Business Model Risks

Achieving Product/Market Fit is a critical milestone for every new product. Many companies never reach this stage. The stage where companies seek a path to sustainable growth and long-term profitability. Product/Market Fit is to be celebrated, but it is not a guarantee of success. Once you have proved Product/Market Fit, the heavy lifting begins.

How well you grow Fast!

In this, the second part of a multi-part series on managing risk in high-growth technology companies, we’ll explore the steps after Product/Market fit to test various business models and select the best one to create long-term value.

Managing Risks Series

  1. Defining Product and Market Risks
  2. Business Model Risks
  3. Execution and Scaling Risks
  4. Identifying and quantifying risks
  5. Risks management strategies
  6. Prioritizing and optimizing risk exposure

Finding The Right Business Model

Finding a successful business model is good, it is just not good enough. Exploring various business models to find the optimal activities to capture the most long-term value from your customers can increase your company’s value many times over, maybe an order of magnitude or even two. Many companies pursue early growth, any growth, and miss out on building the best business model for long-term value creation. It is better to spend time evaluating various models, select the one with the best chance of growing long-term value and then scale it like crazy.

At Merita, we’ve identified 5 major stages of a companies path to maturity:
1. Product/Market Fit
1. Business Model Selection
3. Scale It
5. Generating the 2nd Wave
5. Sustainable Growth

Seeking Traction

Traction: the rate at which a business model captures monetizable value from its users. Ash Maurya in Scaling Lean

Just as you spent time ensuring your product was the right one for your market’s pain point, now you want to make sure your business model is the ideal one to:
– deliver value to your customers consistently better than current and potential competitors
– capture your fair share of that value over the long-term
– can be profitable grown at rates that provide an attractive return to your current and future investors
– all while staying true to your core values and meeting the expectations of your employees and other stakeholders.

Yes, it is a lot and it demonstrates why rushing to scale too soon causes many companies to under perform or outright fail.

Finding the right business model, similar to finding Product/Market Fit, dramatically reduces the risk that you build something that misses the mark or simply does not work. Whether you subscribe to Eric Ries’ concept of Build-Measure-Learn from Lean Startup, the traditional lean idea of Plan-Do-Check-Act, or some other method for testing, learning and adapting; one thing is paramount, you must have a clear idea of what you want to optimize. And let me give you a hint, the ultimate goal is not customers, or users, or even revenue. It is your company’s definition of long-term value capture. Different business models and even different pricing structures will shift what your long-term value creation algorithm looks like. The key is to keep everyone focused on the collective long-term value definition and seek the business model that optimizes the creation of that value, risk-adjusted, of course. Seek the optimal business model before you begin optimizing any particular part of the business. Otherwise, you may fall into the local optimization trap as discussed by Ash Maurya.

In our work, we begin by identifying the business model’s ultimate goal as the capture of long-term monetary value. Then we explore trade-offs, boundaries, and constraints the management team identifies as key to the company’s vision, principles, and core values. With these in hand, we identify 3-5 high-level business models that may optimize for this ultimate goal. For each business model, we create either a Business Model Canvas or a Lean Canvas and identify the critical capabilities and key performance targets required for success. We then compare the models’ potential results and execution risks, selecting the 2 or 3 models most likely to succeed.

For each of these potential business model winners, a series of tests are designed and prioritized based on the efficient and valuable learning (Cost & Time versus Opportunity Capture & Risk Reduction) each would provide. The highest priority tests are run based on resources available and following Lean’s Plan-Do-Check-Act model, the experiment is modified and run until enough information is gathered to make a decision. See Merita’s Methods for more information.

In summary, all growth is not good growth and all good growth is not great growth. Finding a way to market that works is wonderful and a critical step in finding a way to scale a business. However, that’s not the same as finding a sales channel that can profitably scale over time. Spending the same rigor to determine the best way to market, the best way to package your product and services, the best pricing structure and price point are all important. There is no better way to verify that you can reach and service clients in the way your business model suggests than to test it in the market. Once proved, you can then move on to continually improving your customer’s experience from first contact through customer satisfaction and referral generation. And that’s for next time. Until then, keep growing right by doing the Right Thing, at the Right Time, in the Right Way!

What are you and your firm doing Right?

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Be sure to check out the entire Managing Risks Series

  1. Defining Product and Market Risks
  2. Business Model Risks
  3. Execution and Scaling Risks
  4. Identifying and quantifying risks
  5. Risks management strategies
  6. Prioritizing and optimizing risk exposure

Also published on Medium.