November 17, 2011 at 11:31Want to build a successful software product business?
Where to start your business?
Surely many programmers will answer that with good code and ideas, managers - ideas and a business plan, artists - inspiration, etc. As you can see, there are many opinions, but in fact, the most correct decision will be to build a business model (objections are welcome, but preferably, by example and after reading the post to the end).
There are a lot of methods, I personally consider the Business ModelCanvas to be the most useful , but I do not insist. To everyone who is just starting their business, I recommend trying to fill the canvas, and to everyone who is already working hard, and maybe even earning money, I suggest checking their business model with eight questions from Alex Osterwalder .
Of course, the only important judges of your business model are consumers.! However, the long-term competitive advantage of the model can be improved by evaluating its design with a couple of questions that go far beyond the usual perception of products and market segments.
I suggest sketching an existing business model or a startup model using the Business Model Canvas tool below (you can use other techniques or just look at the mechanism for making a profit in your business) and then start evaluating its design.
The basics
Each business model is based on a product and (or) service, focused on the task that the client has to solve. I call it the benefits offered. Therefore, before evaluating your business model as a whole, ask yourself basic questions regarding the benefits offered and the consumer segments that you are targeting.
• First, ask yourself how well the benefits offered help the target consumer solve the problem. For example, if a user tries to find and purchase the latest Nike sneakers in a search engine, a measure of success will be how the search engine helped the user to cope with this task.
• Secondly, ask yourself how many people or companies exist with a similar task. This will help you find out the size of the market.
• Thirdly, ask yourself how important this task is for the consumer and whether he really has the means that he can spend on this task.
This is about the basics. However, even the greatest products are going through difficult times before gaining a long-term competitive advantage. That's why you need to switch from a pure product / market segment approach to a more holistic approach with a business model. The following are eight questions for evaluating the design of a business model. Evaluate the effectiveness of your business model on a 10-point scale (0 - poor, 10 - excellent) for each question.
1. How much do the costs associated with changing the supplier prevent the outflow of consumers?
The time, effort or money that a consumer is forced to spend switching from one supplier of a product or service to another is called “switching costs”. The higher such costs, the greater the likelihood that a consumer will stick to the same company, instead of switching to competitor's products or services.
An excellent example of accounting for costs associated with a supplier change in a business model is the introduction of iPod by Apple in 2001. Do you remember how Steve Jobs announced his new product with the catchphrase “a thousand songs in your pocket”? It was not just a new product designed for storage. It was a business model strategy designed to get consumers to copy all their music to iTunes and their iPod, which would further complicate their transition to competitors' digital music players. At a time when something more than the preferences of a particular brand did not allow people to switch from one player to another, this was a smart step that laid the foundation for Apple's further strengthening of its position in the field of music and subsequent novelties.
2. How scalable is your business model?
Scalability shows how easily a business model can be expanded without a corresponding increase in base cost. Of course, business models that rely on software and networking products naturally scale better than models that rely on real products, but there are big differences between digital business models.
An impressive example of scalability is Facebook. With just a couple of thousand engineers, they create value for hundreds of millions of users. Only a few companies in the world have a similar ratio of users to one employee. The company that managed to push the boundaries even further is the social gaming company Zynga. By creating games such as Farmville or Cityville on Facebook’s largest social network, they were able to capitalize on Facebook’s range (and scale) without having to build it on their own.
A lesson in scalability, Skype's peer-to-peer communications company quickly learned in the early years of development. Their relationship with consumers collapsed under the weight of a large number when they received ten thousand users daily. They had to quickly adapt the business model to become more scalable.
3. Does your business model generate regular income?
Regular income can be explained with a simple example. Revenues from selling newspapers in kiosks are called piecework, and subscription income is called regular. Regular incomes have two main advantages. First, you bear the cost of selling just once, earning a regular income. Secondly, regular income gives a better idea of how much you will earn in the future.
A great example of recurring revenue is Redhat, which provides open source software and supports long-term subscription businesses. In this model, customers do not pay for new versions of software products, as they are constantly updated. In the world of software as a service (Software as a Service, Saas), this type of subscription has become the norm. However, Microsoft still sells most software products as licenses for each major release.
But there is another aspect of regular income, which is the additional income caused by initial sales. For example, when you buy a printer, you continue to spend money on cartridges, or when you buy a game console, you continue to spend money on games. Or take a look at Apple. Along with the fact that the majority of their income comes from the sale of hardware products, regular revenues from content and applications continue to grow steadily.
4. Do you earn before you spend?
This goes without saying. The more you can earn before spending, the better.
Dell was the first to launch this model in the field of computer hardware. Starting to assemble immediately after placing the order and payment, they were able to avoid the terrible depreciation of inventory in the field of hardware. The results show how effective it is to first earn and then spend.
5. How much do you make others work?
What could be more effective than making others work while you make money?
In the real world, IKEA forces us to assemble the furniture we buy from it. We are working. They save money. Facebook forces us to upload photos, create and participate in conversations and make a “like” mark. This is the real value of Facebook, entirely created by users, while Facebook itself only provides a platform. We are doing the work. They earn the highest stock ratings.
The previously mentioned Redhat made another smart business model based on other people's work. Their business model is based entirely on software developed by the open source software community. This allowed them to significantly reduce development costs and compete with larger companies such as Microsoft.
A more parasitic business model in which others do work is the model that the so-called patent trolls practice. In this model, patents are bought with the sole intention of suing successful companies and getting money from them.
6. Is competition protection built into your business model?
A great business model can give you more protection from competition than just a great product.
Apple’s main competitive advantage stems from a powerful business model rather than just innovative products. Samsung, for example, is easier to copy the iPhone than creating an ecosystem like Apple’s AppStore, which serves developers and users alike and owns hundreds of thousands of applications.
7. Does your business model underlie a cost structure that can change with changing game rules?
Reducing costs requires a long workout in the business. However, some models go beyond cost reduction, creating value based on a completely different cost structure.
For example, Skype provides calls and communications almost like a regular telecommunications company, but for free or at a very low cost. They can do this because their business model has a completely different cost structure. In essence, the Skype model is based on the economics of a software company, while the telecommunications provider model is based on the economics of a network company. The costs of the first go mainly to human resources, while the costs of the second cover huge investments in infrastructure.
Similarly, one of the world's largest network providers, Bharti Airtel, significantly modified the cost structure, getting rid of its entire network and information technology. Having bought network capacities based on variable costs from a consortium of network equipment manufacturers Ericsson and IBM, they can now offer the lowest prices for mobile telephony worldwide.
Redhat, which was mentioned earlier, also built a business model on a changing cost structure: wisely putting the work of other people at the heart of the model.
8. How does your business model design work?
Of course, none of the business models will receive a maximum of 10 points for each of the issues mentioned. Some may even be successful in the market without scoring the proper amount of points. But by asking yourself these questions and getting good points on at least some of them, you are likely to significantly improve the long-term competitive advantage of your business.