Product Management: The 7 Essential Elements of a Strong Business Model
One of the prerequisites of a product’s success is a well-thought-out business strategy. In this story, I present proven, ready-to-use solutions that you can apply to succeed.
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A few points that I will tell you about in this story:
- Solve an urgent, pressing problem
- Stand out from the crowd
- Make the competition irrelevant
- Consider building a partners network
- You need cash to survive
Before we start, I would like to highlight that creating a business model is a process that will involve a lot of brainstorming, corrections, and conversations with others. Instead of providing ready-made answers, I encourage you to ask yourself a few questions.
To write down and work on the results I often use mind mapping tools like XMind or Lucidchart.
Key questions you should ask yourself
1. Who are your customers?
Correct identification of customer groups (segments) to which you address your product is a precondition for taking any further actions.
Try to divide your customers into distinct groups of people who have different characteristics, needs, and behaviors. Each of them will react in a similar way to your marketing efforts.
What are their common features? What is their typical age, sex, education, race, religion, place of residence, and even sexual orientation? Do they have children? Do they use the internet? Are they overweight? Where do they spend their time? What are their plans for the future? What do they dream about? What are they afraid of? What motivates them? What is important to them? Are they following any pages, events, or people? Do they use Twitter or Facebook? Where do they get information about the world from?
It’s a good practice to create one or more “personas” that represent the answers e.g.:
What type of relationship do you want to establish with them?
Is it just a single transaction, long-term relationship, providing personal assistance, self-service, automated service that simulates personal relationship (e.g. offering movie recommendations), community, or maybe co-creation? You will establish and develop each of these relationships in a completely different way.
It’s also worth remembering that every product has a customer who is a:
- User— anyone who gets’s the value from the product, whether or not they pay for it
- Buyer — anyone who pays for your product, whether or not they use it
User and buyer may be two different people. Their interests can be in many ways diverging. For example, unlike businesses, users don’t have to worry so much about security or compliance. Some companies like Microsoft clearly prioritize buyers, especially in the enterprise market.
2. What is their single pain that has to be solved right now?
The goal of every product is to deliver value. Depending on the customer, the value may be:
- Limitation of losses (directly or indirectly)
- Using the product to increase profits (directly or indirectly)
- Meeting regulatory requirements
- Risk reduction
- Basic human needs (hunger, pain, boredom, self-realization)
If you use Scrum you already know that your primary task is to maximize value flow, regardless of what is valuable in a given context.
In practice, we, as humans, are driven toward things that give us pleasure and avoid that which gives us pain. It is absolutely critical to realize that the fear of loss motivates people more than the desire to profit. Some studies have suggested that losses are twice as powerful, psychologically, as gains.
In addition, we live in times of information overload. That’s why your product must also address the problem, the solution of which cannot wait any longer. If it is not urgent, you can wait for months, a decision will probably never be made.
To sum up, at the heart of any successful product which has remained in the market is solving an urgent, pressing problem.
Having said that, you should never scare your customers. Your task is to free them from bad emotions. A great example is Microsoft, which, before the entry into force of the European GDPR regulations (25 May 2018), calmed down customers instead of threatening them with multi-million penalties.
Now consider for a moment what value do you create for your customers? Why would they care about your product right now?
3. What’s unique about it?
To survive in the marketplace, you need to stand out from the crowd. Why would someone take advantage of your offer if there are many others? A characteristic feature of the so-called “unique selling proposition” is one thing — its uniqueness.
Something can’t be more or less unique. This means that only your product has certain characteristics.
Luckily there are endless ways in which you can stand out. Examples of product distinguishing features:
- Functionalities and features
- User experience
- The location where you provide service and support
- Customer segments
- Customer service
- Licensing model
- Partnerships
- Mission and values with which your brand identifies
Competing with price should be treated as a last resort. My favorite approach is to make the competition irrelevant.
4. Haw are you going to persuade others?
You can have the best product and the best offer on the market, but you still need to convince your customers.
Ask yourself:
- What is the evidence that your product works? Do you have references, testimonials, or stories from other customers? Is your brand recognizable? Can the customer easily take advantage of the trial offer without incurring any risk? If he\she is not satisfied with the choice, will he\she be able to return?
- What objections may your potential customer have? What might he\she be afraid of? What invalid assumptions can he\she make before making a purchase decision?
Each of these points should be addressed proactively preferably at the first contact with the customer.
It’s so important to remember the loss aversion theory.
5. Channel sales vs. direct sales?
A sales channel strategy is the process of engaging with third parties to build business partnerships to get a bigger market for a product. This can help you in a few ways:
- To reach new customers who won’t buy directly from the vendor. For some of my past compliance-related products customers definitely preferred to buy them from consultants (e.g. external auditors).
- To sell products through third-party marketplaces and managed service providers, which may offer package deals to customers.
- To find business in new geographic regions.
- To focus on product development without a need to build your own sales department.
While channel sales aren’t for everybody, the best way to level up is by exploring partnerships and connecting with people or other businesses who can help sell your products.
What’s key, however, is that if you’re running a direct selling initiative, make sure your channel sales don’t conflict with.
The most common way to avoid this problem is a deal registration system, in which the first partner registering a sales opportunity receives preferential conditions.
6. What are your revenue streams and costs structure?
Write down all the sources from which a business earns money from the sale of your product and all the costs. Break them down into one-time and repeated ones. Try to simulate how results will change over time.
After you start making your first financial operations both costs and revenues should be broken down into more analytical dimensions like a team, type of activity, customer, month, etc. allowing for their detailed analysis. Some questions that you should know the answer to, even in the middle of the night:
- What is your current costs structure?
- Which customers generate the highest turnover?
- What percentage of funds do you spend on support?
- What is your average payback period?
- How many days does it take for your customers to pay the invoice?
- How would it change if your sales doubled?
If there is no investor with a huge bag of money behind your back, from the very beginning you must realize that some customers may have a standard payment period of even 90 days. Others will far exceed agreed deadlines. It’s common and expected. When (not if) this happens, how are you going to pay your bills? Can you mitigate these risks by, for example, agreeing to monthly invoices, advance payments, or diversifying your sources of income?
Take care of your cash flow from the very beginning. Otherwise, you can have the best product on the market and still go bankrupt. You need cash to survive, not its promise.
7. What are you going to focus on right now?
The market can be seen as a huge pie. But the company has only one mouth. You can do anything but you can’t do everything. So choose your key activities.
Business model canvas
Now that your initial model is ready, you can sit down and prepare a presentation for stakeholders.
One of the most popular tools is the so-called “business model canvas”. If I’ve done my job well, this should be a piece of cake for you ;)
Recommended reading
I will be sharing my knowledge successively in this series and in the following stories. However, if you want to get it yourself, I suggest starting with these books:
- The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses by Eric Ries
- Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers by Alexander Osterwalder and Yves Pigneur
- Inspired: How to Create Tech Products Customers Love by Marty Cagan
- Blue Ocean Strategy: How To Create Uncontested Market Space And Make The Competition Irrelevant by W. Chan Kim
- What Customers Want: Using Outcome-Driven Innovation to Create Breakthrough Products and Services by Anthony Ulwick
and articles:
- Loss aversion: https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/loss-aversion/
- Prospect theory: https://www.economicshelp.org/blog/glossary/prospect-theory/
- The Origins of Behavioral Finance: https://www.cnr.com/insights/article/white-paper-behavioral-finance-2018-2.html
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