How to Turn a Business Idea into a Working Business Model

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If you’ve decided to take the leap and become an entrepreneur, you’re embarking on a journey that will be exhilarating and rewarding, but also incredibly challenging and demanding.

Choosing to start a business is one thing. Deciding which business to launch is a much tougher – and more important – step. Researching and developing your idea is a critical step in your start-up’s ultimate success.

Match your passion and skillset

As a start-up founder, there are two key ingredients that you bring to the table: your passion and your skillset, or expertise. Both are critical.

If you aren’t passionate about the problem you want to solve, it will be difficult pushing through when challenges present themselves. Entrepreneurship is lonely and hard. You need real passion to carry you through the dark days.
Unless you really understand your market and its needs, it’s unlikely you will develop a value proposition that customers will pay for. Your experience in the sector you are interested in is essential.

Key questions to consider:

What problems do you face that require a solution? If it bothers you, it probably bothers other people as well, which means there’s a market for the solution.
What are you deeply passionate about?
Does your business idea align with your passions in some way?
What are you an expert in?
Does your business idea draw on your expertise as well as your passion?
Do you have intimate knowledge of the target market you want to service?

Choose a business model that suits your start-up

Business management guru Peter Drucker said that a business model should do three things:

Answer who your customer is
What value you create or add to that customer
How you can deliver that value at a reasonable cost.

As we mentioned earlier, understanding the problem you are solving is your first step, and it’s critical. If you aren’t solving a problem, it’s unlikely your customers will part with their hard-earned cash to pay for what you’re selling.

Assuming you are solving a problem or delivering on a need, your next step is to figure out how you’re going to make money. This is where your business model fits in. A business model is basically just a description of how you will deliver value to your customer at a reasonable cost that makes you a profit.

It includes:

Your value proposition
Which customer segments you’re targeting
Your distribution channels
Your cost structure and revenue model
Your organisational structure
Your business process.

There are many different business models to choose from, but here are four examples to give you an idea of how different business models work in practice.

A manufacturer takes raw materials and creates a product, or assembles pre-made components into a product (E.g car manufacturers). A manufacturer may sell its products directly to its customers, or it can outsource sales to another company.
A retailer purchases product from a distributor or wholesaler, and then sells those products to the public. A retailer usually has a physical location, but may also be an online retailer such as Amazon or Takealot.
A distributor is any business that purchases products directly from a manufacturer for resale either to retail outlets, or directly to the public. For example, a car dealership would purchase vehicles directly from the manufacturer and sell them to the general public.
A franchise sells the systems and processes required to start and run a successful business. Franchising is common in the restaurant and quick service industry, but is also used in many service industries and the retail sector.

Build Your Business Model

The key to your business model is to structure your costs and revenues in such a way that you make money.

Consider these three key areas:

What does it take to make something or deliver a service? This includes design, raw materials, labour and manufacturing.
What does it take to sell your product or service? Marketing, distribution, delivering a service, and processing the sale.
What will your customer pay you for your product or service? Start with your pricing strategy and then include payment methods, payment timing and your collections process.

Keeping these key areas in mind to ensure your business model will make money, let’s now build your business model based on the six steps we outlined earlier.

1.Your value proposition

Your value proposition is why your customers should buy from you. You need to be able to answer this question, not from your perspective, but from your customer’s perspective.

Key questions to consider:

What makes your offering unique, or better than what’s currently available?
What’s keeping your customers up at night? Do you solve this problem?
What need do you fulfil? (this is similar to the question above, but not necessarily the same thing – we all have wants and needs that we will spend money on, that do not align with a problem or pain point).
Can you sum up what you do in three sentences or less?

2. Which customer segments you’re targeting

This is your target market. It is the people your solution is designed for, and more importantly, who will pay you for it. Some business models deliver a solution to one group of people, but are paid by another group. If this is the case, you need to look at each group as a distinct target market.

Let’s use Facebook as an example. The first target market are Facebook’s users. The platform needs to attract them and deliver on their needs. However, the platform is monetized through advertising, which means a solution has been designed specifically for advertisers (the second target market) that addresses their needs. The secret to this type of business model is that Facebook’s value lies in its users – without the millions of people on its platform, it has nothing to sell to advertisers.

So, what industry are you focusing on? Which verticals within that industry? Don’t forget any other industries outside of your normal operating environment who could benefit from your solutions as well.

Key questions to consider:

What are the demographics of your target audience (include age, gender, affiliations, income and special interests)? You might have a few different people here.
In B2B selling, which decision maker are you targeting? What is their job title/description?
What are their biggest concerns?
How does your messaging differ from one target audience to the next?
Are you being specific in your messaging, and speaking in your customer’s ‘language’? (This doesn’t refer to English or Spanish, for example, but the tone and words customers use – the more you understand how they communicate, the higher the degree of trust you will be able to build because you can demonstrate a deep understanding of their world).

3. Your distribution channels

This is how you’re going to get your product or service to your customer. There are many ways to do this, and they’re very specific to what you’re selling. If you produce local honey, for example, you could set up an online store, list on an existing health and wellness online store, or approach retailers to stock your product.

If you’re selling business solutions or software, are you advertising online or do you have a salesforce that’s in the market cold-calling and meeting customers?

You need to be able to map the entire process from when your service or product is ready to go to delivering it and getting paid.

Key questions to consider:

Who is my end user and where are they geographically located?
What platforms do they use?
How do they like to interact and make purchasing decisions?
Are there other people in your supply chain? For example, will you need to use transport services or a courier company to deliver your product?
Will you use salespeople or independent distributors?

4. Your cost structure and revenue model

Your ultimate goal is to build a business model that makes a profit. In order to achieve this, your revenue must be higher than your costs. In other words, what you sell your product or service for must be more than what it cost you to produce. This sounds simple, but unless you have a clear cost structure in place, you could end up with hidden or unaccounted-for costs that erode your profit margins.

Most costs can be divided into one of two categories: Fixed costs and variable costs.

Fixed costs are any costs that are exactly the same each month. These include your rental, Internet connection and salaries.

Variable costs change from month to month depending on usage. For example, how much you spend on raw materials will be determined by how many orders you have. Electricity, fuel and water bills are also an example of variable costs.

As you build your cost structure, consider every line item it will take to deliver your goods or service to a customer. Where costs are variable, try to predict what it might be as accurately as possible and then track actual expenses to your budget.

Next, critically evaluate your structure to determine where you can trim costs, or cut them out altogether.

In terms of your revenue model, this is all about how you will make money, or generate revenue.

It identifies four key things:

Which revenue source to pursue (for example, will you make your money from commission, rentals, a markup on the price etc; and is the revenue once-off or recurring, such as with subscription models)
What value you offer (why someone will pay you for your product or service)
How to price that value (balancing costs with value and what a person will actually pay for it)
Who pays for the value (who your customers are).

Key questions to consider:

Does your business have the potential to make more money than it costs you to produce your goods or deliver your service?
Have you considered every hidden cost across your entire supply chain?
Have you built a cost structure and revenue model that delivers healthy returns in line with the industry standard in your sector?

5. Your organisational structure

Your organisational structure outlines who has authority in your business, who has decision making capabilities, how information will flow through your organisation and the communication channels you will use, the various rights and duties that various members of your team have and the different levels of management.

Traditionally, organisational structures have been quite hierarchical, starting with a business head, a senior management team, middle managers and filtering down to unit heads and employees.

However, with the rise of agile ways of working, a new ‘agile’ organisational structure has developed. These are made up of empowered teams who have the ability to make decisions and be held accountable for those decisions, and who operate according to a culture of transparency and collaboration. These teams are based on experts and can be fast and flexible.

Key questions to consider:

Are you more comfortable with a traditional organizational structure or a more agile approach?
Are you focusing on hiring experts in their fields, or can you only employ more junior people?
How do you plan to allocate tasks and projects, and how will these be tracked and managed?
Who has decision-making power in your organization?
How will your hierarchy and management structure work?

6. Your business process

A business process is the steps and activities that make up every single task inside your organisation. You should have processes in place for everything: How you take an order, how you invoice a customer, what the sequence of events looks like from the moment an order is received until it is delivered – if it happens in your organisation, it should be documented.

This has three key benefits:

Once there is a process in place that can be followed, everyone in your business knows exactly what they should be doing and can be held accountable for how well (or poorly) they have stuck to the process.
As the business owner, it frees you up from operational tasks to be able to focus on more strategic work.
Any new employees can be onboarded quickly and effectively if there is a clear process for them to follow.

Top tip: Create BOBs (Build Our Business) for everything. A BOB should document every aspect of what happens within your company. There should even by a BOB for creating BOBs. The secret is start tracking and documenting every step of what happens in your business, and get your employees involved as quickly as possible as well, documenting what they do. This way you can also refine your processes.

Key questions to consider:

Have you listed every process that happens from the first interaction your business has with a customer to when you finally get paid?
Have you broken that list down into steps per process?
Have you critically evaluated if you are doing things in the most efficient way possible?
Do you have a system whereby your employees can add value to your processes?
Are your processes all documented, and does everyone have access to those process documents?

Assess your competitors

Many business owners – particularly start-up entrepreneurs – like to believe that they have come up with something so new and innovative that they have no competitors in the market.

In some cases, this might be true, but the key to successfully navigating competition is to understand two key things:

Every single business has competitors, even if it’s only customer spend you are competing for. Consider Xbox and Playstation – these are two clear competitors. And yet, both brands might lose out if the customer chooses to spend their money on a drone instead.
Competitors can come from unlikely places. When Uber launched, the taxicab industry took a hit. What many people don’t realise is that the rental car industry has also suffered. These don’t seem like obvious competitors, and yet, for a decades-old industry, uber has been a competitor that came out of nowhere.

Key questions to consider:

Who are your competitors?
What other industries could potentially move into your space?
Similarly, what other industries or verticals could potentially benefit from your solutions?
Have you researched your competitors?
Do you understand each competitor’s value proposition and why your customers would potentially buy from them?

Stress-test your assumptions

In every step of this journey, the key is research. Every idea or hypothesis you have needs to be stress-tested, and that can only be achieved if you’re out in the market asking questions and checking and double-checking your assumptions.

Most start-ups, from the business plan to the revenue model, is based on assumptions.

While this is normal – and can even be a good thing, because it encourages new ideas and new ways of looking at old problems – you still want to make sure you’re on a path that can lead to success.

In each of the channels we have covered in this article, run your ideas, assumptions and even solutions through a stress test. Look at each through a lens looking for a point of failure. This will help you do two things. First, you’ll determine if you’ve come to the right conclusion and can throw out ideas or models that don’t work.

Second, you can trouble shoot problems before they happen in the ‘real’ world.

In everything though, do your research. Speak to as many people as possible. The more you know, the higher your chances of success.