Wednesday, May 14, 2008

What is your business model?

“What is your business model?” is a question I get asked often ever since I started my own business in 2006. Initially, I used to go blank as I really did not have anything to say other than the fact that I was into “Consulting”. In Indian context, “consulting” is almost equivalent to “training” (This is something I realized over last 2 years). I had not even defined my first training offering then. I used to get looks indicating, “This guy has no clue what he is up to” (And they were right).

I have become better at answering the question now. That does not mean I have complete clarity on my business model. “Answering a question well” and “having clarity” are two separate things. But my favorite definition of business model comes from Guy Kawasaki’s The Art of the Start. It involves answering 2 questions:

  • Who has your money in their pockets?
  • How are you going to get it into your pocket?

Answer to the first question defines who your customer is and his pain area. The second question involves creating a sales mechanism such that your revenue exceeds your cost.

HBR article “Why Business Models Matter” by Joan Magretta (May 2002) gives 2 critical tests to check whether your business model is sound. They are:

  1. Narrative test: The idea here is to narrate the story of your business and check if the story makes sense.
  2. Numbers test: Do some basic math and see if the numbers add up.

I would have certainly failed both the tests when I started my business. Fortunately, I got my first customer and the first cheque before I understood what my business model is. After receiving cheques from 20+ customers I am still not happy with my business model.

If these simple definitions and tests do not satisfy you, then you should check out “What is a business model?” article on Alex Osterwalder’s blog. Alex has been doing research on business model design for past several years and has published extensively on this topic. You will also find a business model design template there.

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