Bloomberg BusinessWeek: Countdown to Product Launch (Part II)
A realistic business model is the second step to successful launch. But many people are stumped on what that really means
You don't need an MBA to start a business, but you do need to get a few things right if you want to succeed. Whether you're opening a restaurant, starting a tech venture, or producing a Hollywood film, the fundamentals are the same. You need a product that meets market needs, a business model that works, a management team that can execute with precision, and lots of luck.
In my last article, I talked about building a market-ready product (see BW Online, 5/4/06, "Countdown to Product Launch"). The second article of my four-part series on how to plan for a successful launch focuses on preparing a business model. What you need to consider at every step of the way is exactly how you're going to generate long-term revenue and profits. Once you build the right product, what's your strategy and process for building a sustainable business? Your business model needs to clearly answer those questions.
REAL PROFITS
"Business model" is a hot buzzword these days with business publications and venture capitalists. But if you don't quite know what the term means, you're not alone. North Carolina State University professor of technology management Michael Rappa says business models are one of the most widely discussed and least understood concepts of the business world and have "largely escaped careful study." Rappa even built a Web site that he says is one of the few comprehensive online resources available on business models.
There is nothing magical about a business model. It is simply the nuts and bolts of how a business plans to generate revenue and profits. A good one is divided into two parts: long-term strategy and day-to-day operations planning.
Entrepreneurs like me thrive on the invention and innovation that comes with building a product. To seek funding, we often put together elaborate business plans showing optimistic market share projections. Even 1% of a billion dollar market seems lucrative, right? Wishful thinking is great, but when it comes time to create your business model, you need to be realistic. The challenges are different in every industry, but here are seven basic points everyone needs to touch upon in their business model:
1. Reaching customers. Ralph Waldo Emerson once said, "Build a better mousetrap, and the world will beat a path to your door". The reality is that even if you did, no one would find you. Even when you know who your prospects are, it is usually difficult and costly to reach them. You have to connect to them via ads in print, broadcast media or the internet, through direct mail, telemarketing, e-mail, or the old fashioned way by cold calling or through references. And they are not likely to be waiting to hear from you and may not take your calls. Explain how you are going to reach customers.
2. Differentiating your product. You think you’ve got the very best solution, but so does the other guy. There is always competition, whether you realize it or not. Smart marketing executives know how to develop unique product positioning strategies that highlight a product’s true value. You need to thoroughly understand the competition and effectively communicate the unique advantages of your product.
3. Pricing. One of the most basic decisions you have to make is how you much you are going to charge for your product or service. Start by understanding how much customers value what they are buying from you and the real market demand. Then you need to estimate your total costs, analyze the competitive landscape and map out your long term strategy. Your price simply has to be greater than your overall costs for you to survive.
4. Selling. Persuading a customer to buy a product that they need is one of the most important skills that an entrepreneur needs to learn (See BW Online Selling for Survival). You are going to be selling at every juncture. So you’ve got understand what it takes to close a deal and put together the necessary sales process. And this process has to be well thought out. Be sure you test your selling strategy as you would your product.
5. Delivery/distribution strategy. Big ticket items usually require a direct sales force, mid- price products are sold through distributors or valu-added resellers, and low-price items go through retail outlets or the Internet. It is different in every industry and for every type of product, but you’ve got to get this right. Your products need to be designed and packaged for the channel through which they will be distributed to customers.
6. Support. In addition to teaching customers how to use your product, you need to ensure that you can deal with defects and returns, answer product questions and take valuable suggestions for improvement. You may need to provide consulting services to help customers integrate and implement your products. If your product is mission critical, you may need to provide 24/7 onsite support.
7. Customer satisfaction. The ultimate success or failure of a business depends on how much it helps customers achieve their objectives. Happy customers will become your best sales people and buy more from you -- unhappy customers will become your biggest liability.
All the pieces have to come together like a jigsaw puzzle. Your product positioning has to be in tune with your corporate strategy. You’ve got to price your products, develop a sales process and support infrastructure that is geared to the channel through which you are distributing. You’ve got to make sure that if you are selling through a third party you have the ability to ensure customer success. And you’ve got to do all this profitably.
The good news is that you don’t have to start from scratch when formulating your business model. You can give yourself a head start by learning from competitors and other markets. It is not only the successes that provide valuable lessons, it’s also the failures. Look at the experiences of the dot coms, for example. They learned the hard way that you can’t give your product away and make it up on volume.
You can also innovate as much in your business model as you do in your products. Be prepared to evolve your innovation strategy as you gain experience and as your market changes. Like your products, it will probably take three versions to get this right.
Once you put together all the pieces, you’ve got yourself a thoroughbred and are off to the races. Now you need a good jockey. In my next article, I’ll cover what it takes to put together a good management team.