Business Model Test Switching cost
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Example: Most ERP solutions are implemented with customized functionality. Each ERP system has a proprietary data model. Learning to operate another ERP system is time consuming for the users. Switching to another ERP system is not easy. Switching cost is high.
How difficult is it for your customers to switch to a competitive product? 1
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Recurring revenue
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Example: Software used to be sold with a onetime paidup license fee and periodical maintenance fees. As less expensive software come to the market it became more difficult to retain the periodical maintenance fees. Small companies resisted this approach and it never picked up in the consumer market. With the introduction of Software as a Service payment on a recurring subscription base was also introduced. Now customers (businesses as well as consumers) pay recurring for using the software (and the associated IT resources).
Earning before spending
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Example: All software companies will have to make an up font investments in a minimum viable product. When that is brought to the market companies may take very different routes. Companies such as Atlassian and 37signals have managed to capture markets without having any cost of sales or need for opening new offices. As the revenue grow they can add more cost for development, production and marketing optimization.
Game chaining cost structure
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Example: Skype was an early mover in taking advantage of VoIP telephony. They competed with the telco’s that had huge infrastructure cost where Skype had basically none. The revenue Skype generated per callminutes was obviously very low (as most calls were free), but as the cost were correspondingly low they were able to build a profitable company. Software companies have difficulties gaining competitive cost structures over other similar software companies, but applying software based solutions to disrupt a physical industry can be extremely powerful (telecom, newspapers, music, film, publishers etc.)
Is each sale a one time transaction or the start of a recurring revenue stream? One time transaction
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Recurring revenue stream
Do you generate revenue before you have to spend on producing or selling your product or service? Operational cost and investments are made before revenue flows
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10 Revenue flows before operational cost and investments are incurred
Does your business model have substantially better cost structures than your competitors? Our cost structure is the same as our competitors
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10 Our cost structure is superior compared to our competitors’
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Business Model Test Getting others to do the work (ecosystem)
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Example: Microsoft, SAP and Apple are famous for their ecosystems, but also smaller players also manage to make other people work for them at their own expense. Damgaard and Navision (before being acquired by Microsoft) each developed an ERP solution for small and medium sized business. The software was basically useless in itself. It came with a toolkit enabling partners to customize it for individual customers and develop vertical solutions for various industries. This Value Added Partner channel developed applications at their own cost, but each time they sold a solution 2550% of the price was Damgaard/Navision licenses.
Scalability
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Example: The software industry doesn’t require building factories and inventories. Software based business models are more scalable than business models based on physical products. However, most B2B software requires substantial marketing and sales resources equally proportional to the revenue. A well functioning partner channel may cover the cost of scaling, but partners need to be recruited, bootstrapped and managed.
Protection against competition Example: Most software companies are outcompeted because they do not manage to grow fast and big enough to withstand competition. Very few software companies can build barriers to entry on the product level only. Does your business model have intrinsic characteristics that it is difficult to copy.
Market Traction
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Example: Having a pretty business model is good, but not enough. Does your business model gain traction. Does it really work? Are you growing faster than your competitors and faster than the market?
Does your business model have eco system characteristics or potential? 1
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Nobody is supporting our business model
Third parties are increasing the value of our solutions substantially (>100%)
How rapid and easily can you grow without incurring proportional cost and investments? Growing revenue requires proportional operating expenses and investments.
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How difficult is it for your competitors to copy your business model and get into your market? Our business model is easy to copy
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Our business model is difficult to copy
Does you business model generate growth rates that none of your competitors can beat? We grow slower than the market
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We outperform all our competitors world wide
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