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You don't need an MBA to start a business, but you do need to get a few things right if you want to succeed. Whether you're opening a restaurant, starting a tech venture, or producing a Hollywood film, the fundamentals are the same. You need a product that meets market needs, a business model that works, a management team that can execute with precision, and lots of luck.
In my last article, I talked about building a market-ready product (see BW Online, 5/4/06, "Countdown to Product Launch"). The second article of my four-part series on how to plan for a successful launch focuses on preparing a business model. What you need to consider at every step of the way is exactly how you're going to generate long-term revenue and profits. Once you build the right product, what's your strategy and process for building a sustainable business? Your business model needs to clearly answer those questions.
REAL PROFITS. "Business model" is a hot buzzword these days with business publications and venture capitalists. But if you don't quite know what the term means, you're not alone. North Carolina State University professor of technology management Michael Rappa says business models are one of the most widely discussed and least understood concepts of the business world and have "largely escaped careful study." Rappa even built a Web site that he says is one of the few comprehensive online resources available on business models.
Business Model Tip Sheet
A business model is the nuts and bolts of how a business generates revenue and profits. When preparing a business model, there are seven basics you should consider:
1. Reaching customers. How are you going to find customers or have them find you?
2. Differentiating your product. What makes you better than everyone else?
3. Pricing. What can you charge that will bring profit to you and value to the customer?
4. Selling. Learn to sell for survival and develop a sales process.
5. Distribution strategy. How will you deliver the goods?
6. Support. What does the customer do if your product breaks?
7. Customer satisfaction. How are you going to turn customers into loyal fans?
There's nothing magical about a business model. It's simply the nuts and bolts of how a business plans to generate revenue and profits. It details your long-term strategy and day-to-day operations.
Entrepreneurs like me thrive on the invention and innovation that comes with building a product. To seek funding, we often put together elaborate business plans showing optimistic market-share projections. Even 1% of a billion-dollar market seems lucrative, right? Wishful thinking is great, but when it comes time to create your business model, you need to be realistic. The challenges are different in every industry, but here are seven basic points everyone needs to touch upon in their business model:
1. Reaching customers. Ralph Waldo Emerson famously said, "Build a better mousetrap, and the world will beat a path to your door." The reality is that even if you did, no one would find you. Even when you know who your prospects are, it's usually difficult and costly to reach them. You have to connect via ads in print, broadcast media, or the Internet, through direct mail, telemarketing, e-mail, or the old fashioned way -- by cold calling or through references. And these potential customers are not likely to be waiting to hear from you and may not take your calls. So be sure you know how you are going to find and reach them.
2. Differentiating your product. You think you've got the very best solution, but so does the other guy. There's always competition, whether you realize it or not. Smart marketing executives know how to develop unique product-positioning strategies that highlight a product's true value. You need to thoroughly understand the competition and effectively communicate the unique advantages of your product.
3. Pricing. One of the most basic decisions you have to make is how much you're going to charge for your product or service. Start by understanding how much customers value what they're buying from you. Then you need to estimate your total costs, analyze the competitive landscape, and map out your long-term strategy. Your price simply must be greater than your overall costs for you to survive.
4. Selling. Persuading a customer to buy a product that they need is one of the most important skills an entrepreneur must learn (see BW Online, 7/12/05, "Selling for Survival"). You're going to be selling at every juncture. So you've got understand what it takes to close a deal and put together the necessary sales process. And this process has to be perfectly conceived. Be sure you test your selling strategy as you would your product.
5. Delivery/distribution strategy. Big-ticket items usually require a direct sales force, mid-range products are sold through distributors or value-added resellers, and low-price items go through retail outlets or the Internet. It's different in every industry and for every type of product, but you've got to get this right. Your products need to be designed and packaged for the channel through which they will be distributed to customers.
6. Support. In addition to teaching customers how to use your product, you need to ensure that you can deal with defects and returns, answer product questions, and listen to and incorporate valuable suggestions for improvement. You may need to provide consulting services to help customers integrate and implement your products. If your product is a critical component of a business, you may also need to provide 24/7 onsite support.
7. Customer satisfaction. The ultimate success or failure of a business depends on how much it helps customers achieve their objectives. Happy customers will become your best sales people and buy more from you -- unhappy customers will become your biggest liability.
INNOVATION WELCOME. All the pieces have to come together like a jigsaw puzzle in your business model. The good news is that you don't have to start from scratch when formulating it. You can give yourself a head start by learning from competitors and other markets. It is not only the successes that provide valuable lessons, it is also the failures. Look at the experiences of the dot-coms, for example. They learned the hard way that you can't give your product away and make it up on volume.
You can also innovate as much in your business model as you do in your products. Be prepared to evolve your innovation strategy as you gain experience and as your market changes (see BW Online, Spring, 2006, "Ideas that Bloom"). Like your products, it will probably take three versions to get your business model right.
Once you put together all the pieces, you've got yourself a thoroughbred and are off to the races. Now you need a good jockey. In my third article of this series, I'll cover what it takes to build a good management team.
Wadhwa, the founder of two software companies, is an Executive-in-Residence/Adjunct Professor at Duke University. He is also the co-founder of TiE Carolinas, a networking and mentoring group.
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