How to innovate your business model

Wednesday 27th January 2010 | 6 comments

I recently came across a Harvard blog post by Mark Johnson on
reinventing your business model.

A confession: I'm not the full bottle on business models, and have used only rudimentary or ad hoc versions in the past.

But as soon as I read this post, I saw that here was a model I could implement - and so that's what I am doing right now.

It works like this. First up 3 questions:

  1. Why would someone want to buy something from you?
  2. How will you make money selling it?
  3. What, exactly, are the important things you need to do to pull off the plan?

The answers go into 4 boxes (question 3 is answered in two parts):

Box 1: Your customer value proposition - what is it that you offer that meets a customer's needs in a way that is different and/or better than the competition?

Box 2: How many can you sell at X price minus Y costs? Johnson has a more complex version of this question, that goes like this (I am quoting here):

  • Revenue model - simply, quantity times price
  • Cost structure - not only direct costs and indirect costs, but also overhead, which too many companies think of as immutable
  • Margin model - though technically part of the cost structure, I break it out separately because all too often companies mistake their margins for their entire profit formula and have tremendous difficulty understanding how a lower - margin opportunities could ever be profitable
  • Resource velocity - often overlooked as a profit generator, this measures how many widgets a company can invent, design, produce, warehouse, ship, service, sell, and pay for throughout the value chain for a given amount of investment, for a given amount of time. In some sense, it's a measure of not how much money flows through your company but how quickly it flows through it.

Box 3: What resources are required to deliver your offering?

Box 4: What processes are required to deliver your offering?

I think this looks like a good model for those of us who tend to avoid models. What do you think?

Tags: innovation, business, model

Comments

  1. Like the simplicity of your words - too much business speak is too filled with inaccessible or fudgy speak. And, any business owner can feel encouraged by doing just 4 boxes to get a grip on what they offer and what they do to deliver. Refreshing. Thanks.

    Posted by Svea van der Hoorn | Wednesday 27th January 2010 @ 3:58pm

  2. Thanks, Svea. What I'm finding by going through the process myself is that you can't fudge around the essentials - or gloss over any gaps - with such a simple model. I like it so much I have pre-ordered his book (Seizing the White Space) due out next month.

    Posted by Joanna Maxwell | Wednesday 27th January 2010 @ 4:58pm

  3. Hi Joanna - this is great. Really simple - doesn't get straight into horrendous and off-putting heavy duty planning.

    Posted by Grace McDonald | Thursday 28th January 2010 @ 7:54am

  4. Good point Grace - though I am finding that once you've done the boxes, the heavy planning still follows - if only I could find a magic pill for that bit...

    Posted by Joanna Maxwell | Thursday 28th January 2010 @ 8:10am

  5. Hi Joanna,
    Really great points. It is something that I've thought about a lot because getting your business model wrong is the fastest way to go broke. One issue for many people is working out how the numbers and the words of a business model go together. We have been working hard on a tool which has seven simple questions which will test a business model against three criteria
    Customer Value
    Transaction Flow
    Money Flow
    If you would like to have a look at the beta version give me a call http://www.onesherpa.com

    Posted by Andee Sellman, One Sherpa | Thursday 28th January 2010 @ 8:57am

  6. Thanks Andee, sounds interesting and I will check it out!

    Posted by Joanna Maxwell | Thursday 28th January 2010 @ 9:01am

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