New Business Verticals Within a Company

    How does a company whose revenues are flat (and have been for a while) get out of that funk? I found that the vertical integration of your business line is the perfect answer.
    Vertical integration is when a company controls more than one stage of its product or service. It can be in the form of other businesses created out of the base business. A personal example is when I started the Bella’s Restaurant chain. Everyone loved our red sauce so much, we decided to create and brand “Mama’s Red Sauce.” We sold it at our restaurants and through a national super market chain, limited to the north east region. Vertical integration can also be a supply chain for commodities, which is exactly what Reliance Energy of India did (as we’ll see later on). There are four phases of the supply chain: commodities, manufacturing, distribution, and retail.
    There are two types of vertical integration. Forward integration is when a company at the beginning of the supply chain “downstream” controls stages further along. An example would be a diamond mining company that owns mines, and then creates a distribution and retail diamond company. Backward integration is when a business at the end of the supply chain takes on activities “upstream.” An example of this is when a movie distributor, such as Netflix, also manufactures content.
  1. Backward Integration
    Reliance Energy is a perfect example of backward integration. Its creator, Dhirubhai Ambani, was a poor fabric dealer among thousands of dealers, but he wanted to reduce the cost of producing carpets. Dhirubhia was so frustrated that he could not get a good price on fabric, so he decided to create a Fabric Manufacturer company. The Fabric manufacturing company reduced the cost of his carpets so well, that he continued to move backwards in the chain. Dhirubhai was making a lot of polyester and using a lot of petrochemicals, so he decided to become a Petrochemical Manufacturer as well, which reduced his cost to produce the end product (carpets) even further. Dhirubhai was using so much petrol, that he then created a Petrol Distribution business, and then a refinery, and so on. You can see how he continued to work backward in the chain to achieve vertical integration.
    By the time Dhirubhai Ambani passed away, Reliance Energy was generating $20 billion in revenue and was 7% of the Indian GDP.

  1. Forward Integration
    Credit Justice Services (CJS) was a small credit restoration company that I started in in 2004, in Florida. It was a technology and data company that disputed inaccurate and unverifiable negative trade lines as reported by the three credit reporting agencies, namely, Equifax, Trans Union, and Experian. As the data from the three credit bureaus were coming in, we saw a pattern among them. CJS noticed that the three credit bureaus were not following the Fair Credit Reporting Act (FCRA), which was passed in 1970 to ensure fairness, accuracy, and privacy of the personal information contained in the files of the credit reporting agencies.
    After noticing this, I decided to team up with bankruptcy attorneys around the United States to assist my clients after the credit restoration process was complete. By law, the credit bureaus must remove any negative credit lines challenged by the consumer within 30 days that they cannot prove (As we would say, “Prove it or remove it”). If they don’t, they can be sued for up to $1,000 for each mistake. So, we tagged each credit line that was not removed under the FCRA, and sent the files to our network of attorneys. This did two things for us: first, it gave us another business line, and second, it differentiated our company from all the other credit restoration firms.
    One time when I was speaking at a credit restoration event in Dallas, Texas, I was approached by several of my peers who asked how I was able to handle so many files per month, and produce the type of service and results CJS was known for. I freely gave my colleagues the information they were looking for, but there was one problem for them: I owned all the proprietary rights to the software and process. I soon created a wholesale division of CJS, helping other credit restoration companies to produce more at less cost.
    There are an infinite amount of ways to expand into the vertical market; those were just two examples among many. However, jumping right into vertical integration is not recommended. As always, success depends upon thorough research, and the vertical integration process is no different. To decide whether or not you should try to expand into the vertical market, there are some things you should ask yourself.
    The 3 questions to ask before expanding into a vertical market:
  1. Why: Why are you expanding into this new market? What data is driving your business’s decision to expand into this market? How do you know customers want or need this product or service? Companies doing well in particular markets can start to get “I can’t fail” syndrome. This is a rabbit hole you do not want to go down, so make sure the “why” is answered, and ensure that you are conducting thorough and complete research (Customer Discovery).
  2. What: What are you offering to a new market place, and is there a large enough differentiation factor to pull you through? Why is your client going to buy from you, rather than the company down the street (Better, faster, cheaper)? Make sure to do the research with your potential clients first (Customer Discovery)!
  3. Who: Who will you target when focusing your expansion efforts? I have seen many companies start with their potential Total Available Market (TAM) instead of their Target Market (TM), which is less costly and more manageable. For example, when I had Credit Justice Services only in Florida, I had the same amount of cash flow as I did when I expanded into 47 States…More headaches—same money!
    Vertical market expansion is more comfortable and less risky than entering into a totally new market. It can be very lucrative because of the expertise and employee base already in place. If the proper research is conducted, the risks are even further minimized as your chances for success increase. As long as you fully investigate those three questions (the “why,” the “what,” and the “who”), you can creatively weave your way into the vertical expansion market and reap the benefits.
    If you’d like more information, please feel to contact me at dmuir@muirandassociates.net

“ENTREPRENEUR” IN THE 21ST CENTURY

    The French word “entrepreneur” first appeared in the French dictionary in 1723, and defined a person who organizes and operates a business while taking a financial risk in order to do so. Since the word entrepreneur came on the scene, it has added some terms like “social entrepreneurship” and “intra-entrepreneurship” (which are terms I explain in other articles). Most simply defined, an entrepreneur is a person who identifies a need or a want and starts a business to fill that void. This simplistic definition, however, provides little insight into the specific character traits and attributes that makes a person thrive as an entrepreneur—especially one doing business in the 21st century.
    Before quitting my day job as an airline pilot to pursue an idea that was brewing in the back of my mind, I considered if I had the necessary fortitude to make it as an entrepreneur. As it turns out, I did. I have been practicing entrepreneurship since 1992, and teaching it as a professor since 2012. I’ve learned a lot, and I certainly know all too well about the pursuit of opportunity without regard to resources. I started my first venture by doing everything I now teach not to do (e.g. I maxed out 10 credit cards, refinanced my condo, borrowed money from family, friends, and fools, etc.). At a fundamental level, all entrepreneurs try to overcome adversity to pursue opportunity with limited resources. So, unless you are comfortable with minute to minute change, incredible amounts of stress, and the uncertainty of your future financial stability, you should consider diverging from the entrepreneurial path.
    As a devoted student and lifelong practitioner of entrepreneurship, these are some things I have learned about over the years from truly successful 21st century entrepreneurs and mentors:
  1. Most start-ups fail : (According to the Small Business Association only 30%of new businesses fail during the first two years of being open, 50% during the first five years and 66% during the first 10). The road to success is often long and lonely, with brutal hours, massive amounts of stress, and lots of personal/family sacrifice and debt. So, why would you want to become an entrepreneur? Well, it gives you the freedom to be your own boss and the creator of your future.
  2. Survival as an Entrepreneur: In my late twenties, I became an entrepreneur (I started I&E Marketing Group—a reseller of phone time to airline personnel), even though I didn’t know the meaning of the word “entrepreneur,” let alone how to spell it. Nevertheless, I saw a void and filled it. In order to survive, I thought, ate, and drank telecommunications. I refined, iterated, and pivoted when needed. I NEVER gave up in the pursuit of my dream.
  3. How to Find Resources: One can do this by making, maintaining, and leveraging contacts. Despite adversity, entrepreneurs can find ways to exploit opportunities for mutual benefit, by networking and being a great student in both the short and long runs. This is the most powerful part about entrepreneurship. The more you give back to the entrepreneurship community, the more you get!
  4. Managing Risk: Up front research is everything to starting a successful company. But, even though research can help you avoid the pitfalls of risky ventures and save you in the long run, some mistakes are inevitable. As life and experience have come upon me, I’ve learned that great entrepreneurs are focused, learn from their mistakes, and move on without regrets. Their appetite for risk is far greater than the average person’s (although it decreases with age and experience).
  5. To Make a Difference: In my fifties, the idea of entrepreneurship completely changed for me. I had started and sold 10 companies and was successful at my trade, but I wanted to make a difference; to do something that has a positive and long-lasting impact. I went back to school to get my MBA, and started teaching what was so freely given to me by my mentors. This required a different kind of mindset. It is not just about making money, or becoming famous, or creating new things. Making a difference as an entrepreneur has been very rewarding for me. In my travels around the world to speak about and teach entrepreneurship, I have met entrepreneurs from all walks of life–in government, in academia, corporations, labs, and on stage. All these entrepreneurs have one thing in common: they feel the desire to give back to the entrepreneurship community.
    What Is the 21st Century Entrepreneur Made Of?
  • Personality: Entrepreneurs are risk takers and have resilience, tenacity, innovation, creativity, and the ability to identify opportunity all rolled up into one. Whatever the entrepreneur lacks, they make up for with a great employee.
  • Attitude: The entrepreneurial attitude is defined by personal standards and values for the company and employees; the perception of being the best, no matter what the size of your corporation is; understanding the importance of customer focus; and the desire to use and apply creativity and imagination.
  • Motivation: This and attitude is everything! Motivation consists of personal drive and ambition, the desire to make an impact, the need for achievement or self-satisfaction, a desire for status, to create and accumulate wealth, and social responsibility. I was always very aware that I was not the smartest person in the room, and I was okay with that. But, I also knew that no one—in any room—would outwork me.
  • Skills: These will be learned on the job and at a quick pace. You will spend many hours developing your entrepreneurial craft, but once it comes together and you learn from your mistakes, it gets better and easier. I cannot emphasize enough how important it is to have these few necessities: the ability to network, to think strategically, and gain access to resources, as well as possess business knowledge, interpersonal skills, and management skills.
    In the end (and I hate to say it), there is no exact formula for entrepreneurship. Even in the 21st century, when entrepreneurship is a well-taught and well-respected field, the road to success has no GPS to provide you with a turn-by-turn map. Instead, entrepreneurship is as unique as each individual, and you cannot follow someone else’s journey to success. That journey is uniquely yours, and yours only.

Business Mistakes Transformed into Knowledge

As I ponder what I’ve learned over the years as an entrepreneur, I can confidently say that my biggest insights have come from my mistakes. I would like to share these educational pitfalls with all new entrepreneurs who are starting new businesses. The number of mistakes I made as a new entrepreneur was painfully high, but I would not change those learning experiences for anything. However, to assist the new entrepreneur who may read this article, I wanted to write about what I should have done differently in business. I would like to invite all seasoned entrepreneurs to add your experiences to this list.

 

I really don’t believe in failure. I believe that what looks like failure is actually a learning experience with the opportunity to move you in a different direction. Every time I start a new company, it is an opportunity not to repeat the past, but to learn from my past mistakes. After many years as an entrepreneur, I finally have the experience to identify how not to follow the same path of mistakes over and over again. I would like to share some of these insights with you, so you can avoid some of these mistakes, too.

 

My biggest learning experience in business was when I had almost lost it all. I did the typical entrepreneurial financing for the first restaurant I opened: I maxed out 10 credit cards, leveraged my kid’s college funds (they were five and six at the time), put my home up as collateral, borrowed as much money from family, friends, and fools as I could, and personally signed for everything. The following are a few pitfalls that I learned from this experience, which I would change if I had to do it over now.

 

  1. Admit you’re in trouble – The ego has killed more businesses than I can count. When the proverbial you-know-what is hitting the fan, most people, including myself, stick their heads in the sand. This was the worst thing I could have done when my restaurant venture was failing. These are the times you have to ask for help and look the problem straight in the eye. When I finally asked for help, it was amazing how many people came to my rescue—landlord, vendors, the bank, and other experts. It’s such a liberating experience when you learn exactly what’s going wrong, and the solution to fix it. For me, the problem was that my partners were stealing from the company (due to a lack of financial understanding). This was an easy fix, and then I moved on.

 

  1. Partners – This should be the most researched area when starting a company, and yet, is the least respected. A partnership dissolution is worse than a divorce. When it comes to money, everyone changes. I recommend a serious background check, a credential check of past employers, and a review of tax returns and personal financials. If your partners are unwilling to comply, move on. When I started the restaurant, I hired the first person who told me he had a great deal of restaurant experience, which I later found out was false. Writing a very clear job description for each partner helps during the times when the lines start getting blurred due to growth. Each partner has their strengths and weaknesses, so make sure they are outlined in detail.

 

  1. Operating agreement – This saved me from a partner I had in a consulting firm based out of New York City. After expanding the company 5X, he thought creating a mirror company and taking the clients was legitimate. (A little side note: beware of the attorneys who use boiler-plate operating agreements. There is no boiler-plate anything when it comes to partnerships and entrepreneurship. Every company and partnership is different, so you need to treat them with regard to their highly individualized needs. Example questions you should be asking are: what happens if one of the partners dies? Who gets the stock? Does it go to the spouse? If so, should they receive the same pay for doing no work? What happens if one of the partners leaves within a year? Do they get to cash out for only one year of service? What if a partner is caught stealing? The questions could go on forever, but make sure you ask the tough questions in the beginning—it will save you hundreds of thousands of dollars in the long run.)

 

  1. Financials – The number one reason businesses fail is a lack of understanding when it comes to financial statements. This was the biggest learning experience of my career, and it proved to be a game changer when I took control of it! When I started my first restaurant, I hired a business broker who built business plans and developed all of my financials, without explaining any of it to me. What I learned from this mistake was that whoever knows the numbers is in control. There are three financial statements you should know as well as your children:

 

      1. Cash Flow Statement. This is the lifeblood of the company, yet it is one of the least understood aspects. When there is no more cash, the lights go out. You must hoard cash in the beginning, middle, and end.

 

      1.  Profit and Loss Statement. What we learn from this document is how much revenue comes in and how many expenses go out. The problem here is that your mortgage, accounts payables, etc. are not taken out of the bottom-line number called your net profit. So, it is possible to have a large net profit and still be bouncing checks—which is exactly what happened to me!

 

      1. Balance Sheet. The balance sheet is even less understood than the cash flow statement. The balance sheet helps you understand certain types of ratios. For example, I do an inventory ratio (how long my inventory is staying on my shelves), and a current ratio (how much short-term cash I have compared to short-term debt), so I know the health of the company.

 

  1. Know your market – Until I discovered the Customer Development process in conjunction with the Business Model Canvas methodology, I was a poke-and-hope type of guy. I believed the innovative idea I had would work because I said so. The idea that someone would try to start a company, without asking at least 100 people, companies, or potential customers what they think of their idea, just makes no sense. By taking time and doing the Customer Development process, along with a detailed Business Model Canvas, you develop a clear understanding of who your customer is, and what business model is best to deliver your product or service. This process has saved me a great deal of time, effort, and money. Below you can view an outline of the Business Development Model.

 

 

                       Business Development Model

 

 

If you are a new entrepreneur just starting out, try to remember that mistakes are a crucial part of your entrepreneurial journey, and more importantly, your success. You will make them time and time again, and while it may seem like the end of your business (or the world) at the time, remember to seek out the learning opportunities your mistakes have offered. But, also remember that you are not the first entrepreneur making mistakes out there. Many have done so before you, much like myself, and you can learn from us. If you’re going to make mistakes, make them original. Otherwise, why waste your time, money, and effort? Instead, ask questions from your mentors, and carefully study how to avoid common mistakes.

 

 

 

INTRAPRENEURSHIP YOUR COMPANY TO SUCCESS

In April of 2017, I decided to leave academia and my Private Equity Firm to retire in New Jersey and be close to my family. (I know, who retires to New Jersey?) As an entrepreneur, that retirement lasted for about a month. A thought began to plague me: “Wouldn’t it be nice to work full time for another company?” I had never done this before, but I thought I could take my entrepreneurial skills from Main Street to Wall Street. I was going to be an “intrapreneur.”

I was blessed to work with a broker/dealer that had the best reputation on Wall Street, and two of the finest owners a person could ever work for. Although the learning curve was massive, I quickly found out that the same business processes, tactics, and procedures that made me successful as an entrepreneur could be used in my role as an intrapreneur for my new Wall Street firm.

I have researched, taught, and written about big companies that typically struggle with innovation. The research shows that once companies reach a certain size, their investors become more conservative, their leaders less entrepreneurial, and their decisions are managed by consensus. Meanwhile, in an effort to protect their jobs, their employees become less willing to take risks with new and innovative ideas. However, without innovation, companies can get too comfortable with their past successes, just before they find themselves going out of business (e.g., Sears, Blockbuster, Eastern, Pan Am, and many companies on the floor of the NYSE). They lack the innovation needed for continued success.

The intrapreneur’s role, then, is to find new and disruptive ways of doing business, deliver innovative products and services to the market, and foster a culture of innovation to maintain market leadership. Interestingly, intrapreneurs often don’t have job descriptions, and if they do, most of their actual work is done outside what’s written down in the corporation’s policy and procedure guide.

Companies that are not familiar with the intrapreneurial process need to watch out for these four possible pit-falls:

  1. Lack of intrapreneurial learning and validation. Companies and employees unable to do the basics of Customer Discovery for new products and services will be doomed, and will likely fail. It is imperative for your company to bring in an adviser at this point. With the new GIG economy, there are plenty of people like me that would be more than happy to set your company up for intrapreneurial success.

 

  1. KPI’s not befitting a start-up. Let’s be perfectly clear, a start-up company is not a smaller version of your large company. Metrics must be designed for the start-up, and iterated as information and experience comes in.

 

  1. Enforcing the corporate structure in your start-up. Enforcing existing management systems is a common mistake when putting intrapreneurial initiatives into motion within a mid to large size company. This will only stifle the intrapreneurial spirit and crush innovation. There are certain systems and processes that only work for start-ups, and not for larger companies.

 

  1. Strict adherence to company strategy. Making no adjustments to strategy is the life killer of a start-up within a company. The waterfall-type process just does not work. You must be agile, and ready to iterate or pivot on the dime. Again, there are processes for start-ups that work only for start-ups within a company or organization.

You can avoid these four pit-falls if you familiarize yourself with the intrapreneurial process, and if you acquire help from an adviser.

If you are a mid to large company looking for innovation, create a culture of intrapreneurship inside your organizations. Let your employees know that it is okay to spend part of their day jobs tinkering around with new ideas. That it is okay to make mistakes, and that failure will not result in punishment if things do not go as planned. Hire people that have entrepreneurship wired into their DNA; leaders who are not afraid to take risks and make decisions on their own. The company that hired me managed this by first allowing me to teach the owners about the intrapreneurial process and culture. Then, I was able to teach the business unit managers, and finally, the employees, while monitoring, measuring, and iterating all along the way.

As I said before, intrapreneurs don’t typically have job descriptions. Instead, they break the confines of the norm and hunt down opportunities for growth. The innovation that an intrapreneurial culture fosters is indispensable for start-up success within a company. Don’t think you and your company can’t attain such a culture of innovation—you can, and with the right help, you will.

I have researched and written much on this subject and would be honored to share more with you. If I may be of assistance to your company, please let me know.

Email: dmuir@muirandassociates.net

Can Entrepreneurship be Taught?

I have been asked many times, “Can you learn entrepreneurship in a classroom, or only through real-world experience?” Similarly, I’m asked if entrepreneurs are made or born. I answer these questions with a story. I was a pretty good wrestler in New Jersey and was taught by one of the best wrestlers in the world, Mean Gene Mills. Gene was a sight to see on the mat. It was an art when he wrestled. Gene just had it. I, on the other hand, did not have the “it” and few people do. Nonetheless, I still did very well, because I perfected the necessary skills as taught to me by Gene. The same idea applies to the great entrepreneurs of our time; some people are born with the entrepreneurial drive, mindset, and skills, while others must learn them.

How does one know if they are a natural born entrepreneur? There isn’t a test you can take, but there are a few signs to look out for:

1.    Hate the status quo. You hate just going through the motions, doing what you’re “supposed to do.”

2.    Easily bored. You are simply not loving what you’re doing while working for someone else.

3.    Fired from jobs. You get fired more often than you’d like to admit. Hint: telling the owner what you think when they don’t ask is not a good thing!

4.    Resist authority. Resisting authority was my favorite thing to do as a kid, but doing so got me into a lot of trouble. I would always have to ask the question “WHY?”

5.    Ready to improve everything. You are always looking for ways to streamline and improve processes, policies and procedures.

6.    Not normal. You probably feel different from those around you. Until I realized I was different from my friends, who are 9 to 5 type of people, I always felt different. Then I jumped head first into entrepreneurship, risking everything and that’s when it all changed. Turns out, I wasn’t “normal” in all the right ways.

If none of these resonate with you, but entrepreneurship is something you are passionate about, then don’t worry, the game isn’t over yet. Just as I learned how to wrestle, you can learn how to think and act like an entrepreneur. Allow me to explain my front-row view of how entrepreneurship is changing the face of education and the ever-developing business world.

As a retired entrepreneur who started ten companies and sold them all, I felt a calling to go back to school and get my MBA, so I could teach what was so freely given to me by some of the best mentors. I’ve had the honor to teach entrepreneurship at University of Virginia and, most recently, Felician University. I have learned and experienced a lot about the entrepreneur and am happy to share some of that with you in this article.

We have seen entrepreneurship take root in the curriculums of universities across the country, and its appeal has spread from business schools to disciplines as varied as art, nursing, engineering, education, and many others. Courses offered in entrepreneurship have grown approximately 20-fold. In 1985, there were about 250 courses offered in entrepreneurship at college campuses across the nation. In 2008, that number grew to 5,000, with over 2,000 schools teaching entrepreneurship and creating accelerators and incubators within the schools of business (Kauffman Foundation).

So many of the lessons that I had to learn the hard way are exactly what I teach aspiring entrepreneurs, so they can avoid repeating the same mistakes I made. I teach entrepreneurs indispensable skills and insights that change how they approach their businesses. This can be done in many environments, ranging from universities, to incubators, accelerators, and even mentoring programs. A few of the lessons I teach include how to evaluate opportunity, how the entrepreneurial selling of your company differs from the professional selling of a product or service, and how to effectively communicate about your business. I also teach about some of the pitfalls of agreeing to 50/50 equity splits that are sealed with a handshake at the outset of a new venture. Students learn to highlight tools that improve processes, procedures, and productivity. They also learn how to use data to uncover patterns in the success and failure of new ventures that highlight the consequences of decisions.

I also teach another part of entrepreneurship that is crucial to success: Customer Discovery. Applying the discipline of Customer Discovery can help entrepreneurs avoid spending time and money building a product or service that no one wants to buy. Founders will also learn the skills of negotiation with investors, presenting to clients, marketing a product or service, and even how to hire good, qualified employees.

So, in a nutshell, the answer is YES, entrepreneurship can indeed be taught. It’s the “how to” that really matters; that is, how to do certain things, perfect certain skills, and learn how to ultimately think and act in an entrepreneurial way. Below are a few concepts and processes that students need to walk away with. They must know the “how to’s” of the following:

  •  Identify– opportunities.
  •  Market Research- Evaluate ideas and assess the market.
  •  Value time, money, and work hours– Appreciate the risks and rewards of entrepreneurship.
  •  Customer Discovery– Leverage experiments to validate your idea and refine your business model.
  •  Financials– Discover the key financial decisions any entrepreneur must make in the early stages of a new venture.
  •  Investors– Understand the process of raising capital, and how to speak to investors and understand their “Term Sheets,” which outline business agreements.
  •  Mentorship– Learn from successful entrepreneurs and leading investors, as well as peers.

If you can grasp these concepts and skills, you can enter the field of entrepreneurship; a field defined by breaking the rules, boundless innovation, passion, and even fun.

It’s true, some people are born with an entrepreneurial mindset or skills, and will excel naturally, while others may be a fish out of water and struggle to reach the same point until they learn and perfect those skills over time. People not born with the “it” of entrepreneurship can still learn how to become entrepreneurs, but they must be willing and able to learn things extremely fast. Your success rate increases with each class you take and skill you learn. But, beware, it takes a lot more than some slick power point presentations and nice new entrepreneurial textbook to become an entrepreneur. It takes a lot of grit, risk, and tenacity. Do you have what it takes?

If you’d like more information, please feel to contact me at dmuir@muirandassociates.net

Source: https://www.kauffman.org/currents/2015/10/the-evolution-of-entrepreneurship-on-college-campuses

Information Missing from Entrepreneurs’ Pitches (7)

Information Missing from Entrepreneurs Pitches 7
-Revenue Model-
 

How do you actually make money from your product or service that is being sold to your customer segments? One of the most common mistakes people make is not knowing the difference between the revenue model and the pricing model, which are the tactics you use to set the price in each customer segment.

Let’s cover the three mistakes I see startups make most often:

1.They think that the revenue stream is the price they charge for their product.

2.They set their price by how much it costs them to produce the product.

3.They set the price lower than the competition (race to the bottom).

These common mistakes leave way too much money on the table. So, there are a few questions you must ask yourself while setting the revenue model and pricing:

What do customers value, and how much are they willing to pay for it? On day one, when you are sitting in your building, your lab, or at your desk, these questions are mere hypotheses, but when you get out of the building and talk to hundreds of potential customers, you come to understand what it is they value. This is what we will use to find out what the revenue streams and pricing should be.

How do customers pay for products today? How much are they currently paying?

All of the above leaves so much money on the table. There is a better way to figure out the revenue model, or strategy, and the pricing tactic. Such revenues are the lifeblood of a company. Revenue streams may have different pricing mechanisms, such as fixed list prices (i.e. Target), bargaining pricing (such as car dealerships), auctioning (Sotheby’s), market dependent (supply and demand), and volume dependent (such as food services buying in volume).

Revenue streams can result from two areas: one-time customer payment, or (my personal favorite) recurring revenues where ongoing payments deliver a Value Proposition or after-sales services to a customer (monthly recurring fees). Companies continually research the answers to questions such as: what are customers willing to pay for what value? How are they currently paying, and are they satisfied doing so? How much does each revenue stream contribute to overall revenues and profits?

Revenue Model (Streams)

These can be generated in many ways:

Asset Sales

This is the sale of ownership rights to a physical product. Ford sells automobiles, which buyers are free to drive, resell, or dispose of. A consumer goes into a Wal-Mart and buys household products. A customer goes into a hardware store to purchase tools.

Usage Fees

These fees are proportional to the usage of service. Examples are Verizon cell phone, Amazon Web Service, Fed Ex shipping, and electric power. I use this in my company, Credit Justice Services (www.creditjusticeservices.com), where I charge a per-trade-line fee to correct the inaccurate or unverifiable information on people’s credit reports. The more trade lines I work on, the higher the fee.

Subscription Fees

These fees are for continuous access to service. At Salesforce.com you pay for the continuous use of their product, at Netflix you stream all the videos you want, and my gym yearly membership fee is good for however often I choose to go. At my restaurant chain, Bella’s, we found a company that would charge one fee for my electricity and take over the bill. This was a very beneficial arrangement because the electric bill is now a fixed cost.

Lending/Renting/Leasing

These fees are for temporary access to a good or service. The revenue stream is created by granting someone the exclusive right to a particular asset for a fixed period of time in return for a fee. Lenders receive recurring revenues, and lessees pay a fraction of the full cost of ownership. We used to think leases were only for houses or cars, but what about Chegg, the textbook rental store, borrowlenses.com, which rents out camera equipment, and monthly furniture rental companies?

Licensing

This is a fee for the use of someone’s Intellectual Property (I.P.). Microsoft, Electronic Arts (EA), and Apple are just a few of the companies we use to license software. At the University of Virginia, we have a division that concentrates only on I.P. protection and licensing called the Licensing Venture Group (http://lvg.virginia.edu/about/lvg).  There, the content owners retain copyrights while selling licenses to third parties.

Intermediation or Brokerage Fees

Often found in marketplaces of various types, this is a fee for bringing together two or more parties involved in a transaction. The most notable examples are brokers and real estate agents who earn a commission each time they successfully match a buyer with a seller. A relatively new company in this model is called Airbnb. They don’t own all the apartments and homes that are available for short term rent, but receive a cut of the daily fee. Match.com brings people together on their dating site for a fee. At Credit Justice Services, we bring credit-challenged clients together with attorneys from around the country for a lead-generation fee.

Advertising

These fees are paid by brands and companies aiming to get in front of potential clients.  Newspapers—and the media in general—rely on this approach, which has spread to companies like Google, Facebook, and Twitter, all of which sell advertising on their sites. These companies draw massive amounts of users, monetizing their product or service.

Pricing Types and Tactics

There are two types of pricing: Fixed and Dynamic.

Fixed Pricing

This could be as simple as Cost + Markup, but the one thing that is missing from the equation is the value to the customers you’ve been talking to. Now that you know what your customer desires, you can price on value for each customer segment, or feature what your customer needs. A list price is what is stated in the store or brochure, but could be subject to discounts depending on the number of items purchased or service required.

Dynamic Pricing

By contrast, dynamic pricing moves depends on market conditions, and is subject to the power and negotiating skill of the purchaser. The price depends on the inventory and time of purchase (as in Expedia or Hotels.com). Price in real-time markets is dynamically established by supply-and-demand conditions. Prices at auction also result from competitive bidding.

Inside of each revenue stream you might have different pricing tactics. A few I have used in my companies are illustrated below.

Bella’s Restaurant Chainwww.bellas-restaurant.com Meatball Mondays, half price bottles of wine Tuesdays, 15%-off date night on Wednesdays; all of these are tactics that attract customers when the restaurant is normally slow.

Credit Justice Serviceswww.creditjusticeservces.com Make a one-time payment and receive a 20% discount, make two payments and get a 10% discount. This approach allows me to receive cash upfront for a discount to the client. While increasing short-term cash flow, you decrease long-term income. We are also the only credit repair company in the country with attorneys who will take your case for free if you’ve been wronged; another valuable tactic.

Bisenti Technologywww.bisentitech.com So many start-ups are being ripped off by American programming companies who hang a shingle outside their door and claim to be technology experts. We just ran into such a client, and after further review we found a 21-year-old kid who took our clients’ money and became overwhelmed with the project and ran. Our standard at Bisenti Technology is pay for performance. We do not get paid unless we perform. This makes our job more challenging, but our clients love it. We are also 1/6th the cost of any other local or national programming company.

 

For more information about starting a company or new product development, please feel free to contact me at dmuir@muirandassociates.net.

 

Source:

Blanks, S. (n.d.). (2015, November 13). Business Model Canvas, Udacity. Retrieved from www.udacity.com

 

Information Missing from Entrepreneurs’ Pitches (6)

Information Missing from Entrepreneurs Pitches 6
-Customer Relationships-
 

This building block dictates the nature of the relationships that an organization will develop with its various customer segments. Remember in the customer segment box we learned (among other things) exactly who our archetype client was, where they lived, what they purchased, and how. Now that we have a good understanding of who our client is, it is time to GET-KEEP-GROW the customer base. For me, this is the fun part. Let’s look at each of these three sections individually. I will be using my new chain of restaurants, Bella’s (www.bellas-restaurant.com), as an example throughout this article.

GET. Getting clients into your pipeline can be broken up into two categories: Paid and Earned.

Paid Media. These are paid-for services such as advertising on TV, radio, in newspapers, buying Google ad words, etc. At Bella’s Restaurant we launched a Facebook page and boosted every posting we made. We started with videos and pictures highlighting the very first day of construction, and then posted daily video updates showing the progress of construction and design up until opening night. Clients told us they felt as if they were a part of the development of Bella’s. They were excited to experience the restaurant once it opened and they posted many comments on Facebook. Starting two weeks before opening, we also advertised on radio, TV, and in newspapers and magazines in order to flood the market. This was a very direct style of marketing, since we already knew whom to target from doing our customer segment interviews.

Earned Media. Earned Media is public relations. This is the best type of media money cannot buy. Bella’s started off by sending press releases to all the media outlets in town, because they love local stories and are always looking for new content. They requested interviews for their TV news programs and newspapers. This campaign started two months before opening. On opening night there were three TV stations, two newspapers, and two magazines that covered the event. All this publicity cost us nothing!

So, how does one acquire and (once they are in the pipeline) activate their potential clients? This is more information on the GET section of our model.

Acquire. Customer acquisition is the process of persuading a customer to select your organization’s product or service over the competition’s. A number of mediums and tactics are available to entrepreneurs today who are interested in acquiring customers. Here are a few:

Content Marketing. This is a very valuable tool for entrepreneurs with limited resources. It includes your branding (i.e. logo, website, company story, and fliers) and any other content about why you exist in the marketplace. At Bella’s we created our logo and trademarked it. Our story was about my parents-in-law coming from Rome, and how they taught our chefs the cooking and recipes they served to their own family and friends in Italy. We wanted to emphasize that our menu was authentic Italian food. We filmed these cooking lessons and added them to our content.

Search Engine Optimization. Now it’s time to take your content and share it with the world. The more people who are exposed to it and share it, the higher your content will rank in search results. This is one of the most effective ways of getting your product noticed by your target customer. I do not believe in hiring an SEO. I do it myself, as should you. We placed everything on Facebook, Instagram, newspapers, TV, etc. All this goes on the web and increases your visibility.

Email Marketing. On Facebook, we had contests for a free dinner on opening night (we still have such contests). Through these contests we obtain clients’ names and email addresses, and use them for marketing. We also get this information when people make reservations. This data is rich and is the best way to reach your client directly. We then use Constant Contact to send out weekly emails with promotional material and information about the specials of the weekend.

Social Media MarketingAlthough you cannot be dependent exclusively on social media to get the word of your product or service out to the market, when used in collaboration with other tactics, social media can elevate your product significantly in your target customer segment’s estimation.

Activate. All of the above systems are well and good, but mean nothing if you don’t turn them into paying clients.

Conversion Rate. The more your company gets clients into the pipeline, the stronger your chances are of activating them by making minor tweaks to your content and learning what works. Bella’s did a test sample of 500 customers who ate at our restaurant by giving them a “How did you find us?” card to fill out at the end of their meal, and offered a 5% discount if they did so. What we found out was amazing. A full 68% of diners came in through word-of-mouth, 18% came in from seeing us on Facebook, 10% found out about us by driving or walking by and seeing the restaurant was always full, and 4% checked the “other” box and wrote a comment.

Analytics. It is not enough to just mobilize word of your products through the media. If companies do not use data gleaned from one or more of these resources and analyze it to better understand their customers, they are not taking full advantage of the investment they have made.

Stand for Something. Bella’s gets at least 100 requests per year to donate gift cards, space, and food for events. (Don’t they know we work on a 3% margin?) Although we certainly can’t afford to say yes to every request, it is very important to be known as good stewards of the community. Every fiscal year, in April, we examine all the requests for donations and accept four large ones and four smaller ones, giving out $200 in gift cards. This is a personal choice I made when starting the company.

Give Them What They Want. Bella’s conducted six weeks of taste testing with my mother-in-law working side-by-side our chef in the kitchen, cooking for 15 people every night. The clients would fill out an anonymous data card at the end of dinner. It was amazing what we learned. Customers are automatically more inclined towards a product based on how much it reflects qualities that they feel exist in themselves. Companies need to know their customers inside and out, have a complete understanding of the language they speak, their wants, needs, and desires in order to be successful.

Make It Personal. By providing a personal service to your customers, you increase your chances of creating a repeat customer. This couldn’t have been more evident than when I opened my second Bella’s restaurant, and was not spending enough time in the first one. My clients said the customer service was lacking, and it wasn’t the same without me there making my personal visits to each table. This could be the kiss of death if not done correctly, but we hired a “mini me” and this turned things around quickly. Clients love the personal touch!

KEEP. Once you get your clients, how do you keep them? It is much less expensive to keep a client than to get them in the first place.

Loyalty Programs. These are a great way to keep clients coming back. We signed up with a company called Cardagin (http://www.cardagin.com/) that handled all of this for us. The data we received from this company was tremendous, (such as spending habits, amount spent, what was purchased, etc.). This information was key to us and the loyalty points for free food, drinks, and even iPads were welcomed by clients.

Contests and Events. This has been very helpful to us. We place events on Facebook and the winners get something worth their time to participate in the event. People are competitive in nature and really enjoy these contests.

Product Updates. Changing things up and adding new things is good, so long as you stay with your core business. We do this at Bella’s by keeping the menu consistent, but adding specials every week. We find the best-selling specials during the year and add them to the menu. The clients feel they are a part of creating the new menu.

GROW. This is key to success. It doesn’t take much to do this, but it eludes more entrepreneurs than you can imagine.

Up-Sell. This is my favorite. There is a waiter in my company from Florence, Italy who is the best at this. When I eat at my restaurant and he waits on me, I notice how he upsells me and the people I’m eating with. It is so subtle that no one is the wiser. It is as simple as a client asking for water, and the waiter saying, “Would you like flat Acqua Panni water, or San Pellegrino sparkling water?” (In other words, leaving free tap water out of the equation.)

Cross-Sell. This is a great way to bundle some of your products together. For example, at Bella’s, we have a Specials Night when you can buy a complete dinner, including appetizers, salads, entrée, wine, and dessert for a fixed price. In my company, Credit Justice Services (www.creditjusticeservices.com), we cross-sell our legal program after a client is finished with the credit repair. This keeps the client in the loop longer.

Referrals. As you already know, this is the best avenue for growth in a company. As mentioned, 68% of Bella’s clients come from referrals. We have a referral program whereby a repeat client who brings in six or more guests receives a gift card as a thank you.

For more information about starting a company or new product development, please feel free to contact me at dmuir@muirandassociates.net.

Source:

Blanks, S. (n.d.). (2015, November 13). Business Model Canvas, Udacity. Retrieved from www.udacity.com

Information Missing from Entrepreneurs’ Pitches (5)

Information Missing from Entrepreneurs Pitches 6
-Customer Relationships-
 

CUSTOMER RELATIONSHIP BUILDING BLOCK

This building block dictates the nature of the relationships that an organization will develop with its various customer segments. Remember in the customer segment box we learned exactly who our client was, where they lived, how they purchased, and many other things (we learned the archetypal client). This is the fun section for me, because now that we have a thorough understanding who our client is, its time to GET-KEEP-GROW the customer base. Lets look at each one of these three sections individually. I will be using my new chain of restaurants, called Bella’s www.bellas-restaurant.com, as an example throughout this article.

GET. Getting clients into your pipeline can be broken up into two categories: Paid and Earned.

Paid Media. This would be things like advertising on TV, radio, newspapers, buying Google ad words, etc. What we did at Bella’s restaurant was to start a Facebook Page and boost every posting we made. We started off with posts on the first day of construction and continued until opening night. Clients told us how they felt a part of the development. We did advertising on radio, TV, and magazines two weeks before opening to flood the market. This was a very direct type of marketing since we already knew who to target from our customer segment interviews

Earned Media. This is public relations. This is the best type of media money cannot buy. Bella’s started off by sending press releases to all the media outlets in town, because they are all looking for content and love local stories. From that point, they requested interviews for their news programs ore news papers. This campaign started two months before opening. On opening night there were three TV stations, two newspapers, and two magazines that came and wrote about the event. All this publicity cost us nothing!

So, now how does one acquire, and, once in the pipeline, activate their potential clients? This is the first of three sections of the Get-Keep-Grow model.

Acquire. Customer acquisition is the process of persuading a customer to select your organization’s product or service over the competition’s. A number of mediums and tactics are available for entrepreneurs today who are interested in acquiring customers for their business. Here are a few:

Content Marketing. For entrepreneurs with limited resources, content marketing is a very appealing and useful alternative. This is your branding (i.e., logo, website, company story, fliers) and any content that you put together about why you exist in the market place. Bella’s created their logo and trademarked it. Our story was about my parents-in-law coming from Rome to do our cooking. We filmed all this and added it to our content.

Search Engine Optimization. Now it’s time to take your content and share it with the world. The more people who are exposed to it and share it, the higher your content will rank in search results, which is one of the most effective ways of getting your product noticed by your target customer. I do not believe in hiring an SEO. I do it myself, as should you. We placed everything on Facebook, Instagram, newspapers, TV etc. All this goes on the web and increases your visibility

Email Marketing. On Facebook we would have competitions for a free dinner on opening night, and continue to do so even now. For the entry, we get the clients’ names and email addresses. We also get this information when they make reservations. This information is rich and the best way to get to your clients directly. We then use Constant Contact to send out weekly emails with promotional material and specials of the weekend.

Social Media Marketing. You cannot be dependent exclusively on social media to get the word of your product or service out in the market. When used in collaboration with other tactics, however, social media can elevate your product significantly in your target customer segment’s estimation. It is much easier to target a specific market using social media than other forms of advertising.

Conversion Rate Optimization. The more your company starts attracting customers, the stronger your chances are of acquiring them by making minor tweaks to your content and outlook.

Analytics. It is not just enough to mobilize word of your products through the media mentioned above. If companies do not use data gleaned from one or more of these resources and analyze it to better understand their customers, they are not taking full advantage of the investment they have made.

Customer Retention. This refers to the long-term relationship a company establishes with its customers. The more repeat customers a company has, the more it is assured of champions who will market its products and help it acquire additional customers.

Below are some strategies businesses can use to retain their customers and form long-term relationships with them.

Stand for Something. Customers are more loyal to brands that they identify with, or those that they feel represent traits and characteristics that they would like to emulate. Therefore, it is imperative for a company to select what its brand stands for and communicate that to its customers.

Utilize Positive Social Proof.  Websites that provide customers with facts that show how the use of their product will improve their social standing are more likely to help the company retain customers in the long term.

Invoke the Inner Ego. Customers are automatically more inclined to a product based on how much it reflects qualities that they feel exist in themselves. This is called implicit egotism, and can be a very effective weapon. Companies need to know their customers inside and out, have a complete understanding of the language they speak, their wants, needs, and desires to be able connect with them, and show them how the company and its products are an extension of themselves.

Use Words They Love to Hear. Certain words have a deep impact on the buying behavior of customers, and if the product fulfills the promise of these words, customer retention becomes easier.

Reduce Pain Points and Frictions. If you address a pain point for your customer, or resolve a problem for him, you will retain him for much longer.

Realize That Budget Is Negligible. Most companies balk at giving back to customers without realizing that giving them a discount, even if it is a small one, will wow the customer and keep him coming back for more.

Utilize Surprise Reciprocity. Surprising the customer by providing them with a boon (like a discount or a free add-on) will stay with the customer longer.

Make It Personal. By providing a personal service to the customers, you increase your chances of creating a repeat customer.

Speed Is Second to Quality. Often times companies make the mistake of picking speed of service over quality, thinking customers would appreciate the tradeoff. However, studies have shown that customers are more likely to come back if importance is given to quality.

Customers Enjoy Businesses That Know Them. The more time an employee spends with the customer, getting to know them and therefore providing a level of personalization, the more likely he is to reassure the customer that the company truly knows him and therefore keeps pulling the customer back to the brand.

Choose the Right Platform. It is important to know what communication channel is preferred by customers, and to utilize this channel to the fullest extent in order to keep the company’s presence ensured in the customer’s psyche.

Make It a Communal Effort. All elements of the organization must be fully engaged and informed when it comes to servicing a customer. The aggregated effect will greatly improve the overall experience.

Get People Started. Loyalty programs are more likely to be used if companies get past the customer’s initial resistance, and ensures that customers are automatically signed up for such schemes. Once the ball is rolling, customers are more likely to stay the course.

Get Ideal Customers to Be VIP’s. Humans are competitive by nature, and studies have backed this observation by showing people appreciate being assigned to a particular customer class if there is a class below them in the program.

Label Your Customers. Customers are more likely to keep coming back if associating with their brand puts a label on them.

Boosting Sales (Upselling)

Companies are forever focused on increasing their sales, and often use a strategy called “upselling,” which requires representatives to convince the customer to buy more of their company’s products. By using a combination of linguistics, packaging products and lowering their overall price, and selling dependent products, companies ensure that a customer buys as much of their products as possible.

In fact, companies often provide incentive programs that reward employees who manage to boost their sales through the technique of upselling, and ask others to emulate the techniques and tactics those employees use. However, such incentive programs are kept strictly under wraps, because if a customer gets to know about them, it may break the tenuous relationship of trust between the customer and the customer representative.

Typical upsells that you may have experienced can be: asking a customer if he would like to add a drink or fries to his order at a fast food restaurant; convincing a customer who is getting his laptop fixed that he should get more RAM, or a bigger hard drive installed; suggesting to a customer who is getting his phone fixed that he should upgrade to a newer version of the handset, etc.

Typically, there are two techniques that successful upsellers often utilize. Successful upsellers are many times researchers and observers who get to know their customers’ profile, particularly focusing on their economic status, demographic, preferences, and social aspirations. This helps the upseller to customize his pitch to the taste of the customer.

Another technique that is common among upsellers is the use of fear. By letting the customer know that the product might go out of stock due to demand, or getting them to buy after sales services or warranties for expensive items by letting on that the product is sensitive and needs to be handled by expert hands.

 

For more information about starting a company or new product development, please feel free to contact me at dmuir@muirandassociates.net

Source:

Blanks, S. (n.d.). (2015, November 13). Business Model Canvas, Udacity. Retrieved from www.udacity.com

Information Missing from Entrepreneurs’ Pitches (4)

Information Missing from Entrepreneurs Pitches 4
-Customer Segment- 
I cannot tell you how many times I’ve asked new start-up companies how many potential clients they’ve talked to about their great breakthrough, and have received the disappointing answer, “none.” This is so disheartening to me. I learned a long time ago, when I started pitching to investors and studying the Business Model Canvas (BMC), that I needed to find out who my customer base was going to be. To do this, one needs to get out of the building, so to speak. First, one must do research on Customer Discovery (find the problem) and Value Proposition (create the Minimum Viable Product). The Customer Validation phase begins when you take the Minimal Viable Product (MVP) you have developed and go back to as many potential clients you have spoken to, and see if your product or service is the right one for your customer. This is called the Customer Segment of the Business Model Canvas.

The Customer Segment is one of the most important building blocks in the Business Model Canvas, so getting this right is key to your success. By matching your customer segment to your value proposition, you can achieve a more lucrative revenue stream and develop a Product Market Fit (briefly discussed in last week’s article). This part of the BMC can only be done outside of the building by interviewing hundreds of potential clients. Your customers can be segmented into different groups based on their needs, behaviors, and other traits they share. A customer segment can also be defined through demographics such as age, ethnicity, profession, gender, and more. We can also break this down into other factors such as spending behavior, interests, and motivations. Then, the organization must create a value proposition, and employ a business model best suited to servicing their chosen Customer Segment’s needs.

The Customer Segment part of the Business Model Canvas will help the startup discover the following:

Creating a Customer Profile:

Who Is My Archetype? In order to ensure that a start-up’s product or service appeals to its customer segment, the business must work to understand who the customer really is. This can be discovered by evaluating the customer’s environment, experiences, and general social context. This is called “living in the day and life of your customer.” By learning what your customer does from the minute they wake up until they go to sleep, you come to understand exactly where your product fits in their lives. All of these factors contribute to how the customer will respond to your product. So, a customer’s geographic, demographic, and social context will define the customer’s persona, creating a customer archetype for your products and services.

Customer Gains. We have to ask ourselves what outcomes our clients expect, and then widen our lens to discover what we can provide for them that would go beyond their expectations. Is it quality they are looking for, or more of “this” and less of “that?” Could it be features they are looking for, or perhaps better performance? What would make your customer’s job or life easier? Could it be more services, lower cost of ownership, or removing a step from a cumbersome process? And what would increase the likelihood of them purchasing your product or service? Is it cost, better quality, lower risk, more fun? The answers will differ if you are selling to a business customer rather than a consumer customer, but regardless of your customer type, these questions all need to be answered in the Customer Segment of the BMC.

Customer Pains. This part is the part that is easiest to identify. It’s seeing clearly what exactly is causing your customer hardship, and making sure your product or service will alleviate it.

Customer in Context. Selling a product or service from business to business is much different than selling to a consumer or end user. Within a corporation there will be people who use the product, people who would recommend the product, and people who are the actual buyers of the product. But the people you really have to look out for are the saboteurs. A great example of this is when one of my companies, Bisenti Technology (www.bisentitech.com), went for its first big project with one of the largest Hedge Funds in America. We knew who the economic buyer was (the CFO), we knew who the end user was (the marketing and sales departments), but we had to understand that the I.T. department was going to be our saboteur. They were worried that we were going to take their jobs instead of understanding we were there to help them. Knowing the chart of players before going in gave me a strategic move that helped us win the contract.

With all of this information in place, it is time to hit the streets and start testing your hypothesis. I ask myself the following questions as I engage in this real-life stage of the Customer Segment:

How do you test your customers’ interest?  I use what is called a Minimal Viable Product (MVP). This contains the core features your product or service delivers. I watch the customer’s eyes as they review my solution to their long-standing problem. If they light up, I know I am in. If not, I ask questions and iterate.

Where do you test your interest?  When I started Credit Justice Services (www.creditjusticeservices.com), I went to over 100 mortgage broker offices with my MVP, showing them the solution I had to their problem. When I started Bella’s, a new chain of restaurants (www.bellas-restaurant.com), I placed a picnic table in the middle of a defunct restaurant, and cooked for 15 people every day for six weeks until I knew I had the recipes just right.

What kind of experiments can you run?  I try to keep it as simple as possible. When I came up with a new Italian red sauce at my restaurant, Bella’s, I tested 500 people who sat at my bar and did a blind taste-test with 10 other red sauces. This gave me enough data to figure out what I needed to do to be number one.

How many do you test?  This is simple. The larger the data set you have, the more the accurate information about your product or service will be. I try to never to go below 100 users.

For more information about starting a company or new product development, please feel free to contact me at dmuir@muirandassociates.net

Source:

Blanks, S. (n.d.). (2015, November 13). Business Model Canvas, Udacity. Retrieved from www.udacity.com

Information Missing from Entrepreneurs’ Pitches (3)

Information Missing from Entrepreneurs Pitches 3
-Value Proposition- 
According to Investopedia.com (2015), “Value Proposition refers to a business or marketing statement that summarizes why a consumer should buy a product or use a service. This statement should convince a potential consumer that one particular product or service will add more value or better solve a problem than other similar offerings will” (p. 1).

The question I like to ask my clients and students who are starting a company is: “why would I buy their product or service instead of the company’s next door?” They normally come back at me with the types of features they have, or the coolness of their product. The Value Proposition is asking what pains and gains I will receive from using your product/service instead of the other company’s. Let’s look at what that means.

What is it you are building, and for whom are you building it?

What pains are you removing, or what gains you are creating?

Pain Killer.  What are you going to reduce or eliminate for the customer? Is it wasted time, cost reduction, emotional frustration, or risk removal?

Gain Creator (The Solution). How do you create benefits for the customer? Is it through exceeding their expectations and desires, or will they be surprised by the ease of the solution?

Once you have gotten out of the building and interviewed hundreds of potential clients in your customer-discovery phase of this process, you then come back to the lab and design a Minimal Viable Product (MVP) from what you learned. What is the Minimum Viable Product? It is the smallest feature set you can create to show the potential client that it would solve their pains or create gains. This is where I see clients and students go off the rail, especially engineers. They come up with a 50-feature set of ideas, and have no clear vision of what the customer wants or desires. This will only confuse the potential client and drive them away. You need to make the MVP as simple as possible to understand. Remember, you will be returning back to the client with your MVP,  saying, “This is what I’ve created to solve your problem. Is this what you were talking about?” Other features will add on after launching, depending upon the customer feedback.

There are two types of MVPs — Physical and Web/Mobile. Let’s look at each:

Physical. This is a product that will be sold through a direct sales channel, so you will need something that the customer can touch or feel. If not, I have my students go out with a power-point slide deck. This will test the understanding of the problem and solution. It will also help you figure out the minimum features the customer desires.

Web/Mobile. You need to start with a low-fidelity website. This means you need either a wire frame, or a power-point mockup of what you are creating. Remember to keep it simple. This is so the customer can understand what you are trying to solve or create. I would advise that you get a high-fidelity feature a few weeks after your customer interviews, which would include a more detailed webpage and an actual back end that works. This will help you develop something the customer wants and desires, without trying to figure it out yourself and wasting a lot of time while doing so. I love this process, because all you need to do is just ask the client, and they will tell you what they want!

What most start-ups don’t understand is that it’s not about your idea or product, but about solving a problem or a need for a customer. So, what does that mean, and what is the difference between a problem and a need?

Problem. This is solving an accounting  problem or a company systems problem.

Need. This is universal, and is therefore wanted by the billions of people on the planet. Great examples of this are communications, entertainment, and even love. EHarmony tapped into this like no other company. Apple also took the iPhone and turned it from a problem of communication to a need that resulted in people wanting a new one every year.

The Value Proposition works hand-in-hand with the Customer Segment part of the BMC, which I will be writing about next week. When a start-up can connect the two (Value Proposition and Customer Segment), we call that a Product Market Fit. This answers the question, “Is what I’m building needed, wanted, or desired by the customer?” The great news about the Business Model Canvas (BMC) is that you can iterate (make small changes) or pivot (go in a totally different direction) between the Value Proposition and the Customer Segment during the Customer Discovery stage until you get it right. When this is accomplished by a start-up, the chances of success increase significantly.

Most start-ups only look at what their actual product or service Value Proposition will bring to the client. I ask my clients and students to look at the whole package to be delivered to the customer. Here are a few questions you need to ask yourself about your product or service:

Product

What are the parts of your value proposition? Manufactured goods, commodities from other lands, etc.?

What are the entanglement parts of your value proposition? Perhaps copyrights, the licensing, or something else?

Are there financial parts, like insurance you offer, financial guarantees, and so forth?

Is it digital, like MP3 files or e books?

Service

Which core services are part of your Value Proposition? Is it consulting, a haircut, investment, or advice?

Which presale will you offer? Is it to help the client find a solution, financing, free delivery?

What after-sale services will you provide? Is it free maintenance, disposal of product, etc.?

The Value Proposition is the part of your product and service that states exactly why the client would rather buy from you than from your competitor. It is the part that describes what pains you will be removing and what gains you will be adding.

For more information about starting a company or new product development, please feel free to contact me at dmuir@muirandassociates.net

Source:
Blanks, S. (n.d.). (2015, November 13). Business Model Canvas. Udacity. Retrieved from www.udacity.com

Investopedia. (2015, November 13). Value Proposition. Investopedia. Retrieved from http://www.investopedia.com/terms/v/valueproposition.asp