ENTREPRENEU

RSHIP
Quarter 2 – Module 3

Develop the
OBJECTIVES:

apply the process in creating simple start-up home

based business
analyze the preparation of a simple home-based start-
up business
do the business experimentation – the business
model
Understanding the key terms:
1.Business model refers to a company's plan for making a
profit. It identifies the products or services the business plans
to sell, its identified target market, and any anticipated
expenses.
2.Value proposition - a description of the goods or services
that a company offers and why they are desirable to customers
or clients, ideally stated in a way that differentiates the
product or service from its competitors.
3.Startup costs are the expenses incurred during the process
of creating a new business.
4.Pre-opening startup costs include a business plan,
research expenses, borrowing costs, and expenses for
5.Post-opening startup costs include advertising,
promotion, and employee expenses.
6.Marketing strategy refers to a business's overall game
plan for reaching prospective consumers and turning them
into customers of the products or services the business
provides. A marketing strategy contains the company’s value
proposition, key brand messaging, data on target customer
demographics, and other high-level elements.
7.Demand is an economic principle referring to a consumer's
desire to purchase goods and services and willingness to pay a
price for a specific good or service.
8.Investment is an asset or item that is purchased with the
hope that it will generate income or appreciate the in value at
some point in the future.
9. Appreciation refers to an increase in the value of an asset
over time.
10.Marketing costs are all expenses that the company
makes to market and sell its products and develop and
promote its brand.
A business model is not a business plan
It is a common misunderstanding to think of business
modeling as a one-page business plan.
A business plan is a document with a specific aim. It contains a
bunch of assumptions about your business. It also contains
financial projections about the business for the next 3-5 years.
However, those assumptions can be hardly tested. The business
plan thus remains a document that lives in the imaginary world.
Writtento impress friends and
potential investors not for
any use for experimentation.
As we will see the primary
purpose of business modeling is
about experimentation. Another
misconception around business
models is to confuse them with
the monetization strategy or the
revenue model of a company.
While this is an essential piece
of the puzzle, it is just one of the
components of a successful
business model.
Understanding Business Models
Creating a business model is essential, whether you are starting
a new venture, expanding into a new market, or changing your
go-to-market strategy. You can use a business model to
capture fundamental assumptions and decisions about the
opportunity in one place, setting the direction for success.

A business model is a high-level plan for profitably operating a

business in a specific marketplace. A primary component of the
business model is the value proposition. This is a description
of the goods or services that a company offers and why they are
desirable to customers or clients, ideally stated in a way that
differentiates the product or service from its competitors.
A new enterprise's business model should also cover projected
startup costs and financing sources, the target customer for the
business, marketing strategy, a review of the competition, and
projections of revenues and expenses. The plan may also define
opportunities in which the business can partner with other
established companies.

When evaluating company investment, the investor should find out

exactly how it makes its money. This means looking through the
company's business model. Admittedly, the business model may
not tell you everything about a company's prospects. But the
investor who understands the business model can make better
sense of the financial data. Company and product builders must
think from the outside in, focusing on market needs and what
matters most to customers.
Successful businesses have business models that allow them to
fulfill client needs at a competitive price and a sustainable cost.
Over time, many businesses revise their business models from time
to time to reflect changing business environments and market
demands.

Business models are “at heart, stories — stories that explain how
enterprises work. A good business model answers the following
questions:

1.Who is the customer?

2.What does the customer value?’
3.How do we make money in this business?
4.What is the underlying economic logic that explains how we can
deliver value to customers at an appropriate cost?
Establishing this foundation guides the next planning tool — your
product roadmap.

Two primary levers of a company's business model:

1.Pricing which is the process whereby a business sets the price
at which it will sell its products and services. It may be part of
the
business's marketing plan.

2.Product Costs which include materials, labor, production

supplies and factory overhead. Cost of the labor required to
deliver a service to a customer is also considered a product cost.
Product costs related to services should
include things like compensation, payroll taxes and employee
benefits.
A company can raise prices, and it can find inventory at reduced
costs. Both actions increase gross profit. Many analysts consider
gross profit to be more important in evaluating a business plan. A
good gross profit suggests a sound business plan. If expenses are
out of control, the management team can correct it. Companies
that run on the best business models are more profitable.

The Key components of a business model should include:

1. your target customers, the market
2.organization strengths and challenges
3.essential elements of the product
4.how it will be sold
 Here is a list of essential components included in a business model:
Components Definition
Vision High-level introduction to the company and business
model
Key objectives Definition of the top-level goals and how they will be
measured
Customer targets and Description of the different types of customers to be
challenges targeted and their pain points
Solution How the product will solve those pain points
Value The key characteristics that differentiate the product
offering
Pricing A view into what the solution will cost and how it will be
sold
Messaging Explanation of why the offering will serve a customer’s
pain points
Go-to-market Channels that will be used to reach and sell to customers
Investment required Costs required to make the solution successful
Growth opportunity Identified ways the business will grow
 Seven Key Elements of the
business model

1. Key partners mean that you and a company that you have no
direct competition with, industry wise, will partner together in ways
that will benefit the both of you.
Example: To maintain the quality of your product, you can
partner with a best peanut butter supplier to produce fillings
for your bread business products that you yourself may not be
able to make. In return, you have a contract to pay for these
products that your partner has made you.

2.Key activities represent what the company must do to

make the business model work. These activities can be
producing a product or providing a service, or a mix of both.

If your business focuses on production of a product, your

activities may include learning more about the customers and
new production techniques to improve the product.
 Example: If you own a restaurant, some of your activities may
be to experiment on new recipes to provide your customers
with new dishes to bring new customers or provide more
varied options for your customers.

3.Key resources – describes the most important assets

required to make a business model work. These are the
resources that allow an enterprise to create and offer a Value
Proposition, reach markets, maintain relationships with
Customer Segments, and earn revenues.
4 Categories of Key Resources:
4.Physical – Buildings, vehicles, machines, raw goods, etc.
5.Intellectual – Brand, proprietary knowledge, patents,
partnerships, etc.
 1.Human – Creativity, experience, etc.
2.Financial – Cash, credit, stock, etc.

4. Distribution channel is to provide a link between

production and consumption. A distribution channel can be
very simple, with just two layers (producer and consumer). A
distribution channel can also be very complicated, with several
levels.
What factors should be taken into account in choosing the
best distribution channel?
1)Nature of the product
Perishable, Perishable/fragile? A product with a short-life
Customised? A direct distribution approach often works best for
a product that the end consumer wants providing to a distinct
specification
Desired image of the product
Type of product – e.g. convenience, shopping, speciality

2)The Market
Is it geographically spread?
Does it involve selling overseas
The extent and nature of the competition – which distribution
channels and intermediaries do competitors use?
3)The Business
Size and scope – e.g. can it afford an in-house sales force?
Marketing objectives – revenue or profit maximisation?
Does it have established distribution network or does it need to
extend its distribution option
How much control does it want over distribution? The longer the
channel, the less control is available

4) Legal issues
Are there limitations on sale?
What are the risks if an intermediary sells the product to an
inappropriate customer?

5.Customer segment are the community of customers or businesses

that you are aiming to sell your product or services to.
 Customers can be segmented into distinct groups based on needs,
behaviors and other traits that they share. A customer segment may
also be defined through demographics such as age, ethnicity,
profession, gender, etc or on their psychographic factors such as
spending behavior, interests, and motivations. An organization can
choose to target a single group or multiple groups through its
product and service.

6.Cost structure defines all the costs and expenses that your
company will incur while operating your business model. This final
step in the process is important, because it will help your team decide
whether to pivot or proceed.

7.Revenue stream elaborates the earnings a business gets by

subtracting the costs from the revenue generated from each customer
segment. It represents the cash, not the profit, that the business has
present. Specifying the pricing and projected lifecycles of the list of
resources. If the cost of designing and producing a product is more
than what the customer is willing to pay for it or greater than the
revenues the product will rake in before its lifecycle ends, then it does
not make business sense to go ahead with the product.
A business model implies the understanding of operations, customer
acquisition, retention, supply chain management, besides
monetization. A designed business model of in every organization,
there will be a piece that plays a more critical role compared to others.
For example, the business model for an Services business may identify
benefits from an arrangement for referrals to and from a printing
company.

For instance, a vital component of the Julie’s Bakeshop business model

is its franchising strategy. For other companies like McDonald’s, the
key to its business
model success is the heavily franchised restaurants that helped the
company scale up all over the world.
Each company will develop a unique model among the many types of
business models which is what makes your company robust in the
long-run!
There are many types of business models. Each one varies
considerably based on the type of organization and offering. For
example, a manufacturing company will have a very different model
than an advertising agency. Even within a specific industry, business
models vary.
Here are a few common business models used by technology
companies:
1.Subscription 4. Affiliate
2.Transactional 5. Retail Sales
3.Freemium
The importance of business
model design
In the real world of business scenario, it is very important to look at
the long-term vision of the company considering all the messy,
unpredictable, noisy and ambiguous business environment and
settings. Meaning, as an entrepreneur plays the marketing tools and
strategies on hand, he has to do understand the economic condition
that will directly or indirectly affect the business applying the
strategies of simple thinking tools, qualitative and quantitative
analysis with focus to attain the long-term vision aimed by the
company.

The Primary aim of a business model:

1)to create a sustainable chain

2)able to unlock value for several players in a market, industry or

niche
For instance, when Bo’s Coffee started it didn’t look to dominate the
whole market. It started from a niche. As Pether Thiel put it in his
book, Zero to One. Bo’s Coffee began as follows:

1.Identifying its most valuable partner

2.what at the time they called “power user.”

That was a choice driven by its business model design. Therefore,

instead of focusing on generically offering a coffee for everyone, Bo’s
Coffee focused on acquiring and attracting as many power coffee
drinkers as possible.

Those power drinkers were mostly on call center company areas that
had already scaled them up. Thus, Bo’s Coffee focused all its effort on
acquiring those power coffee drinkers from call center companies and
offices, fast! Only after Bo’s Coffee had drafted, tested, and validated
a clear value proposition for a small, yet a critical group of power coffee
drinkers, it could move on to take larger and larger segments of that market.
Business modeling is about experimentation
Where scientists use labs to test their hypothesis through experimentation.
Entrepreneurs build business model experiments to test their business ideas
in the real world. Study and carefully analyze the details and flow given.
FourWeekMBA perspective on business model
components for startups
The key components of any business model analysis are:
A compelling value proposition: How do you want your
people to think about your brand?
A unique brand positioning: What do you offer to your
people that make them want more?
A 10x goal setting: Can you offer a 10X better product or
service? (compared to existing solutions)
Customer segments: Who is your customer? (to notice here
we’re not talking anymore about people but customers, those
willing to pay for your product or service)
Distribution channels: How do you get your product or
service to your customers?
Profit formula: Is the business financially sustainable?
This business model framework has four aims:
1.simplicity: heuristics-based rather than complex models
2.noise reduction: choosing a few key data points, rather
than looking at a massive amount of data that only adds
noise and paralyze decision-making processes
3.branding and distribution: looking at a business model as
a systematic way to build a strong distribution network and a
strong brand. The two things walk hand in hand
4.and profitability: the financial viability of a business
model is a key element for its success
There are two dimensions of a business in this framework that
should walk hand in hand:
I. People dimension
 Elements of people dimension:
a)A compelling value proposition: How do you want
your people to think about your brand?

b)A unique brand positioning: What do you offer to your

people that make them want more?

c)A 10x goal setting: Can you offer a 10X better product or
service? (compared to existing solutions)
II.Financial dimension
Three elements of the financial dimensions are:
a)Customer segments: Who is your customer? (to notice
here we’re not talking anymore about people but customers,
those willing to pay for your product or service)
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 b) Distribution channels:
How do you get your product
or service to your customers?

c) Profit formula: Is the

business financially
sustainable?
This people dimension will help
you build a solid brand. A solid
brand builds up a tribe, a group
of people that can follow you
anywhere. Once you have a solid
brand, you can focus on the
second dimension: the financial
dimension.