Building A Better Small Business: What is Your Hypothesis?

We are finally in Week one of our 4 weeks to building a better small business series. I hope you are just as excited to get started as I am. In this week’s post we are going to discuss capturing the breadth of your business idea. Now don’t panic, I will not be talking about writing a lengthy business plan which is the most obvious piece of advice you will get about starting a business. Instead this post will help you think through and capture your business concept as you see it today.

15 years ago when I was in school for my MBA, one of the key artifacts we were taught to create when thinking of starting a business was the business plan. I recall looking at the outline so many years ago and feeling overwhelmed by all the information I was to generate for my business idea. Most of my fear stemmed from the fact that my business idea at the time was heavily based on assumptions and not facts and I was not clear initially how to go about getting all the information for my plan. That is why instead of kickstarting this series with a business plan, we will instead ignore the business plan as a starting point of your new business idea. Your start will be the point before the business plan where you search for a business model that will work for your small business. If you are not familiar with the idea of a business model, it really embodies how a company creates value for itself while providing products or services to its customers.

The typical entrepreneur wanting to kick off a small business will start off with a hypothesis about their business. The process of searching and finding the right business model will help morph your hypothesis into a viable enterprise without accruing a huge overhead if done right.

Common Mistakes

Some of the mistakes that small business owners make can be avoided to a great extent if an entrepreneur goes through the loop of stating, testing and improving their hypothesis – as a result more effectively arriving at a realistic product market fit. Some common mistakes are as follows:

  • They take their assumptions to be fact instead of a basis to start researching and refining their concept
  • They do not properly identify their customer
  • They do not go to the trouble of identifying the right business model for their product or service
  • They do not have a structure to properly handle the operational needs of their business
  • They Attempt to grow too quickly or to grow before having a viable business

Your Business Model Canvas

As I was planning this post, I thought hard about what will be the best starting point and all arrows led back to discussing the key ingredient in planning a new venture that will set up a business for success if done correctly. That is none other than identifying the right Business Model. To do this, you can leverage a little helpful ‘tool’ known as the Business Model Canvas, a strategic management and lean startup template for developing new business models or for documenting existing business models. What we will essentially be doing is capturing your business hypothesis or best guesses in this first exercise. In the subsequent post, I will share some ideas of how you can test and continuously refine your hypothesis and finally you will take your business out for a test drive. Keep in mind that as you research and get more facts and customer insights, your original hypothesis will need to be adjusted. The key is to be agile in your thinking and planning in order to benefit from this exercise. Below is a quick definition of the sections in the business model canvas.

  1. Your Value Proposition: What solution are you providing to address a pain point or need of your potential customer? How are these pain points or needs addressed today and How will your solution stand out?
  2. Your Customer Segment: Who is your customer? Think of each of your customer groups as an individual and for each archetype, be as specific as possible – How old they are, Their Gender, What they do, How much they earn, How they spend their time etc. For example, if you were planning on starting a tutoring business for middle school children, one of your customer archetypes might be for a 12 year old student athlete and another might be for the single working parent or guardian who hardly has time to help their child with homework and who will actually be paying for the tutoring service. For each of these archetypes, you should attempt to fill in your best guess about who they are in as much detail as possible.
    • Your Market Type: Market type is an important consideration when identifying your customer and defining your concept. There are four market types. Knowing which market type your idea falls into will be an important driver in your business.
      • Existing Market: Will you be going into an existing market? This type of market is the quickest path to profitability. It is established and known.
      • Clone Market: This is where you take an existing concept and clone it in a new area. For example, you take a concept that works in the United States and clone it in another country. This is the next quickest path to profitability.
      • Re-segmented Market: This is where you find a very specific niche within a market segment that is already being addressed and target that niche. For example, you could be a travel agent targeting the needs of Nigerian immigrants in the United States.
      • New Market: This is where your product or service is created for a market that isn’t defined yet. You will have to create it. This market type typically takes the longest time to profitability at the highest cost.
  3. Your Distribution Channel: How will your product or service(s) get to your customers? Using the Tutoring business example, will you have a location where you physically tutor students? Will you tutor them virtually on the web? etc
  4. Your Customer Relationship: How will you get, keep and grow your customer base?
  5. Your Revenue Stream: How will you make money from your product or service?
  6. Key resources: What key resources will you need to make your business model work? Will you need finances? human resources? etc
  7. Key Partners: What key partnerships are you going to need on day 1 or at the current stage of your business? Note that the partnerships you need on day 1 may not be the same you need a year later when your business is up and running. Depending on your market type, you may need some of the following types of partners:
    • Strategic partners who could sell something to you that would have taken time to develop or license it to you. For example, if you were planning to put a specialized logo on some t shirts to sell as a business concept, one of your strategic partners could be the actual Tshirt manufacturer.
    • Joint Partners are those with complimentary products that you can work with to do joint promotions.
    • Key suppliers could be partners that support your accounting functions or perform your marketing functions etc.
  8. Key Activities: What are some of the ways you will measure your success (your key metrics)? What are the key activities you need to do to start making progress on your metrics? For example, you may consider the number of paying customers, twitter followers or some other performance indicator as a key metric to measure your progress. List the ones that come to mind and some activities you will need to do to make progress in that area. Your key activities will be tied to these indicators.
  9. Cost Structure: What are the costs you will need to operate your business model? For example, will you need to pay for a website to be built? For a phone line? etc.

This week’s activity

Go through the sections of the business model canvas I have described above and write down your hypothesis (best guesses). You can get a printable copy here. Remember that these are your best guesses based on what you know and what you have gathered. However, don’t get hung up on getting the details ‘right’. Instead, capture as much of what you think to be true about your business idea as you can manage based on your current understanding. The canvas will continue to evolve as you go out and start testing your hypothesis but for this week the main focus is to first capture your hypothesis. Below is an example of a business model canvas for Google.

google-business-model1

 

 

 

 

 

 

 

 

 

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