Disciplined Entrepreneurship Workbook
Page 16
The Beachhead Market gives you the all-important focus to get an initial win, build up some important credibility and capability, develop your Core, get to positive cash flow (hopefully), and start getting to critical mass for the next market. You will continue this relentless focus, but for this step now you will pick your head up and make sure you have the big picture in mind so you know that you are truly building a scalable business.
To start calculating the follow-on TAM, make a list of markets that are adjacent to your Beachhead Market. These markets should leverage your Core and fall into one of the following two categories:
Selling your existing target customer new products, or
Selling your base product (perhaps with modifications) to a new target customer.
You would not immediately branch out into a market where you are selling a different product to different customers compared to the beachhead. Instead, you change one variable at a time, either selling to new customers or selling new products to existing customers, so that you can rely on your strengths and knowledge from your Beachhead Market to expand. Each time you conquer a market, you can then move to an adjacent market.
Use your Market Segmentation from Step 1 as a reference if you are having trouble coming up with follow-on markets.
Once you have made this list, identify the markets that you think best leverage your Core and are in line with the passions and values of your team. Quickly estimate the number of end users and the annual revenue per user, then rank the top three markets in each category (same product and same customer) by indicating which market you would address first, second, and third.
You do not have the time to do the rigorous analysis you did in Step 4 for your beachhead, and you do not need that level of detail because by the time you get to address these markets, your priorities and the market dynamics may have changed considerably. A top-down analysis with just a quick bottom-up “sanity check” is not only acceptable but appropriate at this point.
Next, for your top follow-on market from each category (same product and same customer), make a list of markets you could pursue if you won that first follow-on market. You will quickly estimate the TAM for these markets and rank them in order of priority.
Your goal is to identify the TAM for at least five follow-on markets, so you have a better sense of your startup’s potential beyond the Beachhead Market.
GENERAL EXERCISES TO UNDERSTAND CONCEPT
See the back of the book for answers to these questions.
Amazon.com example: What was Amazon.com’s Beachhead Market? What have been the follow-on markets? What Core do those markets share? Have the follow-on markets proven to be more attractive than the Beachhead Market? Is that common among startups you have seen? ______________________________________________________________________________________ ______________________________________________________________________________________ ______________________________________________________________________________________
Strategy for next follow-on market: Where in the matrix below should you not go for your first follow-on market after the beachhead? Why? ______________________________________________________________________________________ ______________________________________________________________________________________ ______________________________________________________________________________________
WORKSHEET
Summary of Follow-on TAM Estimate and Priorities
Candidate How it leverages your Core Same product or same customer? Pros of selling to this market Cons of selling to this market TAM est. Other considerations Rank
Individual Worksheet for Each Follow-on Market Segment - #2
Follow-on Market Segment Candidate Name:_________________________________________________________________________________
Estimate # of users Estimate revenue per year per user Estimate TAM range Compound annual growth rate (CAGR) estimate Other considerations (profitability, time to conquer, potential market share, investment required, competition, etc.) and other comments
Individual Worksheet for Each Follow-on Market Segment - #3
Follow-on Market Segment Candidate Name:_________________________________________________________________________________
Estimate # of users Estimate revenue per year per user Estimate TAM range Compound annual growth rate (CAGR)
estimate
Other considerations (profitability, time to conquer, potential market share, investment required, competition, etc.) and other comments
Individual Worksheet for Each Follow-on Market Segment - #4
Follow-on Market Segment Candidate Name:_________________________________________________________________________________
Estimate # of users Estimate revenue per year per user Estimate TAM range Compound annual growth rate (CAGR) estimate Other considerations (profitability, time to conquer, potential market share, investment required, competition, etc.) and other comments
Individual Worksheet for Each Follow-on Market Segment - #5
Follow-on Market Segment Candidate Name:_________________________________________________________________________________
Estimate # of users Estimate revenue per year per user Estimate TAM range Compound annual growth rate (CAGR) estimate Other considerations (profitability, time to conquer, potential market share, investment required, competition, etc.) and other comments
Individual Worksheet for Each Follow-on Market Segment - #6
Follow-on Market Segment Candidate Name:_________________________________________________________________________________
Estimate # of users Estimate revenue per year per user Estimate TAM range Compound annual growth rate (CAGR) estimate Other considerations (profitability, time to conquer, potential market share, investment required, competition, etc.) and other comments
STEP 15
Design a Business Model
WHAT IS STEP 15, DESIGN A BUSINESS MODEL?
Consider the different ways to get paid for your product and choose the one best aligned with all of the stakeholders’ interests.
WHY DO WE DO THIS STEP, AND WHY DO WE DO IT NOW?
Wise selection of a value extraction business model can dramatically reduce Cost of Customer Acquisition (COCA), increase Lifetime Value of an Acquired Customer (LTV), and provide you with a competitive advantage. It may even be the difference between your product being adopted or not. You do this now because, for the first time, you have all of the elements from the previous steps to make an informed decision.
By the Book: See pages 163–171 of Disciplined Entrepreneurship for basic knowledge on this step.
See page 172 of Disciplined Entrepreneurship for an example of how a company addressed this step.
Entrepreneurs usually spend far too little time on analyzing and choosing a business model.
PROCESS GUIDE
I have found over and over again that when talking about “business model” with regard to startups, it is an ill-defined term, if it is defined at all. Still, it is used all the time. I want to clearly define the term for our context.
Business Model = Method to Extract Value for Your Company
The business model is your framework by which some fraction of the value you create for your customer gets paid back to your startup. It is important to understand that business model is not pricing. You will get to pricing in the next step, but you first must determine the way in which you will get paid and from whom.
The choice of a business model is a fundamental decision that entrepreneurs often make quickly with little thought. History shows that to be a mistake. A carefully crafted business model can have a huge impact on your business as well as create significant competitive advantage. More often than not, additional effort here provides a better return than spending the same effort on further enhancing your product’s features. That does not mean you shouldn’t have a focus on enhancing the product as well; it just means there should be a better balance. You need both.
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br /> The best way to start is reviewing some of the most common business models. See Step 15 of Disciplined Entrepreneurship for more information and examples on each of them. Keep in mind that creative new business models and hybrids are often created by startups to gain competitive advantage, such as the Amie Street example in Disciplined Entrepreneurship (page 172).
Here are some of the most common business models that companies have used:
One-time charge plus (potentially) ongoing maintenance agreement: Most common.
Subscription or leasing model: Now very popular, especially in the software area with software as a service (SaaS). There are numerous variants of this model.
Consumables: The classic razor/razor blade model, where the initial product purchase is inexpensive (the razor), but the consumables needed to continue using the initial product (disposable razor blades) have a high profit margin. Very popular in the medical area.
Advertising: Selling access to your user.
Transaction fee: Earning a commission from a party for a purchase or action the user makes with respect to that party.
Reselling data: Others will pay for access to information about your customers, either as a one-time download or being able to access a database on a recurring basis.
Usage-based: Customer only pays when they use the product/service, but the more they use, the more they pay.
Cell-phone plan: A base plan allows for a predictable monthly (or other time period) cost, and then additional ability to use the product is available at higher marginal rates.
Microtransactions: Hybrid variant of per usage and one-time charge models, where users provide their credit card and then make a number of very small (often $1 or less) transactions, particularly for digital goods, that add up over time.
Upsell high-margin products: A hybrid variant of consumables and one-time charge where the initial sale is for low profit or even a loss, but money is made when the customer buys optional high-margin add-on products.
Cost plus: Customer pays what it costs to make the product plus some percentage of markup. Very common and not a good idea in the long term. Might make sense at the beginning but suggests that your product is a commodity, which creates a difficult environment in which to gain long-term attractive competitive advantage from. You want a business model focused on value to the customer, not cost of making the product, otherwise your business and your customer will focus on the wrong priorities.
Hourly rates: A consultant or service provider model not based on costs but based on human utilization (variant of usage model). Unattractive because it rewards activity and not results.
Penalty fees: An extreme variant of the cell phone plan where there is a small fee for the base service but there are substantial charges if you go over a set condition (e.g., credit card interest rates, late fees at video stores, parking meters).
Franchise: You create a template for a business that others pay you for the right to implement and use your brand; you also make money by selling certified supplies and other products/services to the franchisees.
Shared savings: Customer pays only after getting benefit from the product, and pays some fraction of the benefit they receive. Conceptually a good model to align customer and vendor interests, but challenging to implement, especially over the long term.
Operating and maintenance: You are paid to run an operation (e.g., plant, IT services) at a fixed price, with incentives for you to make more money if you can reduce costs while maintaining service levels.
Licensing: Getting paid for your intellectual property, which results in high margins but small TAM sizes. It also often results in an adversarial relationship with your customers as they tend to look at the licensing fee as a cost to be reduced each year, rather than a just payment for value gained.
Others: Don’t let your imagination be limited to just these models. There are always more models to be invented and hybrids to be tried. Customers are more willing now than in the past to pay based on variable pricing, as customers become more sophisticated and technology enables more options. But don’t make it too complicated or it will frustrate and confuse your customers.
How should you think about what business model is right for you? There are four major areas to consider when making the decision:
Value Creation
Revisit Step 8, Quantify the Value Proposition. How much value does your customer get? When do they get it? What is the risk that they won’t get as much value as they thought?
Customer Revisit Step 12, Determine the Customer’s Decision-Making Unit (DMU), and Step 13, Map the Process to Acquire a Paying Customer. What is the DMU and the process? What does that analysis tell you?
Who gets the value? When? What is their capacity to pay?
Does the economic buyer favor one-time charges (called “capital budgets” in business) or smaller ongoing charges (called “operating budget” in business)?
What are the current standards and habits the customers have, and how entrenched are those habits?
Are there any showstoppers in the DMU or process that you have to be especially aware of? Examples of showstoppers may include: reimbursement or purchase authorization limits, standards, regulatory limits, onerous purchasing processes if certain choices are made, etc.
Competition What business models do your competitors have?
How entrenched are your competitors?
Could you gain a competitive advantage with your target customer by using a different business model than your competitors use?
Could your competitors respond to that? How difficult would it be for them to do so?
Internal Sales, Profitability, and Operations Will the business model decrease or increase friction in the sales process, thereby increasing your COCA? (More on this topic in Step 18, Map the Sales Process to Acquire a Customer, and Step 19, Estimate the Cost of Customer Acquisition (COCA).)
How do you optimize how much value you get from an individual customer over the length of time they are a customer with you? (More on this topic in Step 17, Estimate the Lifetime Value (LTV) of an Acquired Customer.)
If you will be dependent on distributors, will this model work for your distributors?
What will be the operational considerations to implement this business model? In systems? In billing? In the receivables area? Customer support? Elsewhere?
What kind of access to capital do you have? How will this business model affect your access?
Three final notes:
First, business models are not easy to change once you commit to one, so think through your decision carefully before you lock into a business model.
Second, “freemium” is not a business model; it is a customer acquisition strategy. The business model shows who will pay (the economic buyer, some third party who wants access to your end user, etc.) and how they will pay. There has to be money transferred to your company in order for something to be a business model. Freemium only impacts your COCA.
Third, think about what “unit” of product you charge for, because the choice of units can set your startup’s business model apart. For instance, consider that commercial real estate companies have traditionally charged on a basis of square feet used. Some innovative real estate organizations today are now charging on a per-employee basis or a per-desk basis. Or consider a project some of my students are working on where they make robots that cook food. What should the units be? They can choose to sell the robots, or they can use the robots to make prepackaged meals and sell to retail stores on a per-meal basis, or they could open a restaurant and sell per meal, or charge a flat fee like at a buffet. The choice of units is an important factor in your business model.
Selecting the business model is not an easy step, but it gives you a strong foundation to make good decisions throughout exploring the theme of “how do you make money off your product.”
GENERAL EXERCISES TO UNDERSTAND CONCEPT
See the back of the book for answers to these questions.
List to identify business model: Identify the business model for the following: HP printer division
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Automotive companies (not named Tesla)
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Salesforce.com
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LinkedIn
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iTunes vs. Spotify
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Effect assets have on business model: A startup does not have a lot of money, nor does it have access to money through banks, investment, or other means. What models does this generally favor and disfavor for the startup? Can you think of something creative you can do with a disfavored model to make it more attractive in this case?
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