Designing a simple business part I: Working that idea

This is the first in a series of posts I plan on the topic of designing a simple business. The idea for the series started when I realized simplicity is a common feature of many of the great startups that are out there. If you can visualize a business it’s easier to evaluate it, and improve the individual parts. This first post deals with the initial idea, and the main message about your initial idea is to get you to simplify your idea - don’t bite off more than you can chew.

What is a business idea? - The three components.
A business starts off with an idea. The idea should be something that creates value for someone, said value must be deliverable to whomever it creates value for, and there should be some way of capturing this value (including protecting it). If this process seems simple for a particular idea, it’s easier to think of it as good.

A good idea exemplified
Imagine you’re the inventor of corrective eyewear (i.e. glasses). Until now there has been no product which deals with bad sight. You can probably pretty quickly see roughly how you could go about making money on this idea. Corrective eyewear creates value for people that have poor eyesight, it can be delivered through for example pharmacies, and you can capture the value through charging money on the spot. Additionally it is likely that you could protect the idea with patent, for instance the use of optical lenses for correcting eyesight should be patentable if you are the first to think of it.

The simplicity that makes this idea good comes from three aspects. Firstly, the idea deals with a specific need. Secondly, there is a clear path to market which may not cost you too much (i.e. it’s “doable”), and lastly there is a clear way to make money, as well as a clear model of how you can protect the idea (patent) while you build a strong market position.

Simplify your idea!
Too often entrepreneurs pitch ideas that are just too complex, and it comes from the typical business/engineering school instinct of wanting to cover everything. Every customer, every need that customer have/will come across in the foreseeable future. Every possible product that can cover these needs, and every application of said product. The reason we do this is that we think there’s more money in more customers, and more products. Which of course there is. However, very few companies end up where they thought they were going. Starting a business is all about adaptation. And to be successful, you need an idea that you can test systematically and improve upon.

Note that it’s not always that complex ideas are bad. They’re just hard to test objectively, because you cannot separate the issues. For this reason I propose that the first thing to do when starting a business is to simplify the business idea.

A complex idea
The other day I met a young aspiring entrepreneur. He was full of life, and eager to tell me his idea. I paraphrase:

“So what I was thinking was to automate grocery stores, so customers can just make a shopping list online, say when they want to pick their goods up, and just appear at the store. Also there would be no one working in this store, so you would check out everything yourself. Furthermore all inventories would be updated at the suppliers, so everything would always be in stock, but just enough to handle the daily demand”.

Ok, I thought, as he continued:

“Now I’m into automation, so I would make a system where deliveries would be made at the back and everything would be tagged with RFID-chips,( there’s so many cool things you can do with those), robots would then sort the goods and pick out what people order into bags. So everything’s ready when the customers appear!”

So what’s the need anyway?
This idea is so complex, and includes so many different aspects, that it's really hard to understand even what the actual need is. At first it seems the need is for a simpler shopping experience. But is it really simpler to go to a website and pick everything you need? How would you pay, do you need to enter your credit card number or would you pay on pick up? Do you need an account? How do you verify that the person that picks it up is the right person? What if someone else picks up your groceries after you paid for them? It could be a simpler shopping experience, but maybe it’s really just a faster shopping experience? Maybe removing the need for staff is a significant cost reduction for a store? Or is it just a cooler shopping experience?

In any case simpler and faster in this context are secondary needs. The consumer’s primary need is for groceries. Imagine the complexity of creating a grocery chain in and of itself. Imagine to then try to make it simpler and faster! Indeed you would have to compete on a lot of other factors as well. Would you for example be equipped to keep the salad green? And I'm not even going to attempt to comment on the capital needs to make this happen.

Let’s simplify!
Creating a new grocery store is very complex, and I think we can agree that doing so is probably not something you'd want to do. And if you are not deterred yet, let me assure you that you will not have an easy time raising funds for such a venture.

But there's a silver lining, because surely there are great ideas within this idea. From the idea, we can find many smaller ideas. The point is to start with something simple, something that you can easily test against the market. One way we can go about extracting ideas from his idea, is by looking at the needs, and finding solutions to service them. Let’s look at the need for lower costs for grocery stores, and see if we can extract something simpler. Now I’m not claiming that this is a good (or new) idea - just that it’s simpler, and therefore easier to understand and test in a structured way. Let us then ask the question, "how can we use automation to cut costs in a grocery store?"

A simpler idea to lower costs for grocery stores
One of the main drivers of costs for grocery stores is the staff. The main bulk of people working at grocery stores are those that scan items and receive payment. So if we could automate checkout it would represent a clear cost reduction. One way to do this is by allowing customers to do this job themselves. Self-checkout would be presented in stations, each station consisting of 5 registers, each with a scanner and a system for payment. At each station one clerk would be stationed to help customers that need help, to receive cash payments (if this is important to incorporate of course), and to make sure everyone is using it correctly (e.g. so they don’t leave without paying). The solution could be delivered on a store-by-store basis, so that a chain of stores would try it out at some locations first, and then scale it up when they were comfortable using the system. Value could be captured through a leasing based plan, and the idea would be protected by moving quickly to gain a first mover advantage (for those that believe in that sort of thing).

Evaluating the idea
Regardless of whether the idea above is good or not, we certainly understand better what it’s all about now. If we decided to start a company commercializing this technology we could write down hundreds of clear and testable hypotheses about the market, which we could then proceed to test, for instance:
-    Grocery chains wish to reduce costs by replacing staff
-    Customers are willing to check out their own goods
-    Cash payments are important for customers
-    Customers will generally be honest when scanning their merchandise

Some things would be confirmed, and some things would be completely different from expected. These things would have to be sorted out. This is where the real innovation lies. For example, if customers are dis-honest, how can you make the check-out desks verify that all goods was scanned, and that the correct goods was scanned?

Of course it’s not that straight forward in real life, you still need to consider your competitors, make a strategy to avoid being copied too soon, facilitate production, consider your costs and pricing structure, and so on. However, you can now visualize how the business might look. This is a necessary first step to formulating the hypothesis that needs to be true in order for your business to flourish. The next step would then be to start testing these

The next post will look more closely on evaluating your idea, and deals with the 10 questions you should spend 15 minutes asking yourself before you move ahead to more advanced and time consuming analysis' of your idea.

Lessons learned:
-    Ideas should ideally include how your business might create, capture and deliver value.
-    When you see how an idea might work, it’s easier to formulate testable hypotheses about the product.
-    Complex ideas, that are hard to visualize can and should be simplified.

Killer apps and USP’s – find them, use them!

New products need to provide value. We all know that. But further than that it needs to be clear what the product does and why people should care. This will let your product escape the trap Google Buzz, New Coke (or even better Crystal Pepsi), Cosmopolitan Yogurt, Palm, other PDA’s, and countless other products that no one in the world could understand what were good for went right into. Products need to have a clear intrinsic purpose, and they need a company around them that clearly explains externally what the product is, what it does, and why we should care.

New products should have a killer application. For example Twitter’s killer app was status messages that fit into a text message. Now it’s important to note that a killer app isn’t necessarily what you will end up doing. The killer app is what you start out doing! Today I don’t care if Twitter updates fit into a text, now I use it because I already am. Killer apps allow you to find a niche that’s big enough for you to start growing your business. For example I think that in [insert random number here] years there will be a big company that deals in robots, kind of like a Microsoft of robots. If I wanted to start that company today, I wouldn’t care what robots would be in 20 years, I would find a small niche in which to start making robots today that could provide me a basis for new niches and eventually a world leadership in robots. Maybe I would start with toy robots? Certainly I could make a lot of fun stuff without requiring too much AI at the offset? Nevertheless a killer application is something more specific. It’s something that makes my robots intrinsically better than other robots. Maybe my toy robots could play board games? Certainly the technology to allow robots to play the games already exist, the only technological challenge left would be to get the robot to recognize the game, the location of the pieces and give it the ability to move the pieces autonomously.

USP’s are something else, they’re extrinsic, but they are very much related to killer apps. A USP is a Unique Selling Proposition, to understand it fully you should go to your local supermarket, locate the aisle that has toothpaste and read the tag lines. Every brand will have toothpaste for whiter teeth, cleaner teeth, anti-bacterial, anti-bad breath and a few that attempt to do it all. Think about it, do you really think there’s a lot of difference? Most of the toothpaste is just filler anyway, the parts that differentiate the products are measured in parts per million, so it likely wouldn’t be all that difficult to put all the good stuff in a single ultimate toothpaste. Continuing the robot example above, we could for example use “A friend for life”, or “Playmates forever” as a USP. This is how people understand your product. Notice that the USP don’t only separate the product from other robots, but other toys as well.

The difference between the two is that the killer application is the use of your product; the USP is what separates your product from all those others in the mind of the consumer. For start-ups however you often find yourself being so original that your product will be mentally sorted in a new category. In these cases, it pays to use the killer app to create a USP because you fortify your position as the one that provides that application. Combining a clear view of killer apps, niche markets, product positioning and business strategy will align different interests in your company so that product designers, business strategists, marketers, finance people, sales people and so on all understand what the company is setting out to do, and can agree on it.

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

What Facebook is missing out on...

It strikes me as somewhat absurd that Facebook don’t see the opportunity they are presented with in face of the recent criticism. The criticism, as you are probably well aware off, is in my view best summed up in Leif Harmsen’s words “It is not ‘your’ Facebook profile. It is Facebook’s profile about you”, he considers it a repressive regime akin to North Korea, and he’s not alone. Yet this isn’t anything new. It’s more a case of the “commoners” starting to question what the more tech savvy ones of us have questioned for quite some time, and thus the topic has gained some momentum in the mainstream press as well.

The problem is obvious, as problems often are, but the solutions keep escaping the minds of clever people. Or does it really? A related debate I have followed since I first heard a discussion about social networking 3.0 at Stanford in 2007, is about how we can transfer ownership, and more importantly control over user information to the users. The simplest solution is of course just to pressure sites like Facebook to change their terms of use, but a more lasting solution would include the possibility for users to bring their friends, pictures and other information with them between social networking sites. Undoubtedly there are many design issues for such a system, for example I certainly have multiple online identities; my Facebook content isn’t really suitable for my LinkedIn page and so on. And where would my information be hosted? Would I have to buy server space in case someone wanted to view my profile while I was online? Would the standard allow new networking sites to add slots for specific information that were only suitable for that site (like favorite recipes for a cooking site, or where I’ve been for a scuba diving site), and how would I controll what and how much  information is sent to each site I visit?

This however isn’t the biggest problem; the reason why such systems haven’t been implemented is that no one with the leverage to create this system has done it yet. This system has to be made by the right people, people that can reach critical mass. At present, only geeks and idealists would bother to learn how to use a totally new system, especially because something like that sounds very complicated. The average user doesn’t want complicated stuff, they want simplicity, and they just want to use the product. So to reach critical mass for such a system you would have to have some way of gaining a lot of users for it fast. Like a big already existing user base, like Facebook has, but wait - why should Facebook make this system? Facebook like it the way it is, they own your content (or their content about you to be accurate), and can use it for pretty much whatever they want. In addition to this Facebook enjoys users that have extremely high switching costs, something which might be their biggest competitive advantage. It seems that Facebook is in a perfect place.

So why should Facebook do it?
The first reason why Facebook should create a system for sharing information is that it would buy them credit. It would buy them credit with the tech community for being open and with the media for listening to them. It would buy them credit with normal users because they would feel safer and because they have the option to leave. Remember why some people escaped the Matrix? It turned out that given an unconscious choice nearly 99 % of test subjects would accept the program anyway. I see no reason why this shouldn’t hold true for Facebook as well, as the primary reason people leave is because they are malcontent by Facebook’s closed systems and strict privacy policy (at least if we believe random Internet chatter - which we do).

Secondly, and maybe more importantly, I believe that if Facebook don’t do this, others will. Services such as Google Accounts and Open ID don’t have a long way to go to allow users to store information that at their request can used by third party sites. Right now Facebook can deny Open ID and other such services to provide login to their site, but can they still do that in 3 years? Right now they can delay the inevitable move to such services, but as I wrote in a blog post some time ago, change happens when change is due. Change isn’t always created willingly, it’s just there and those that catch the wave gain momentum, furthermore no surfer ever caught the back of a wave. If people gets used to logging in to their favorite sites through a third party provider, I’m not sure Facebook can withhold the pressure.

The third reason Facebook should use their user base to create an open, user owned system that can transfer information easily from site to site is that whatever disadvantage Facebook sees in having users logging in to their site via a third party provider will be Facebook’s advantage against new social sites. If users are used to using their Facebook login when they log into pages on the net, they will expect new sites to follow this convention, thus granting Facebook some limited power to monitor and control new services.

The fourth reason Facebook should do this is because there’s bound to be a business model in it. What this model is, I’m not sure, but it could for example be that commercial sites would have to pay a small fee to use the service, or that when you log in you get redirected through Facebook’s ad page.

The fifth and final reason is that this would be a good first step towards extending into new forms of web services. When users already have a login, it should be easier to gain momentum for new and exciting products. Google has already realized this when they launched both Wave and Buzz (though this seems to be bad examples, as both services are virtual ghost towns). Having a customer base like Facebook’s is an incredible asset, in the case of Facebook an asset that remains close to unexploited. Surely marketing new web services through Facebook would ensure enough users to create critical mass for many services?

Maybe Facebook as we know it today is just a stepping stone? I certainly think that they should consider expanding their services, and specifically they should start making a product that they could easily gain market leadership with almost immediately, namely an open profile service that provides an API for other services to let users log in with their Facebook profiles. With the share number of users Facebook has it shouldn’t be a problem becoming the market leader in this "sort of related" market.

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

Why the iPhone succeeded, a case of recognizing complex unmet needs, not technology revolution!

It’s hard not to notice that the players that were dominant in the cell phone market a few years ago have been marginalized by players such as Apple and Blackberry. It’s easy to attribute this to technology saying that the iPhone was so technologically superior to the phones of the time that it was inevitable, or that iPhone redefined the cell phone industry. However, it is important to note, I think, that the iPhone wasn’t mainly a technological innovation, in fact the technology to do most of what the iPhone does had been available for years, what happened was non-technology based disruption that largely was due to the incumbent industries inability to meet a very complex user need. Let’s look at the case of the iPhone to see what really happened.

Consumers were screaming for increased use of their cell phones, yet there was no solution in sight, but let’s for the purpose of limiting this post look at music as an example, keep in mind though that music is just one example and that you can replace “music” with “content” or “applications” in most places where I use the word. So, the consumers were screaming to use their cell phones for music, yet there was no good solution in sight. There were three parts of the infrastructure that needed to come into place, the content, the device and the network capacity, these were controlled by three types of actors with differing interests that would have to come together to put music on phones in a user friendly way: cell phone manufacturers, record labels (content providers) and phone carriers.

The manufacturers was happy with the way things were, incremental innovation, mostly in design, lowered the product life cycle so that new phones was bought all the time, they didn’t have to spend much on marketing, because consumers often bought what they were recommended in the (carrier owned) stores, so the best marketing was to have good relations with carriers, making sure both players made good money on selling that particular phone. The market mechanisms seemed to have stabilized, leaving no reason to think there was any change around the next corner. The manufacturers were largely dependent on the carriers. Since the stores where cell phones were bought generally belonged to the carriers, people chose their phone on the basis of what carriers offered them, the best thing a manufacturer could do was to be present in as many stores as possible, and just make sure they didn’t fall behind the other brands in innovation. Indeed a comfortable place to be for a large firm.

The record labels viewed cell phones as a treat, this seems to be their strategy with most new technology, so consumers were pirating music and putting it on their phones, with little revenue finding its way to labels. The labels would have preferred a pipeline of music that went through carriers, for example you would by a song for a few dollars through SMS or WAP. For consumers this took too long and was too expensive, for them it was easier to just use their pirated/ripped media library on their computer and use a cable or whatnot to transfer the songs to their cell phones. The phones didn’t have any storage capacity anyway to support buying a media library that would just work on your phone. In an effort to limit pirating, the music industry didn’t even make an effort to expand their market by finding a viable business model in cell phones or mp3-players.

The carriers on their part had a wholly different agenda, music didn’t really interest them. When a carrier imagined a future where wireless high speed internet access, together with technologies such as Skype was dominant, they got sick to their stomach, because that was a world where they were redundant. The carriers have been selling subscriptions that has a monthly fee and fixed prices on for example calls and texts, by adding free or cheap cell phones to the mix they could confuse buyers into buying subscriptions with crazy margins. If phones become internet based (with for example Skype as the carrier), they will at most be able to maintain the monthly fees, a prospect that will allow consumers to better understand what they are paying in relation to other carriers, this will lead to a lowering of the carriers margins, and force them to compete on price.

Needless to say, the phone carriers wanted to postpone the introduction of high-speed internet to phones and thus didn’t want music consumption to go through the high-speed connectivity that the consumers needed to effectively use their phones for music, because this connectivity could also facilitate other uses. For them the “pirate music on your computer then transfer to phone” model was sufficient, and no one bought a lot of music from the crappy stores they had anyway, why go into a market that clearly can’t be solved in their best interest? This stifled the innovation among the manufacturers, because, as noted above, they didn’t want to upset the carriers that they were so dependent on. And besides, they didn’t own any content that could be sold anyway, how would they make more money from adding functionality which someone else would get the revenue from (if anyone would get any revenue at all), and that their most important partners didn’t even want or push for? They settled for having the capacity to play music, in their crappy homemade players, and consumers would have to take it or leave it.

Enter Apple. Apple had three resources that allowed them to enter, they already had a deal with the record labels; the labels acting on their fear of becoming obsolete had agreed to sell music through iTunes for use in mp3-players, given that all effort would be made to limit the ability to copy the music, which suited Apple well. Apple also had the expertise to create ways for consumers to interact with the technology, this is really the only expertise Apple had that separated them, the technology, which is the third resource, was widely available, and Apple had a large engineering division that could make the phone. What happens is that Apple enters as a cell phone manufacturer and has a deal with the record labels. The high speed connectivity that carriers didn’t want and that the other manufacturers didn’t see any point in providing was pivotal to Apples plan, they wanted to make money not only on their phones, but on the extras as well, like iTunes. Apple also had a plan to sell other content, but let’s keep with the music for this post.

Apple had an advantage over the other manufacturers; they had a congregation that would buy their product no matter what. The iPhone was also perceived as an iPod with phone capability; to consumers this was just as good as phone with mp3 capability would have been. In addition consumers already knew how to consume music on mp3-players, they didn’t to the same degree know how to do this on their phones. Thus the iPhone was perceived as a better music player than the other phones, but not as inferior when it came to the phone capability. The incumbents in their infinite wisdom had their core competency in making phones, however this wasn’t perceived as important, because any technology company can make the phone part of a phone. These reasons add up to the fact that consumers wanted the iPhone, whether their carrier recommended them or not, this represented a shift in power, from the carrier’s power over the manufacturers, to Apples power over carriers. Even if the smart phone, here exemplified as the iPhone, likely will be the death of the carriers current business model (as noted above) in the not so distant future, the carriers needed to scramble to make sure they would be the one that had a monopoly on marketing the iPhone, because now the consumers would buy the carrier that had the iPhone, not the phone that carrier recommended.

Though I limited this post to apply to music it could just as easily apply to other content, such as movies or games. The point is that Apple sees an opening where the increasing needs of consumers are not reflected in the market offerings, and where the players that are necessary to fulfill this market need are looking the other way. If the three types of actors above had put their heads together, they likely would have seen this path to profit, and would have acted on it, but they were busy following different agendas. The genius of Apple lies in realizing that more sophisticated phones wasn’t the need at all, the actual need was made up of at least two different needs, the need for better phones and the need for some way to use the better phones. Apple set about to provide both at the same time, and it was this that gave them the ability to enter the market for cell phones with such a success.


If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

What is a business model and why should you care?

How are you actually going to make money? Way to often I, and others in the innovation field, see entrepreneurs and experienced business owners that do everything right, except ask that fundamental question; How am I going to make money?

Many books and gurus on marketing or entrepreneurship push this idea that you have to follow the needs of your customer, why do they bother to use this product or service? While this is a good question to start with when you have new idea for a business or a product, another question that should be one of the first five you ask yourself is how you are going to make money. This is your business model. That consumers need your product is a good thing, obviously, but are they going to pay for it? How much will they buy? How many will actually buy it? Are there any alternative ways to make money on this? Consider the video below, this is a clip from Southpark in which Tweaks discover the underpant gnomes, the gnomes have a secret plan: they steal underwear, but what are they going to do with it once they stole it?


Clip from: Soutpark season 2 episode 17: Gnomes

As you can see the gnomes got it all figured out, well, to the same extent that most businesses do anyway. Phase 1 is always easy, you figure out a clever product or new technology or a concept for a new nightclub or whatnot, the difficult and often neglected part is part 2, what happens between you steal the underpants and profit? How do you turn underpants (or a nightclub or whatever it is) into profit?

I wish there was a simple answer that I could give you, unfortunately there’s not. But know that no matter what you think of first there’s bound to be a hundred other ways. Underpants for example could be resold, that’s the first idea of course. They could also be remade into cloth and resold; maybe the gnomes should focus on celebrity underpants and market them to creepy stalkers? For this particular example, probably the correct answer, unless someone smarter than me figures out something, well, smarter, is to discontinue this idea and find something that has a viable business model.

The point about considering your business model is that with all the effort that goes into figuring out how to make the perfect product, why don’t take the effort to figure out the perfect business model. Let’s say you want to start a newspaper, what are 10 ways to make money? Think about that for a while, write down your ideas and continue reading.

Ok, good, hopefully you have some ideas, I used a few minutes myself to think about the same thing, at first it’s hard to think about anything but the obvious, like selling the paper at stores and 7-Elleven and so forth, or you could have a subscription obviously. That’s two ways to make money. You could have ads, classifieds is one way to make money, and big display ads from major brands is one way. But now I really started to enter a bit of a pickle, what other six ways can you find? You could let companies pay for editorial content, or product placement (which is by the way highly unethical), you could have people pay to be a journalist for a day, you can use the paperboy to deliver other newspapers in addition to yours, or ads. You could sell the leads you uncover to tv-stations or other media. You could have puzzles, like crosswords with the price of $1 to participate and the lucky winner gets a mug or a t-shirt. You could use the paper to get visitors to your online site, where you really make your money, you can sell lists of customers to data warehouses, or you could sell printing services to others since you already have the facilities and they may not be operational for your purposes all the time anyway. There, ten ideas! Admittedly not all are excellent, but if you keep going I’m sure you can find 10 more and 10 more, and finally you are bound to stumble on to something that may actually work well!

The final issue that I want to address is that you may notice that some of these ways to make money may be mutually exclusive or just hard to combine. Maybe if you charge consumers for the paper they tolerate less ads than if you give them the paper for free, and if you sell ads, the advertisers would certainly be willing to pay more if more people read the paper, which they would if the paper was free. The point here is that when you have lots and lots of ideas on how to make money on your idea you have to start putting together combinations that you think will work. The combination of smart ways to make the most money that you are left with in the end is your business model. The business model that you choose will have a dramatic effect on your business in many effects. Maybe it will require you to change the product in some way, maybe you have to suit your marketing to the model? If you choose to focus on subscriptions you can probably benefit from having a callsenter from which you call prospects and try to sell the paper, however that would be stupid if you sell one paper at a time! If you do wish to sell one paper at a time through stores or Starbucks or whatnot that will affect your organization to, now you have to build relationships with the distribution channels, to ensure your paper gets a good spot as well as so many locations that you reach the desired number of sales each day. In addition you may have to focus your first page in a way that lures consumers to buying it spontaneously, while a subscription may be different. The point here is that the business model affects your business in so many ways that it should be considered as one of the very first questions you ask.

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.