Do you have a solid business model or a glorified hobby? Your business model is how your company operates and makes money. The heart of any business is its offering, but the business model is wrapped around the product or service, completing the picture and generating revenue.
Most entrepreneurs come from a skilled background. Many small business owners focus their attention almost exclusively on the product and leave the business to an afterthought, erroneously believing the business aspects are simple and straightforward. Entrepreneurs will agonize over every feature put into a product, or how to perform the service, but when it comes to almost all business aspects – marketing, pricing, manufacturing, and distribution – they look at their competitors and just copy their business models.
Have you ever heard that small businesses need to stand out from the competition? You need to differentiate your business? Copying won’t do this.
The experimental start-up phase is where the entrepreneur’s product concept meets its business. The cornerstone of this phase is a system composed of the concept plan. Then phase two is the business experimentation strategy. It’s a process by which the entrepreneur discovers the right product and the right business model, and creates the business proof of concept needed to take the start-up to the next level (and possibly attract investors).
The concept plan is a precursor to a business plan. Many entrepreneurs launch right into the business plan. The unfortunate truth is most business plans are filled with guesses, estimates, and wishful thinking. They should start with “once upon a time”. What’s the point of writing a work of fiction? On the other hand, the concept plan outlines what the entrepreneur thinks the product and business model will be, and details all the missing pieces, assumptions, and unknown factors. One of the first lessons I was told about evaluating business plans is to ignore the numbers and focus on all the assumptions on which they are based.
The concept plan needs to be followed by a business experimentation strategy. This is where the entrepreneur devises ways to turn all those assumptions about the business into fact. Once an entrepreneur has this direct knowledge and experience with the customers and the market, then it’s time to move to the next phase where they can write a solid business plan.
A traditional bookstore start-up would buy books, put them on their shelves, and then try to attract customers to come into their store to buy their inventory. When Chegg, the rent a textbook start-up began, they took orders for the text books, then bought them on a single purchase basis from an online store, and had the books shipped directly to the customer. Their profit margins were awful. Customers even called and wondered why the return address on the packages weren’t labeled Chegg. They proved the business was viable. Students would rent textbooks over the Internet. Then they proceeded to structure the business in a way that could grow and to improve the margins. It was one experimental step at a time.
Most entrepreneurs want to act as if they are an established company with financial might on day one. So they start with the more traditional method of renting space, performing tenant improvements, ordering inventory, holding a grand opening, and then building a customer base. They are proceeding down a path as if they are certain the business will do what they expect. It’s ‘acting as if’ you have a proven business or you know exactly what to do on day one which leads to business failures. Too many entrepreneurs take their fictitious business plans and execute them right into a shut down. It’s time to take a new approach to the problem of how to create a successful business: one that emulates the process of the scientific method, where discovery, not execution, is the primary focus of the new business.
About the Author: Cynthia Kocialski is the founder of three start-ups and helps entrepreneurs transform their ideas into new businesses. Cynthia is the author of Startup from the Ground Up and Out of the Classroom Lessons in Success. Cynthia writes regularly at http://cynthiakocialski.com/blog/