate as part of your solution.
These challenges can be emotional, creating undue stress or annoyances. Pain points can occur because of unnecessary dollar expenses, wasted time, or excessive effort. Once you identify the problems, it is vital to see a way to quantify the challenge using some metric. For example, if the customer feels that a task takes too much time to complete, find out how much time it takes. Later on, this information will serve as the baseline by which you will measure the improvement generated by your venture’s solution.
Once you have identified the customer’s objective – problem to be solved or job to be done – you need to answer who primarily experiences the problem the most? During the first iteration of your business model, the team should brainstorm all the potential groups of customers that share the problem. While identifying these possible customers, think about how you might group them based on the context they are experiencing the problem. For example, it might be by the job or tasks or where the problem is encountered. Consider contextual or situational factors when segmenting your customers. Here is an excellent time to consider your customer’s profile and how various groupings may differ in needs, demographics, behavioral characteristics, and purchasing decisions.
At this point, there are a couple of things to keep in mind as you identify potential customer segments. First, I always advocate that startups consider a primary customer segment to focus on early in the process. Sometimes referred to as your “beachhead customer,” you will want to stay focused on a primary target as you engage early customers and test many of your BMC assumptions. Then, in later BMC iterations, you will refine the customer segments to reflect your primary target markets.
Secondly, you want to decide if your business model will include customers from two or more market sides. Sometimes referred to as two-sided or multi-sided markets, these business models require engagement with multiple types of customers. A typical scenario has your venture matching two customers, one who needs a solution (demand-side) with another who supplies an applicable product or service (supply-side). You should add both of these customers to your BMC. You will quickly discover that each side has its objectives, needs, and pain points. Your future offering will have to address the needs of both sides. As you will see shortly, the value proposition will inevitably be different for each side of the market, so you will need to identify and align both within these first two BMC elements.
Value Proposition. Once you have addressed your preliminary assumptions about the customer’s objective, context, and priority segment, you can turn your attention to the Value Proposition element of the BMC. The focus of this BMC element is to answer the following question: What value is your customer looking for from an effective solution?
As mentioned, the typical BMC application assumes you have an initial solution in mind. However, I advocate that founders focus on customer outcomes, including specific solution benefits and pain point relievers. As you will see, I leave an option at the end of the element box to add your initial solution concept.
As you consider the customer’s problem or the “job or task” they are doing, ask yourself, what outcomes are they hoping to achieve? For this BMC element, you should consider what outcomes your customers are looking for in an effective solution? At this point, you should be thinking about solutions in an open-minded manner. Whether it is your initial solution concept or some other option, it only matters to achieve the desired outcomes.
In an earlier post, I made the case that there are two levels of outcomes, one that addresses the customers’ deeper needs and the other based on what functional and emotional benefits come from an effective solution. Thus, an excellent working definition of value proposition is the degree that a solution achieves a customer’s deeper needs plus expected functional and emotional outcomes. To support the articulation of the value proposition, I suggest you expand on the differences between Functional and Emotional Outcomes.
For functional outcomes, you ask, what does the customer want to do differently if they could? For example, the customer tries to solve a problem or perform a task and wants improvement. How would the solution have to function to improve the customer’s situation? Make sure you express your functional outcomes in terms such as better performance, cost efficiencies, increased accessibility, or customization. Always keep in mind that these outcomes should be measurable.
For emotional outcomes, you are answering the question, how would the customer like to feel if they could do things differently? Similar to functional outcomes, you can measure emotions such as satisfaction, happiness, and joy through various methods.
As you consider all the potential outcomes and benefits the customer wants, you ascertain what the customer might expect from an improved solution. In other words, what benefits are expected from a better solution than what currently exists? This knowledge will be critical in future solution design efforts.
Another crucial area to address in the BMC value proposition element is how are the customer’s “pain points” relieved by an effective solution? Here you outline what obstacles or challenges the customer would like to see reduced or eliminated by your product offering? Again, this response should align with the actual “pain points” outlined under the customer segment section of your business model.
Finally, I suggest that you finish your value proposition with a brief description of your initial solution concept for the customer. For example, what is the collection of products and services you plan to offer to your customers? If you are submitting an early solution concept, be sure to outline your assumptions about how your offer is unique in the marketplace and provides outcomes and benefits they cannot derive elsewhere.
In the Value Proposition section, your goal is to clearly articulate the outcomes and benefits you expect the customer to derive from a compelling offering. You also want to clarify how the value offered aligns directly with the customer needs and pain points in the customer segment element.
The alignment between the customer segment information and value proposition elements is typically considered the degree that the product offering meets the market’s needs, labeled as product-market fit. During the earliest stages of venture realization, I tend to articulate it as a problem-solution fit. While this might seem like semantics, I purposely say it this way because I want founders to keep their options open on how to solve the customer’s problems best and meet their needs. During the early business model formation, the focus should be on assumptions about the customer’s needs and what value they expect from an effective solution. Once you validate these early assumptions, you shift your focus to the whole business model and how all the components work together to provide value to the market, product-market fit.
In my next post, I will continue to look at the BMC and provide definitions and thoughts about the two customer engagement elements.
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