After putting together some thoughts on questions entrepreneurs should have for angels, I got a number of questions and comments from angels about some counter questions they should ask entrepreneurs in an effort to better analyze the model and company.
In simple,
a business model is an integrated array of distinctive choices specifying a startup’s unique customer value proposition and how it will configure activities—including those of its partners—to deliver that value and earn sustainable profits.
These choices startups make can be grouped into FOUR BROAD categories pertaining to a startup’s customer value proposition, technology and operations plan, go-to-market approach, and profit formula.
Since these posts can be long I will break it into four parts, the first:
Customer Value Proposition
- What unmet needs will the business/venture address?
- Will the business emphasize differentiation? Increasing customer willingness to pay relative to rivals' offerings, OR by low cost, reducing expenses that customers incur - again, relative to rivals' offerings - for a comparable bundle of benefits? If it emphasizes differentiation, will the venture’s edge principally be vertical (i.e., outperforming rivals’ products on dimensions for which most customers would agree that “more is better,” for example, a car’s gas mileage) or horizontal (i.e., distinguishing itself on dimensions of taste that cannot be intrinsically rank ordered, for example, an Audi’s styling compared to a Saab’s)
- Which customer segments will the venture serve upon launch? How will targeted segments change over time? With respect to the customer segments, will the venture serve 1) a fundamentally new market, offering a radically innovative product, 2) an existing market, offering a product that offers superior relative performance against well-established benefit and/or cost metrics, or 3) a re-segmented market, offering a product that offers superior performance on familiar attributes strongly valued by a subset of the existing market’s customers
- How large is the total addressable market (more to come on market sizing) for the venture’s product, and how fast is the market likely to grow
- What will be the venture’s minimum viable product for launch, that is, the smallest set of features needed to validate key business model assumptions? What is the plan for adding features over time, that is, the product road-map?
- To access a whole product solution, will customers need to acquire any complements or ancillary services from third parties? If so, who will provide them, and under what terms?
- Will pricing be structured per transaction, per period (as with a subscription), or through some hybrid approach? Will prices/fees be: 1) fixed per transaction/period (e.g., a $20 book; a flat fee for a consulting assignment; a $10 monthly subscription to Netflix), 2) variable, based on a fixed fee per unit of activity (e.g., hourly billing for a legal case; a per unit royalty to a patent holder; a per minute charge for long distance calls), 3) tiered based on feature/service level (e.g., “freemium” pricing that is free for a basic product or $10/month for a “pro” version) or 4) linked to some outcome (e.g., “pay-per-click” advertising; a broker’s fee on a home sale)?
- If the venture’s product is a physical good, will it be sold outright—transferring title—or will it be rented/leased?
- Will the venture pursue a skimming strategy that is, charging a premium to early adopters with high willingness to pay for the product? Alternatively, will the venture engage in penetration pricing to exploit strong scale economies or other first mover advantages?
- Does the venture have opportunities to capture value through price discrimination, for example, through negotiated pricing, auctions, or discounts for early booking? Through bundling, for example, by including after-sale service with the product’s purchase?
- What switching costs will confront customers, and what will be the expected average life of a customer relationship? Can the venture improve customer retention through incentives, for example, a penalty for early contract termination or a rewards program for heavy users?
- Relative to offerings from likely rivals, how will customers’ willingness to pay (WTP) for the venture’s product compare to their expected total cost of ownership (TCO)?
