Entrepreneur's Handbook
BUSINESS MODELS
According to a definition adapted from Eric Ries (2012), author of Lean New Venture, entrepreneurs with high growth potential are those who try to develop a new product or service in an environment of high uncertainty. Usually they try to do this with the help of technology. If such entrepreneurs achieve success, they make great contributions to the growth of economies, the creation of new jobs, and the creation of value in general. On the other hand, entrepreneurship, which is already a risky business, takes a very risky shape especially when it is done in an environment of high uncertainty. So what does high uncertainty mean? Think of such a situation that you do not know what kind of product you will produce, the features of the product, where it will be sold, where it will be produced. Even more importantly, you don't know who your customer is, how many people are, what they are doing, what they want to do, what kind of problems they have, how important these problems are. You may have some ideas about some of them, but you may not have thought of many of them at all. Here, in an environment of high uncertainty, the biggest reason for failure is the blind attempt without knowing what kind of problems are in front of you. If problems were foreseen, perhaps some precautions could be taken, preparations and changes could be made, and many headaches could be reduced. In fact, if there are big problems, maybe it would be better not to get into that job at all.
In cases where the work to be done is relatively clear, that is, if you are going to produce and sell a known product using known methods, you can prepare a comprehensive business plan. Business plans are usually 50-100 page documents that explain in detail how to do the job step by step. It describes "What, when, how and by whom to do it, who is the customer, what the product is, where it will be sold at what price". The biggest problem of business plans is that they are static. It is done once at the beginning and does not change. This approach can work in old, large companies or in situations where the details of the work to be done are well known. However, it is problematic to prepare a business plan from the very beginning for innovative entrepreneurs who are in the idea or establishment stage and trying to do business in an environment of high uncertainty, because in these cases, detailed plans prepared from the beginning are likely to be old and meaningless as soon as they are made. For this reason, the first step for entrepreneurs trying to make an entrepreneurship in an environment of high uncertainty is to start with business models rather than preparing business plans. Business models are not business plans. Business models are tools that help you capture your floating business idea, quickly put it on paper, embody it and elaborate it so that high uncertainty can be reduced. According to Alex Osterwalder, developer of the Canvas Business Model, business models are descriptions of how to create value, how to deliver that value to the customer, and how to capture some of that value for your enterprise. (Osterwalder and Pigneur, 2012).
The stage of putting the business idea on paper is very important. While you were dreaming in the previous stages, the ideas that were flying in the air may have been very nice to you. However, when it is necessary to put it on paper and to concretize and elaborate, the gaps and gaps of those ideas are much easier to see and understand. Working on the business model forces you to think in more detail and see some negativities that you previously ignored. In this way, some weak ideas can be eliminated at an early stage, and the important elements of other ideas necessary for success are presented in a concrete way. Once you've identified the assumptions of your business idea, try to place them in priority. How will you identify the most important ones? Your most important assumptions are what will ruin your business idea if you are wrong about them. Starting with these important assumptions, you need to run tests to understand how likely your business idea will succeed. Don't be afraid when it comes to testing, they don't have to be time consuming and expensive things. Even choose those that can be used cheaply, quickly. In modern entrepreneurship education, these are often called (MVP-Minimum Viable Product). An MVP is a tool that can be used to quickly and cheaply test an assumption of your business idea. When most people hear about the concept of MVP, they think it must be a prototype, but much simpler things can also be used as MVPs, especially in the early stages of testing the idea. For example, a market research or interviews with potential customers can be MVPs.
1.1. Canvas Business Model
There are many different business models, but we will use and introduce the Canvas Business Model developed by Alexander Osterwalder (2012), the most widely used in entrepreneurship training today. Canvas helps you organize a business idea into 9 building blocks and put it on paper. These are, as can be seen from the figure below:
- Customer Sections,
- Value Proposals,
- Channels,
- Customer relations,
- Key Activities,
- Key Resources,
- Key Partners,
- Sources of Income and
- Cost Structure.
All of these nine building blocks may be important, but the ones that need to be examined and finalized first, and the heart of the model, are the “Customer Sections and Value Proposals”. It is very important to determine them correctly and whether there is a product / market fit between them. If there is, it should continue to develop the idea, but if not, the model should be searched for a chance of success or abandoned by making changes in the model. Apart from these, a proper income model must also be found in order for the company to survive in a healthy way. Nowadays, we will see that there are many alternatives that go beyond the old classical income models and these should be evaluated. Customer Sections, Value Proposition and Income Sources building blocks will be included here in a shorter form as they will be discussed in a separate section in this study.
- Customer Sections: Who are you creating value for? How many people, what kind of jobs are they trying to do, what kind of problems do they encounter, where do they live, what are their common characteristics? How does the purchase decision work and who plays a role?
- Value Proposals: What are the values you provide to your customers? By solving what problems do you create this value? What kind of product or service do you offer to the customer to create this value?
- Channels: From where do you interact with your customer at different stages? Where and what kind of contacts do you establish with your customers during the * awareness raising, * evaluation, * purchasing, * distribution and * after-sales service stages? How does the customer first know about your product, where does he see or hear it? Where do you find your customers? Is it television commercials or a magazine ad or among the results when searching the Internet? How does the customer find more information about your product, compare and evaluate with its competitors? Do they come to a gallery or make use of reviews or videos posted on their web pages? Where does your customer buy the product from? Is it from the grocery store on the corner of the street, from the supermarket in the mall, from your own shop, by ordering over the phone, from your door-to-door vendors, or through your website? How does your product reach the customer after purchase? Does it leave the shop under your arm, is it sent by the cargo company, or is it delivered to your home by your service? How does your customer get support when they have a problem? Is it via the website, by phone, or by your representatives in every neighborhood in your official service network? So what are the costs of all these alternatives?
- Customer relations: What kind of relationship do you build with your customers? Will you benefit from the cost advantage of mass production by offering the same standard product to all your customers, or will you follow a more tailor-made approach by offering individual customization? So if you can automate this customization with technology, does it matter? Another way to examine customer relationships is how do you get them, how do you keep them, and how do you grow them (generate more revenue)? To evaluate customers, it is necessary to compare their CAC (customer acquisition cost) and LTV (life time value) values. If CAC is
- Key Activities: What are difficult or expensive activities that need to be done to make your business idea come true? It may vary according to the project, but may include research and development, design, production, sales, advertising, service, website building and keeping up to date, smartphone application development, agreement with suppliers. If you are planning to sell personalized wedding rings, design will be one of your key events. Manufacturing according to the characteristics of the designed rings may also be a key activity, but if the production is relatively simple and easily done in many places, it will not be a key activity. If you plan to release a product that can be distinguished from other products that can be found in the market by quality or other features, and if your product needs to be easily recognized so that it can find the value it deserves, creating a brand and making it recognizable by advertising can be key activities. If you are going to open a store that will sell on the Internet, it will be necessary to prepare and keep the website up-to-date, except for the selection and supply of the products you will sell. In addition, there may be key activities such as advertising correctly on the Internet and delivering orders to customers in order to attract customers to the website. But if they are in very normal business, as mentioned earlier, they are not a key activity, even if it is necessary.
- Key Resources: As with key activities, these refer to hard-to-find or expensive resources that you must have on hand for the business idea to be successfully implemented. These resources can be physical, financial, intellectual or human. For example, while there is a patent in a project as a key source, other projects may be an e-mail list, a very good software developer, a very valuable production facility, a hard-to-find raw material or a building in a very good location. If your business idea requires door-to-door sales, then one of your key resources will be a network of salespeople who can handle such a burden. Key resources are not just what you have, they should cover all you will need.
- Key Partners: Few entrepreneurs have all the key resources listed above or are able to do all key activities on their own. Therefore, entrepreneurs need key partners where they are lacking. For example, in the business model, production is a key activity and a very expensive machine needed to make this production can be a key resource. However, if you cannot buy the machine for financial reasons, then where can you find people who have this machine and have free capacity? If you can find that person and come to an agreement with him, he can become a key partner of you. If we rethink the door-to-door business model we gave before, a company that already has access to your potential customers with an established sales staff but sells products from a different area could be an attractive target for a key partnership. But remember, a key partnership is a special case, it is not a key partnership that you agree with the owner of a machine with dozens of them in any OIZ.
- Soruces of Income: This building block describes how you can monetize your business idea. The most classic revenue model is selling. Even in this model, there may be uncertainty because there are unknowns such as what price to sell, how many people buy at that price, how the price should be determined. We won't go into any other details here, as we'll come back to the sources of income later.
- Cost Structure: This building block is not just for calculating the cost of the product. What are the main items causing the costs? How much of the costs are fixed and how much is variable? This feature is important because fixed costs are what will cause projects to fail, at least in the short term. In the case of real variable costs, ie production and sales, the resulting costs can be covered by the cash flows from the project, but fixed costs will stop there and have to be paid even if there is no production and sales. Therefore, it can cause problems when cash flow is problematic.