How to Design a Business Model

I recently met a fantastic artist.  Scott Stearman is a sculptor who specializes in bronze work, such as life-size statues and memorials.  The process he goes through to create the end product truly is amazing.  Long story short, Scott actually starts his process with a very small clay model.  This model is then magnified and processed to create a mold for the bronze, which is then finished.  The part of this process that I found most intriguing is that the large finished product is being made from a very small model.  This means that any errors that are made on the model are magnified multiple times when it is enlarged to create the bronze mold.  Having a half inch error on a model can result in a four inch error when the model is magnified to become eight times larger.  

I have found that the same is true in how to design a business model.  If a business does not fully refine their strategy on the small scale, it becomes magnified as the business grows.  This is not always a bad thing, but how much more effective could a business be by being intentional?  If a business model is not intentionally designed, the business will ultimately default on a business model that may, or may not be the most effective model for the business.

Refining a Business Model

Regardless of the size of a business, any business owner can learn how to design a business model by following four strategies.

The Target Market Strategy

The first step in designing an intentional business model is to define the target market.  The target market should be a narrow group of people or businesses who will likely consume or utilize your product or service.  While some businesses choose to service a large variety of people, it is not possible for many small businesses to use this strategy.  For example, a large grocery store such as Kroger may have a target market of “anyone who eats.”  Since they are such a large company, ranking in as the fifth largest grocery chain in the world, they are able to carry products that meet the needs of the majority of the population.  They have regular groceries, ethnic foods, and an organic section. 

The problem with this approach is that most small businesses do not have the economies of scale to be able to have such a broad target market.  On the other hand, some businesses struggle as they have narrowed their target market so much that that there is not enough demand to support the business.  The key in refining a target market strategy is to be able to narrow the target market so that a strong niche is being served while the demand is strong enough to support the business.

The Value Proposition Strategy

The value proposition is the core element of a business model.  This is what a business has to offer that a customer is willing to pay for.  Why would anyone pay for anything?  Because there is a level of value being offered to the consumer that is worth paying a certain amount for.  Examples of a value proposition include convenience, price, knowledge base, or connections.

In refining the value proposition of a business, the value proposition must be clear.  It must be obvious.  It has to be refined so that a potential buyer understands why they should purchase the product.  This is done by evaluating the strengths and opportunities of a business to fully understand what value can be brought to the market.

The Delivery Channel Strategy

The next step in how to design a business model is to refine the delivery channel strategy.  A delivery channel is the method by which the product is delivered to the consumer.  For physical products, this could be a matter of how the product gets to a store. Distributors often assist with this process for physical products who sell their product in brick and mortar stores.  Catalogue and website sales offer alternative delivery channels to the traditional retail store. These channels permit a business to align a delivery channel up with the established target market.

In refining the delivery channel strategy of a business model, a business must try to create synergies with their understanding of the target market.  For example, if a target market is a niche group of individuals, advertising in industry trade journals can prove to be a more effective delivery channel than just placing a product in a retail store that does not cater to the target market.  Additionally, a business can purchase online ads that are targeted to a niche group of people.  For example, a chiropractor could utilize social media sites to identify anyone in a certain area who is talking about back pain.  They could then offer a one-time coupon as a way of getting them into their office.

Relationship Strategy

Once a delivery channel has been identified to get a product to the target market, a business must establish a plan to build a relationship with the customer.  Recurring customers are much easier to obtain than getting all new customers.  Gillette has figured out this strategy.  They understand that their customers are going to need their product every single day of their lives.  So where do they make their money?  They offer very reasonable priced razors knowing that once a razor is purchased, new blades must be continuously purchased. 

In addition, companies like the Dollar Shave Club advertise that with a monthly subscription, they will deliver replacement razor blades to your door each month for a fraction of the cost of buying them at a retail store.  Our mobile phone companies have this figured out as well.  We get a phone for cheap, but pay high amounts in monthly subscription fees.  These companies have figured out that it is more profitable to keep a recurring customer than it is to constantly try to find new customers.

A business must refine their business model to establish a relationship strategy that will keep customers returning to buy a product or service.

Bringing it Home

Just like Scott Stearman must refine his clay model to ensure that the finished bronze sculpture is a masterpiece, we must intentionally refine our business models to have the most effective business as possible.  This is done by being intentional with our target market, value proposition, delivery channel, and relationship strategy.  The good news is that these strategies can be refined at any time.  And the more we refine them, the more effective results we will see as business owners.

Here is a question for you: How intentional have you been in designing your business model?  I would love to see your comments below.