Last week I wrote about the Diamond Square Framework to evaluate a business model, today it's about a practical guide for evaluating a business model. It’s good to know the theoretical framework, but applying it is the next step to seeing results.
Here are some tips on how to evaluate a business model in practice. As so often in life, it is about asking the right questions:
We start by analyzing the business model components and if they are aligned. The goal is to identify any discrepancies. In the following, sometimes terms from the startup world are used, but the questions also apply for mature businesses or new product and service lines.
Business Model characteristics
Customer Value Proposition
- Is the value proposition a must-have, or just a nice to have?
- Is it significantly better than any competitive offerings?
- Switching Costs: Evaluate if the product creates high switching costs or a "sticky" relationship with customers.
Go-To-Market or sales & marketing strategy
- After defining the target audience, it’s time to evaluate the Go-To-Market method, whether B2C (business to consumer), B2B (business to business), and B2B2C (business to business to consumer, reaching customers through businesses or channel partners). For a more mature business, think of the marketing and sales strategy and setup that is applied.
- Is there a good mix of direct and indirect channels to educate, support, and distribute the product to customers in a repeatable and scalable way?
- Organic Growth: Is there a flywheel effect where user acquisition leads to more users?
Profit Formula/Pricing model
- Evaluate the pricing model? If you are looking at a tech startup/SaaS company, there are typically three main pricing models: advertising-based, transaction-based or subscription-based.
- What are the (expected) margins? Will the company earn more revenue per item sold as compared to the cost of acquisition and production?
Technology & Operations
- Operational Complexity: Analyze the capital and operational intensity needed for product delivery.
- Identify economies of scale and potential network effects.
People
- Who are the founders, the team, partners and investors? Are they a good fit?
- Are there any conflicts that could arise from different financial or strategic expectations?
- What is the background? Are there any gaps?
What else?
- Trends and Implications: Consider broader trends, social impacts, and ethical considerations.
- Is there a willingness to pivot by abandoning ineffective elements and trying new approaches?
How will these answers help me?
Answering these questions will help you analyze each component of a company’s business model and determine if there may be components that are not aligned. With a thorough evaluation, you can illuminate the areas where things are not working and where more experimentation or a pivot may be necessary. This is an essential part of refining or adapting a business model.
You need to understand that a pivot in one aspect of the business model has a ripple effect throughout others and that they are interconnected.
Additional topics to consider for a new business or venture
Adoption-First Strategy: Is customer adoption driven before prioritizing monetization? Is the product user-friendly and frictionless?
Shifting to Profit: What is the planned transition from an adoption-first strategy to focusing on making profits without disrupting the user experience.
Designing an Attractive Model: Is there a plan on how to experiment with business model elements to create an attractive and compelling offer?
Financing: What strategies for financing ensure a runway for achieving a profitable and sustainable business model?
Practical application
It’s good to know the theoretical steps and frameworks to analyze a business model. But if you actually have to do it, how do you transfer knowledge into applying it.
I like to have structures and checklists to make those processes repeatable and also evolve and improve those worksheets while I learn “on the job”. This way I can also help others to benefit from my learnings in a structured, repeatable way.
Taking Action
Sign up for newsletters to stay up to date for further articles around business development, corporate entrepreneurship and innovation.
Download the worksheet here for free or for a fair price you can set.