Recap: Business Model Canvas
Again, you should be updating your Business Model Canvas with your learnings around channels and add new assumptions about business models.
Business Models and Capturing Value
The best way to build a product is to build something that creates tons of value for the user or customer. You validated this during your customer development interviews and feedback on your MVP. This is called validating the value hypothesis. The more a customer would be upset if you took the product away from them after they used it, the more value you’re creating for them.
A business model is how you capture some of the value you create for the customer. A good business model aligns the value you create (value proposition) with how you capture some of that value (revenue model), and your cost to create that value (operational costs). Again, you’ll see these boxes on the Business Model Canvas.
Create More Value Than You Capture – Tim O’Reilly
Some businesses have several possible business models: subscription, advertising, per unit fee, percentage of the transaction, etc. For example, Netflix currently charges a monthly subscrption, but they could make the movies free and make money on pre-roll advertising like YouTube. Or they could charge a small fee per movie watched. After you’re done with experimenting with channels your next step is to experiment with revenue models.
“The moral of this story is sometimes you have the right product but the wrong business model. Fixing the business model can fix the company.” – Fred Wilson, Union Square Ventures
Simple Lesson: Watch Unit Economics Carefully
It was fashionable for startups to buy growth at all costs. This is an useful strategy in winner-take-most businesses, like marketplaces. However, it’s difficult to transition a business out of a negative gross margin model into a positive one.
One of the jokes that came out of the 2000 bubble was “we lose a little money on every customer, but we make it up on volume”…If you hold yourself to the standard of making a product that is so good people spontaneously recommend it to their friends, and you have an easy-to-understand business model where you make more than you spend on each user, and it gets better not worse as you get bigger, you may not look like some of hottest companies of today, but you’ll look a lot like Google and Facebook. – Sam Altman, President of Y Combinator
Required Reading: Business Models
- Fred Wilson’s Product > Strategy > Business Model. I don’t think this advice works for all companies such as hardware or some enterprise software.
- Fred Wilson’s You Are Working Too Hard And Not Getting Anywhere.
Pricing is a fundamental part of your business model, and usually the most difficult to get right. Companies are always testing the market for signals on what price is optimal.
“Remember that pricing is not a point; it’s a range. Between the lowest price at which you are willing to sell and the highest price at which the customer is willing to buy, what will determine the final figure?” – KPCB
Here are some good basic rules of thumb to start with: 1) Powers of 10. 2) Powers of 2. 3) Flinch pricing
The best introductory explanation I’ve seen for developing a pricing strategy is Essential Tips for Nailing Your Pricing Strategy from First Round Capital. Here is a sample:
Rather than ask how much a product is worth, ask these questions:
- At what point is this way too expensive that you would never consider purchasing it?
- At what point is this starting to get expensive, but you’d still consider purchasing it?
- At what point is this a really good deal? (You’d buy it right away.)
- At what point is this way too cheap that you’d question the quality of it?
To to get deeper, Tom Tunguz, VC at Redpoint describes the three motives that underpin a pricing strategy: Maximization (to target revenue growth). Penetration (to target market share). Skimming (to target profit maximization).
Required Reading: Pricing
- Mastering the Art of Pricing: What the Textbooks Don’t Teach You – KPCB
- Three foolproof ways to price your startup’s product
- Five Alternatives to Cutting Price
- Essential Tips for Nailing Your Pricing Strategy – First Round Capital
- 5 Mistakes SaaS Startups Often Make With Pricing – Tom Tunguz, VC at Redpoint
- Tom Tunguz, VC at Redpoint on pricing