How to develop a smart business model in three steps

A good business model underpins everything a business does. 

It creates focus, tying short term operation to long term vision, and fostering efficiency and purpose within the business. It also helps communicate your end goal to outsiders, which is essential for securing investment and driving sales.

So how do you develop a smart business model that will lead to commercial success? Here are my top tips.

(1) Choose a service model for fast growth

My first piece of advice is to consider whether you can build a service offering instead of a pure product model. Fifty years ago, companies made products that people bought. But the world has changed, and people no longer want just products, they want services to make their lives easier, and are happy to pay for them.

Take Uber as an example. The startup currently has the same market capitalisation as car giant BMW, despite not owning the significant assets and inventory that BMW does. The two companies have completely different business models, but both address a single issue: getting from A to B.

Our increasing desire for convenience offers great opportunities for companies that can successfully plan for this. The ability to forego significant investments in infrastructure and assets means companies with flexible service models can achieve fantastically fast growth and scale up. It is for this reason that, whilst BMW took almost a century to reach a market capitalisation of $50bn, Uber took just six years.

(2) It’s about more than the idea

Entrepreneurs are often completely wrapped up in their idea and its technical capabilities, but this is a back-to-front approach. 

Of course, we all strive to make things the best we can, but an idea will never see the light of day if people won’t pay for it when it’s done. 

Instead, your business plan should be focused on identifying an industry or market need and addressing it. Who will buy your product or service, why will they buy it, and how much they will pay for it? It could be that you need to strip out unnecessary functionality to lower the cost and make the product marketable.

Furthermore, if someone else is already doing exactly the same thing, you won’t have a good chance of being successful. When building a business model, make sure you know what your competition is doing, and you have a clear understanding of where your offering differs. If you don’t know why your product or service is better, neither will the customer.

Bill Gross, founder of IdeaLab, conducted research into what makes start-ups successful, comparing data from successful and unsuccessful technology companies. He found that the idea was only the third most important factor in a company’s success. Timing was the most important factor of all, showing that the real key to success is really knowing your market, and where your product fits into it.

(3) Secure support from market insiders

Knowing your market is something easily said, but more difficult to achieve, particularly for entrepreneurs just starting out. 

Gaining insights from market insiders can shave off years of trial and error when building a business model. Whilst gaining access to these people can be tricky, there are programmes in place to help.

The Royal Academy of Engineering Enterprise Hub, which I helped to establish, seeks to support engineering and technology entrepreneurs who want to turn their ideas into commercial successes. As well as helping them to secure funding and providing invaluable business training, the Hub gives technology entrepreneurs access to a network of business leaders across an array of different industries.

Such insight from people who have already succeeded helps entrepreneurs ensure they are focused on meeting a market need and surpass their competition.

One such entrepreneur who is supported by the Enterprise Hub is Dr Ben Kingsbury, who leads technical development at MicroTech, a spin out from Imperial College London, which is developing a new catalytic converter that could improve fuel economy, while reducing the size and cost of the component. 

Establishing a smart business model posed a challenge due to the strict regulations and established companies dominating the automotive industry. We helped Dr Kingsbury connect with industry leaders including Ford in a matter of weeks. This gave him extraordinary insider access to a potential customer that could provide guidance on the market need and potential take-up for the technology. Working alone, this valuable insight would have been extremely challenging to secure.

Business models are vital to bringing structure and order to an early-stage business, but only if they’re done in the right way. 

Entrepreneurs must carefully consider whether they want to offer a product or service, how their offering addresses a market need, and identify areas of support for challenging aspects in order to ensure their plan is both profitable and sustainable.

Ian Shott CBE is chair of the Royal Academy of Engineering Enterprise Committee.

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