When starting a new business, reflecting on how to structure your business model is a great place to start. As discussed in this article, frameworks like the business model canvas can really help us understand what value we are delivering to the market, and whether our customers may be willing to buy our products and services in order to get a job done.
As an entrepreneur myself, I have often faced the challenge of testing a business model, to understand whether it is worth investing time and money to bring it to market. On the one hand, only by talking with our customers, we can build the perfect model, on the other, there are a few tricks that can help us get on the right course of action, and reflect on 9 aspects of our model which we need to test out.
Here is in brief, a short summary of what our post is about, and what you should be testing out for your up-and-coming business:
- Your value proposition combines both tangible and intangible benefits.
- Your customer segmentation is both descriptive and behavioural.
- Your distribution is experiential.
- Your customer relationships revolve around co-creation.
- Your revenue streams are diversified and multi-tiered
- Your key activities are focused on customer value.
- Your key resources are scalable.
- Your key partners cannot replace you.
- Your costs are proportioned to the value they deliver to the customer.
1. Your Value Proposition Combines Both Tangible and Intangible Benefits
The place to start for any business is your value proposition. The value proposition helps you identify how you are going to help your customers, by solving a problem they are experiencing in their lives, by “pulling something in” from the market. The business model canvas was designed with a particular marketing strategy in mind: the jobs to be done theory which we discuss in more detail here.
The challenge with your value proposition is that sometimes it is too focused on tangible good, and sometimes it is too intangible. A tangible valueproduct may be easy to market, but it will be likely to be more easily capped in terms of pricing. An intangible value, will not be limited in terms of pricing but will have a harder time connecting the asked price to the actual value being delivered.
In this sense, it’s important to make sure that our offer meets both ends of this spectrum. An example can be clarificatory, as we discussed in this article, Rent the Runway has a great business model, pairing the tangible benefits of acquiring high-end clothing at lower price points with many intangible benefits such as the “guilt-free” experience.
So is your value proposition fulfilling these criteria? This might be the first thing to work on, as your value proposition is the one-liner statement that defines your business. You can use some additional tools to delve into the challenges of creating a compelling value proposition with the value proposition canvas.
Of course, we also need to remember that a business model is a system, and no element of the model is independent. In our next section, we are going to discuss how our value proposition needs to match our customer segments.
2. Your Customer Segment is Both Descriptive and Behavioural
“Know your customer” is an essential mantra for the fashion entrepreneur. The fashion market is an extremely diversified market where so many identities, needs and behaviours coexist. If you’d like to read up more about customer segmentation this post is an all-time favourite.
Sometimes in business models, however, we see that many entrepreneurs focus on profiling their customers only on the grounds of descriptive segmentation, which addresses information such as country of residence, age, income, language etc. These types of data set are very useful to build personas but they don’t reveal much information about the motivation that leads customers to buy. We discuss this point in greater detail in this post.
Therefore, as you build your business model, you should make sure to include a segmentation strategy which does not only focus on describes what your customer looks like, but what are the motivations that push him to purchase. As we do this, we always need to remember how “people don’t buy drills, they buy holes” meaning that what we have to sell is only linked to what a customer can do with it.
Behavioural segmentation in this sense is a powerful tool, as it allows us to ask different questions than the one we usually ask, as delving into a “reason to buy” is a very insightful journey into our customer’s mind. If you’d like to learn more about this approach, look for instance at how Trent Reznor used this approach to develop his record marketing strategy.
Now that we’ve clarified what value to offer, and who our customers are, we can move on to distribution, which we’ll address in the next section.
3. Your Distribution Is Experiential
Alright, so at this point, you have your value proposition sorted and your customer in- target. What we have to do now is “simply” reach him, via our distribution strategy. Distribution is a key topic in the fashion business, as picking a distribution strategy is a major decision that defines your customer journey. In this sense, we can see how the most basic types of distribution for a fashion brand are three: physical, digital and omnichannel.
- In physical distribution, a brand decides to focus its efforts on creating a network of third-party retailers, or vertically integrated stores, which distribute the brand the customer.
- In online distribution, a brand decides to mostly focus on e-commerce platform development, warehouse and shipping management.
- In omnichannel distribution, a brand instead tries to tie together all of the benefits that come with physical and digital distribution to achieve the best of both worlds. We discuss omnichannel distribution in this post: “Flagship Stores and the Future of Fashion Retail”.
In either case, the challenge still lies ahead. It’s not simply a matter of deciding how you are going to reach your customer, but understanding what kind of purchasing experience are you going to provide. What type of atmosphere are you wishing to communicate, what kind of tone of voice will you use to speak to him or her, what values are you going to convey?
This experiential component is extremely relevant, as it allows you to gain a variety of benefits:
- It will allow you to charge more, as an experience is much more valuable than a product or a service.
- It will allow you to use the first transaction, not as a simple “conversion” but as a gateway to start a long-term meaningful relationship with your customer.
- It will allow you to establish a memorable and meaningful connection with your customer so that heshe may build, over time, a habit and become a returning customer.
The challenge of creating an experiential brand, and an experiential strategy is not a simple one, however, operational efficiency is usually the starting point. On 440 Industries we have a variety of sources that might help you build this experience for your customer if you’re interested in learning more here’s an additional source that might help you out: “How to Design a Bespoke Brand Experience”.
Now that you’ve reached your customer, we want to make sure we are able to build a relationship with himher. Depending on the relationship you are willing to build, different decisions need to be made, in the next section, we’re going to start addressing them.
4. Your Customer Relationships Revolve Around Co-Creation
When looking into the relationship created by a brand and customer, we need to see that if the relationship simply consists of giving and taking, not much added-value can be seen. If instead the brand and customer are working together to address a problem or a situation which is much bigger than them, then we see that a process of co-creation is taking place, one that provides the brand with an additional level of value, and the customer with a meaningful opportunity to use hisher “shopping votes” for a greater good.
In this sense, fashion firms should as much as possible learn how to interact with their customers in order to make any personal connection and financial transaction capable of building value. This can happen in different ways, let’s see some examples:
- Intangible value creation: brands and customers can co-create a better future. An example of this can be a company like Patagonia, which is a cutting-edge organisation in terms of sustainability and customer accountability.
- Tangible value creation: brand and customers can co-create a collection, an initiative or even social media content. This is the case in which companies source ideas from their audience (threadless.com), or simply co-create a stylebook, by developing user-generated content which is then shared by the company. In this case, the opportunity of generating value is increased if the brand provides a social currency or a social status which should not simply be associated with exclusivity or aspirational values, as much as with social roles and causes.
In this sense, we can see that the customer, conceptually evolves from being an external stakeholder to being an internal stakeholder, as heshe will, in time feel much closer to the brand, making each customer a much more likely brand ambassador. Ok, with all this value we are creating, it’s now time to look at how we’re going to make some money, moving ahead, and discussing revenue streams.
5. Your Revenue Streams Are Diversified and Multi-tiered
When thinking about revenue streams you should always bear in mind that in fact, your cashflows are the blood of your business, as such, it’s important to think about revenue trying to make sure you can use the following examples as good practices.
- Diversify your incomes. You should not expect to make all of your money from one activity. Try to imagine those activities which are able to build more of a habit, and less of a one-time shopping spree in order to understand when your customers are more likely to spend money. For instance, in an eCommerce platform, you could provide a series of discounts o premium members, with a small monthly charge, as opposed to charging your customers only when they’re actually making a purchase.
- Build a multi-tiered income. As we mentioned subscriptions, never downplay the way in which customer establish different types of relationships with your brand, for some, a once-in-a-blue-moon purchase can be more than enough, for others, any opportunity to wear your collections is a suitable one to make a purchase. In this sense, understand who are your most profitable customers and build additional revenue streams by servicing them beyond their expectations.
- Timelined revenue. As a consequence of the previous strategies, your cashflows will follow different timelines at once, helping your company receiving money more often, and reducing financial risk.
There are many more examples that could be made in this, sense, but when it comes to financing remember that cashflows are the number one reason why companies fail, so planning for a rainy day is always a good idea.
With this last block, we have discussed all of the client-facing activities of your business model. But in order to create all of this, we need to understand how to manage our resources efficiently and effectively, so in the second half of this post, we’re going to do just that, starting from defining what kinds of key activities we should build our business on.
6. Your Key Activities are Focused on Customer Value
Jeff Bezos was the first to show, through Amazon’s success, the importance of focusing on customer perceived value. He was right, many businesses are unable to tell the difference between those assets which create value to your end customer, and those assets which instead are a nice addition to the balance sheet but don’t really contribute to the experience of your end customer. In this sense, in your business model, you need to make sure that your resource allocation is structured so as to devote all of your resources onto those activities which are value bearing.
This could be done by starting to look at the following elements:
- Managing your human resources efficiently. Organising your personnel in a way that allows you to make sure that, for instance, those employees which are going to represent your brand – for instance as brand ambassadors – are going to be chosen and compensated according to standards that really deliver a perception of quality.
- Customer service is the new marketing. In fashion and in FMCG (Fast Moving Customer Goods) the importance of customer service cannot be understated, in this sense, in many fashion business models, taking into account the rising expectations of the increasingly demanding customer is now mandatory.
- Be flexible with your personnel. Realise that in a startup business, nothing is certain. A startup business is generally an organization which is addressing long-term uncertainty and as such, building a culture of adaptability and flexibility with your staff can be a great asset to navigate uncertain waters.
These are only a handful of examples, you may need to find your way to apply the principle of “customer-first”, as the customer is not simply the most important thing, it’s the only thing that matters.
Remember that customer value always needs to be tested and validated. In this sense, in this article entitled Use ‘The Crowd’ to push your business, we look at the role of crowdfunding for your firm’s validation and at ways in which market-testing can be seen as an important component of a fully-fledged strategy.
Moving on we’ll take a look at key resources, and what you need to have in place to get your venture started.
7. Your Key Resources are easily scalable
As you start your company, make sure that the resources you have available are enough to get to “something”. In entrepreneurship, we speak about an MVP or a minimum viable product, as a way to show how any business needs to be able to get (as quickly as possible) to a proof-of-concept stage.
In this sense, what the MVP approach is designed to help entrepreneurs stay lean and use the minimum amount of resources necessary before a business has tested its value proposition and is, therefore, ready to look towards scaling.
There are also, some additional reasons why you want to stay asset-light. Many investors in private equity are always looking for companies with good RONA indexes (returns on net assets) meaning that the more lightweight your firm is, the more the profits will be impressive, as you are able to deliver value to the market, not through large capital-intensive investments, but through creating a unique connection between the blocks of your business model.
At the same time, start small, but think big. Even if you are able to develop a working company with limited resources, you need to make sure you know what it takes to scale. This is essential, as, by the time you start collecting profits you will be required to start investing in this goal.
Digital businesses are the ones that get all the attention because they essentially show how far a website can go, which is a relatively small asset for the size of the profits it can generate. Of course, digital is not the only option, but as we’ve seen in the distribution section of this blog post, understanding the potential of eCommerce distribution is something that all entrepreneurs need to do.
At this point there are only a few other things to look into, starting from identifying your business partners and those who will be able to help you in getting your vision to life.
8. Your Key Partners Cannot Replace You
Partners are a necessity, in many cases, because you want to show how your organisation is not metaphorically fighting against windmills but is instead part of a larger network of organisations which are established and profitable.
At the same time, when looking for partners it can be easy to end up in the wrong spiral, working with organisations that can potentially replace you, by bypassing you and using your entrepreneurial efforts as market validation, or a study on current trends and market needs.
Competition can come from everywhere and we need to be prepared for it, however, we need to take into account that our partners can gain access to information that can provide them with a strong competitive advantage. In this sense, choosing the right partners comes with the intent of making sure that there are strong elements of differentiation and very diverse skillsets in order to operate in the market with little profit overlap.
In the fashion industry, a forward integration strategy, or a backward integration strategy could be an aggressive move, whereby your downstream retailer or your upstream supplier can take advantage of your work, and disconnect you from your audience, or alternatively, your supplier can develop its own distribution network and cut you out.
Because of these risks, it’s necessary to make sure that your partners are not likely to find them in a position where these aggressive takeovers or replacements can happen. We’re almost done, in the last paragraph we’ll look at costs, so that your entire model can be optimised from revenue through, cost to profit.
9. Your Costs Are Proportioned to The Value They Deliver
Just like with the resources we’ve discussed at point 7, costs are also important to keep in check. Building a company under financial pressure can lead to harsh and short-sighted decisions. In this sense, my personal advice is to make sure you don’t approach company-building as an expense, but as an investment, meaning that whatever you decide to spend money on needs to have a return.
If it does not foresee a return, then, it’s likely that it’s not worth buying, at least for now. Starting a company is about making sacrifices, and investing your time, money, and sweat into something which will pay back in the long term, not over a few months.
In this sense, take your time, test everything. Follow your gut, but also follow the evidence. Keep costs low, and you’ll keep the pressure low, and with that, you’ll be better able to imagine the company you want to build.
In the words of ACDC “It’s a long way to the top if you want to rock and roll”. As you build your business, you need to make sure you’re keeping your offer and business model current, vibrant and up-to-speed with all of the paradigm shifts that are impacting our way of doing business and serving our clients.
In this post, we essentially indicated how to push your model a little further, to understand how a small detail or a nuance in your way of doing business can really go a long way, and set you up for success. At the end of the day, a successful business model is simple and effective, with no unnecessary complications or unnecessary effort to deliver value to your customer.
Moreover, remember that the biggest innovation that the business model canvas has delivered is the fact that it’s a tool for experimentation and trial and error. Hopefully, our advice will help you hone your model to a new level of efficiency, but don’t’ forget that practice makes perfect, and only a true and unbiased experience in the market can tell you for certain if you’re on to something great.
Thank you for taking the time to read our blog, we’re looking forward to seeing you again on 440 Industries, and if you’re willing to learn more, by accessing our premium content, here’s a quick link to our online store!