The Dragons’ Den is one of the more popular business programmes on the BBC, with average viewer numbers in excess of three million . The format is pretty simple – entrepreneurs pitch the dragons (wealthy investors) with their business plan. The entrepreneurs are looking for investment (as well as advice) in return for an equity share in the business. Now in its 9th series, the show has been going from strength to strength. However, what is not always evident is that many of the so-called “successes” often represent bad deals for the entrepreneurs, where they give away too much equity in return for modest investments. This is typically the case in instances where the proposition has already been de-risked by way of existing trading history, letters of intent, sales etc., or where you need the cash to fulfil orders, or to expand.

If you have a serious business proposition (and I use this phrase deliberately, as some entrepreneurs are clearly selected based on entertainment potential), you should adapt a very different strategy in the Den. You should use the opportunity primarily as a marketing exercise where you are in effect pitching your product or service to the British public at large. In many cases it is likely that appearances on the show will result in significant interest afterwards. (Given the BBC recognises this, it is likely they will try and dumb down any overt marketing). Here are some tips as to activities you need to undertake prior to appearing on the show so that you can maximise your return.

1. Ensure your website is up-to-date (and can deal with a traffic spike) and that the phone lines are well staffed. The increase in profile from TV will result in a significant increase in interest in the days following the show.

2. Unless you get an offer from the dragon you target (and on your terms), walk away. While there is definitely a premium to their money in terms of media interest, they will be exceptionally busy investors and may not bring enough to the table aside from the cash.

3. After the show, it is important to use your new-found fame (which may be short lived) to engage with more suitable investors who can provide smart money on more attractive terms (i.e., the cash you need at the equity share you want to give up) as well as access to distributors/ retailers or to key contacts.

4. Use PR to leverage your appearance on the show. All media like an angle, and given the importance of popular culture, an appearance on a “reality” TV show should open many doors. It is good to work on a number of stories to help you gain additional exposure after the show.

5. Undertaking an analysis of the appearance by Ling Valentine (who “entered the den” in February, 2007) would be a worthwhile investment of your time. Ling gives a detailed summary of her appearance on the show on her website and also demonstrates that she is an extremely shrewd business person as well as a great marketer. Explaining her decision (not to take investment), Ling says the following:

“All I could think about was that I could get that cash in 30 seconds from the bank for no equity stake, and that I could not face giving away a third of my business for that, I had a proven business and they had no risk! After the Den I had some regrets, mainly wondering if I had lost out from not working with Duncan and what I had potentially lost from Richard’s end-game expertise, but since my episode aired I have been incredibly busy.”

Indeed, her appearance sparked immediate interest:
“Web visits on the night of the broadcast were over 5,000 people, and the next day it was over 10,000. I spent the whole night trying to stop my server crashing”

In summary, if you have a serious business proposition, where external parties (ideally, customers) have validated it as being serious, you will be better served using the opportunity as a means to raise your profile rather than as a means to raise finance.

Relying on academic management literature for guidance can be a fickle business. For example, while “first-mover advantage” was once lauded as the optimum strategy for market entry, it was shortly displaced by its close cousin “second-mover advantage”. The thought went that the “second mover” could learn from the mistakes of the pioneering entrant who was likely to run out of money while trying to educate the market. Of course, some of these initial pioneering entrants did not run out of money and ended up dominating their space, thus striking a blow for advocates of being a “second mover”.

For “first movers” there are a number of poster boys, like Twitter, the micro-blogging platform, which has become so dominant that successful market entry by a direct competitor would be difficult to comprehend. The launch of the iPad created the tablet market, which did not exist prior to its launch but has since been flooded with entrants. For some cash-rich entrepreneurs, with the pockets, vision and patience of someone like Steve Jobs, the lack of a market is an opportunity rather than a problem. However, in the majority of cases, there may be no competition because there are structural reasons why a market does not exist (such as a lack of demand or a market size that is currently too small to serve profitably). In other words, the entrepreneur may simply have misread the opportunity!

For “second movers,” you can generally enter the market without the cost of the first mover. A subsequent entrant can study the incumbent when deciding how to design and position their offering. After all, imitation is the sincerest form of flattery. Competition also helps from a marketing perspective – trying to educate and attract a market on your own is a very costly exercise. However, in some cases the first mover is so dominant, subsequent entry would not be advised.

In other instances market entry is not always so easily defined. A recent example from the U.S. is the almost simultaneous market entry of Gowalla and FourSquare, both location-based social networking sites. These were soon followed by Rummble, and a host of others.

For entrepreneurs the lessons are clear – there are different things to be aware of when you start your business, in terms of market entry. If the market does not yet exist you need to ensure you have deep pockets as marketing is likely to be extremely costly. You also need to be confident that you are not ‘misreading the opportunity’.

In the majority of cases, however, it is likely that there will already be a player in your space. In many ways, starting up in a competitive environment is a good thing. Competition sends a strong signal; demand exists, and a market is being established to meet this demand. After all, this removes one of the biggest issues entrepreneurs face – will there be demand for my product or service?

The reality is that competition is increasingly intense in most industry sectors. The growth of the Internet has also lowered the barriers to entry, given its ability to provide relatively cheap access to much greater audiences without the costs associated with physical outlets. The key is to recognise that competition has benefits (as listed above) and is a “fact of business”. If you offer a more compelling value proposition and have an effective marketing strategy in place, you can compete effectively. Potential entrants must not be dissuaded from entering competitive markets, but rather should focus on the elements they can control so they can target a niche they can profitably exploit.

When I am asked about measuring small business performance, my first inclination is to quote Lewis Carroll. In Alice’s Adventures in Wonderland, Alice comes to a fork in the road and asks:

“Would you tell me, please, which way I ought to go from here?”

“That depends a good deal on where you want to get to,” said the Cat.

“I don’t much care where–” said Alice.

“Then it doesn’t matter which way you go,” said the Cat.

In other words, if you do not have a plan for where you want your business to get to, performance measurement does not matter much!

Management dashboard

Small businesses come in various guises and hence it is difficult to generalise when it comes to individual performance management. Metrics (also called Key Performance Indicators or KPI’s) can range from Software as a Service (SaaS) businesses focusing on Lifetime Value (LTV) and churn rates, to hotels measuring occupancy levels and average room yields. However the old adage holds, ‘What gets measured gets managed’, so it is important to have some metrics in place. A good starting point would be to try and understand what are the typical metrics that define success in your particular industry. After that, it’s a case of adding some additional metrics to the mix to ensure that all bases are covered. The following represent a list of some of the more common elements that can make up a “management dashboard” which combine to help you manage performance. Of course, some may argue that profitability should be the main bellwether as to the performance of a small business. While there is merit in this view, it is better to use a combination of metrics which all support the primary goal of trading profitably while growing year on year. This way you have early warning systems in place, as an assessment of profitability based on financial statements can take some time given the reporting time lag.

It all starts with a plan

Creating a simple business plan is vital for all small businesses regardless of whether the business is looking to raise money or not. Planning is essentially about having the foresight to plot and manage your own future, in stark contrast to reacting to accounting data with its emphasis on past performance. While business plans have many purposes, they are not often associated with performance measurement, despite the fact they are a very useful tool with which to measure performance. By committing your thoughts to a business plan you can ensure that you (or your team) know what the priorities are, what activities need to be done, who needs to do them and by when. A business plan brings a lot of transparency to the business with accountability in the form of names, actions and dates.

Cash-flow management

Careful management of cash flow is a fundamental requirement for all businesses. The reason is quite simple–many businesses fail, not because they are unprofitable, but because they ultimately become insolvent (i.e., are unable to pay their debts as they fall due). If you are a “cash-only” business, you can bank the income immediately. However, if you sell on credit, you receive the cash in the future and hence may need to pay some of your own expenses before that income hits your account. This will put a further strain on the company’s solvency and hence a well structured business plan will help you manage funding requirements in advance.

Pro forma profit and loss

A profit and loss forecast is an integral element of any business plan alongside a pro forma sales forecast and cash flow forecast. These statements are forecast in advance (broken down by month) and represent a reference point for actual data as it emerges. By forcing you to forecast and to document all expected revenues and costs, the process helps you produce a report detailing the likely trading performance for the year ahead. If you are an established small business, this data is easier to arrive at as you can use past performance data as a reference point. While brand new businesses’ lack of trading history makes this process more difficult, it also makes it more valuable – you need some references to know whether your new business is on track. Once you commence trading and have actual real data, it is then easy to undertake some variance analysis (between the forecast data and the actual data) to assess whether or not you and your business are on track. With actual data it is possible to take remedial action before waiting for a full year of historic transactions to emerge, at which point it may be too late. For example, if sales in month one are significantly below the planned level you can make an early decision regarding what actions need to be taken as a matter of urgency (i.e. perhaps bringing costs into line, increasing marketing activities, pivoting the business, etc.)

Google Analytics

If you are running a website it is essential that you are running an analytics package in the background (Google Analytics is one of the more popular free ones). This enables you to gain a real insight into customer behaviour on your website. If you are an ecommerce site, you’ll be able to analyse details like the eCommerce Conversion Rate (ECR) and aim to improve this rate over time. Given that your revenue is essentially a factor of two elements (ECR * Number of visitors), improvements in these two will help you drive business performance improvements.

Peer analysis (ratios)

You can also assess your business performance by measuring some key financial ratios and benchmarking these against results from peers (which are typically aggregated to ensure anonymity). This data is typically compared according to industry codes as determined by the North American Industry Classification System (NAICS) and its predecessor Standard Industrial Classification (SIC). This system helps facilitate peer analysis as companies are grouped according to industry sector. While these systems were well suited to analyzing relatively homogeneous industry groups in the 1930s, I do not believe they are well suited to modern organisations with multiple revenue streams, and disparate business models. However, some small businesses with straightforward, conventional business models may find such data comparisons useful. In summary, measuring performance is an important element for all entrepreneurs and small businesses. However, given the huge breadth of products and services provided, it is difficult to assign blanket metrics. The above will give you some ideas as to the sorts of things to be thinking about and these can be added alongside key performance indicators specific to your industry sector. Once set up it is easy then to keep an eye on these to ensure that your business remains on course.

This is the third of a three-part series. Read Part I and Part II.

A business plan is essentially a more detailed version of your business model. A business plan has been traditionally understood as a physical document, although increasingly this view has changed as business plans have migrated online. The business plan format very much depends on the context and business plans are often verbalised via presentations where a presenter pitches their business plan to an audience. Business models are more likely to take the form of either simple verbal descriptions or one page visual representations which can either be produced before a business plan or as part of the same planning process.

Alexander Osterwalder, co-author of Business Model Generation, agrees with the link, arguing that:

‘..when you have designed and thought through your business model you have the perfect basis for writing a good business plan.’ 

It is also worth noting that there are increasing numbers of business plan critics who argue that their composition is too time consuming and that people need ‘to get building’. Some of this criticism has come from software developers (many of whom are proponents of the Lean Start-up Methodology).  I personally feel their arguments are a little simplistic and that entrepreneurs need to map out a viable business model and a business plan in tandem. I also think that the arguments are more valid in an Internet business context, where it is relatively easy to bootstrap a low-cost website which can be used for feedback and constant iterative development.

If you are looking to build a new business and are about to draft a business plan, you should also spend time working out your optimum business model as well as drafting a visual representation of it.  You can use the following framework to map same. In recent years there has been significant innovation in the range of business models, and some of them may be of relevance to your offering. Finally, it is also worth noting that some business models such as the Internet bubble model have largely had their day. Very few investors will invest in businesses these days that have advertising at the heart of their business model.

Resources

Articles

Reinventing Your Business Model (Harvard Business Review, December 2008) by Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann

No Plan Survives First Contact With Customers – Business Plans versus Business Models by Steve Blank

Free Content as Marketing, Not Business Model by Tim Berry

How Business Models Help Generate Business Plans by Alexander Osterwalder

Virtual Goods: the next big business model by Susan Wu

A New Framework for Business Models (Harvard Business Review) by Mark W. Johnson (2010)

Business Model Innovation –the new route to competitive advantage (IBM)

Books

• Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers (2010) by Alexander Osterwalder and Yves Pigneur.
• Getting to Plan B: Breaking Through to a Better Business Model (2010) by J. Mullins & R. Komisar
• Business Models for Content Delivery: An Empirical Analysis of the Newspaper and Magazine Industry by Marc Fetscherin and Gerhard Knolmayer (2004)
• ReWork: Change the Way You Work Forever (2010) by Jason Fried & David Heinemeier Hansson
• Harvard Business Review on Business Model Innovation by Harvard Business School Press
• The Four Steps to the Epiphany by Steve Blank  (2005)
• Free: The Future of a Radical Price by Chris Anderson (2009)
• Competitive Strategy by Michael Porter (1980)    
• Seizing the White Space: Business Model Innovation for Growth and Renewal by Mark W. Johnson (2010)

 Tools

The Business Model Canvas is a great outline you can use to map your business model.

Videos

How to Choose a Business Model by Roan Lavery

The New Business Model by Guy Kawasaki

Websites

The Business Model Innovation Hub (Exchange knowledge on business model innovation)

Trendwatching.com (Stay abreast of business model innovations)

This is the third of a three-part series
Part I: Have you Optimised Your Business Model?
Part II: Examples of Well-Known Business Models

This is the second of a three-part series. Read Part I and Part III.

The following are some examples of business models that are used by various businesses. The list is by no means exhaustive and is designed to give you a feel for some of the models that exist (business models evolve constantly).

In many instances, the names can vary as they are not typically universally defined.

The Add-On model

In this instance, the core offering is priced competitively but there are numerous extras that drive the final price up so the consumer is not getting the deal they initially assumed. If you have recently tried to buy an airline ticket or car insurance, you will have spotted that the number of extras you are offered can almost reach double figures!

The Advertising model

The advertising model became popular with the growth of radio and TV where the TV stations earned revenue indirectly from people looking to promote services to the audience they attracted, rather than via consumers paying radio and TV stations for the consumption of their TV programmes.

Some Internet businesses derive revenue predominantly as a result of being able to offer advertisers access to highly targeted consumer niches (often in the absence of revenue from selling their goods or services).  So if your website is about a narrowly defined topic, it is likely to attract a highly defined niche audience who could be offered complimentary products or services with a higher probability of success than blanket mass market advertising.

However, this business model is increasingly difficult to justify if it is your main revenue stream. For a start, the landscape is extremely competitive and advertisers are spoilt for choice. Building brand awareness and translating that into site visits is a very difficult and costly challenge. Successes such as Facebook are very much the exception to the norm.

If this model is being considered for your startup, it is worth noting that nowadays most savvy investors ignore ‘vanity metrics’ such as Page Impressions/Visitor numbers and want to understand whether the underlying business proposition is profitable. Examples such as YouTube illustrate how hard it can be to monetise free content even when you have significant visitor numbers. In short, this model is in decline for most businesses.

The Affiliate model

An affiliate is simply someone who helps sell a product in return for commission. However they may never actually take ownership of the product (or even handle it). They simply get rewarded for referring customers to a retailer when they make a sale.  Again this business model has been a huge success given the ease with which the Internet facilitates it.

The Auction model

The auction model is synonymous with eBay, these days, but of course auctions have existed for hundreds and hundreds of years.  The tulip market in Amsterdam is one of the more famous examples. There are numerous different types of auction, from English, to Dutch, Vickrey, Sealed Bid, etc., and they all share certain characteristics: the price of the good is not fixed; each individual assesses the value of the good independently; final value is determined via competitive bids. This business model has become very popular in recent years as the Internet has helped to broaden its appeal.

The Bait and Hook model

This is essentially the razor blade analogy listed above, where disproportionate amounts of the value are captured on components, refills and the like. Anyone who regularly buys ink cartridges for printers will recognise this model where customer lock in and switching costs result in monopolistic pricing on the component side. The mobile phone business also grew rapidly on the back of this model as handsets were often supplied free of charge when you signed up for a contract. Nowadays with SMART phones, such is the level of demand for some that consumers have to pay hundreds of pounds for the phone and in many instances minimum contracts are 18 months.

The Direct Sales model

While direct selling was initially the primary ‘route to market’, production efficiencies coupled with improvements in transportation meant producers could reach a much bigger market and this resulted in the pre-eminence of the retail distribution model for many years.  However the emergence of the Internet as a distribution channel meant that producers could disintermediate costly resellers and sell direct to customers themselves, in effect going the full circle. The PC manufacturer Dell is a great example of a company who is very focused on the direct sales business model.

The Franchise model

Opening a franchise is essentially buying a working business model in a particular industry. You pay royalties for the privilege but get access to a winning recipe, a support network and an established brand. Two famous franchise business models are McDonald’s and Subway.

The Freemium model

This is where the business gives away something for free in return for your personal details so they can then market to you and hope to build up a relationship so that you buy from them in the future. It is typically used in service-based businesses where the lifetime value of the average customer is high and is increasingly popular with Internet services such as Spotify, Skype, or Flickr. Many of these offerings have similar cost structures where the marginal cost of serving an additional customer tends towards zero. The core free offering then acts as a gateway to the paid service. For example, with Spotify, the free version comes with adverts, the paid does not.

The Internet Bubble model

At one point, ‘unique visitor’ numbers to a site had a large perceived value. Many businesses offered free Internet services and businesses were valued on the basis of potential rather than underlying profit and loss metrics. There are still remnants of this today, and some spectacular examples like Twitter.com, where the notional valuation of the company is considerable even though existing revenue streams are negligible.  The actual business model is in effect getting lost in the media hype and proliferating user numbers, and it is more a case of ‘figuring the business model out at a later stage’ than up front. Naturally this is a highly flawed strategy and rarely works.

The Low-Cost model

The low-cost model can be summed up in one word: ‘Ryanair’. This is an extremely well established business model, where the aim is to drive significant volumes of customers (at a low customer acquisition cost) and by charging a very low price. In return, revenue is earned from a whole host of ancillary sources – these include:

• Bank card charges                                                                                           
• Advertising on seats
• Lottery ticket sales
• Flight insurance
• Selling train tickets
• Priority seating
• Extortionate charges for excess baggage, reprinting a boarding pass, etc.
• ‘Preferred car hire rates’

The model is not simply about trying to extract a whole myriad of extra cash from consumers, but also configuring every single aspect of their business model so as to drive out cost. Examples include buying oil futures to manage oil price fluctuations, having destination tourist boards pay for newspaper advertising, having staff pay for their own uniforms and training, and so on.

The Pay as You Go model

With this model actual usage is metered and you pay on the basis of what you consume.  Some mobile phone contracts operate on this basis i.e. the user can buy a phone card which gives them credit. Each call is metered and the credit is reduced as the ‘minutes’ are consumed (in contrast to subscription models where you pay a monthly fee for calls).

The Recurring Revenue model (Subscription model)

With the recurring revenue model, the aim is to secure the customer on a long term contract so that they are consuming your product or service well into the future. Given that the cost of customer acquisition can be high, retaining customers is a primary goal for most businesses. It is also becoming synonymous with ‘subscribing via direct debit’.  Most utilities providers operate under this model. Magazine publishers have also been looking to expand this portion of their business for some time, offering heavy discounts to subscribers (who buy all issues directly), rewarding them over individual discrete purchases (bought on an ad hoc basis from various third parties).

The Somali Pirate Business model!

Business models do not just apply to legitimate businesses as this post, The Somali Pirates’ Business Model by Mark Leon Goldberg illustrates!

As the above illustrates there are numerous business models that can be considered and the number is growing on a regular basis. For example in the gaming industry alone, David Perry, COO of Acclaim Games Inc list 29 business models for games that he is familiar with.

This is the second of a three-part series.
Part I: Have you Optimised Your Business Model?
Part III: Business Model vs. Business Plan

This is Part I of a three part series. Read Part II and Part III.

What is a business model?

A business model is a description of how your business intends to operate and make money. At the most basic level, it involves a producer making something and selling it directly to customers at a profit (but this simple model has propagated into numerous diverse models in recent years).

Alexander Osterwalder, co-author of the book Business Model Generation, defines a business model as:

‘… a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams.’

The development of a business model is essentially a strategic perspective rather than an operational assessment, and focuses on how you capture value i.e. it includes a description of the value proposition. Deciding upon a business model becomes particularly important as a concept when it is not a simple ‘make and sell direct‘ model and you are looking to create value through a non linear route.

The Business Model – An Introduction

In days of old, business was arguably a lot simpler; you produced something and sold it for a profit, building up a good reputation over time so as to ensure ongoing patronage. Before the industrial revolution most sales were essentially local, and you had a much greater steer on competition, demand levels and pricing. You probably sold your products directly to consumers as the butcher, baker or candlestick maker.

Fast forward 200 years and business has changed considerably. A lot more creativity is needed to get noticed in a time-pressed world (not to mention in making a sale). You are probably facing global competitors, and in many instances a widely dispersed audience who are increasingly difficult to reach in a cost effective manner. As a result, numerous alternative strategies have emerged to get your product to market, safely into the hands of the consumer and business model innovation has become increasingly popular.

“Companies that put more emphasis on business model innovation experienced significantly better operating margin growth (over a five-year period) than their peers.”

Source: IBM Global CEO Survey

Mark Johnson, author of ‘Seizing the White Space,’ agrees about the benefits, arguing that:

“Business model innovation is the key to unlocking transformational growth–but few executives know how to apply it to their businesses.”

In many respects the emergence of business model innovation started with Gillette and razor blades. They worked out that if they sold the razor at low cost, consumers would happily pay for the blades. Given the resultant switching costs and customer inertia, the result was often a lifetime of patronage (despite the fact the initial transaction was a loss-making one for the producer). In essence, by providing something at below the market price (the razor); you can create a market for a secondary product (the blade) upon which you make ongoing profits. A second characteristic of the model was that the mark-up on the secondary products were often disproportionate relative to their cost so were highly profitable for the manufacturer. Anyone who has had to buy replacement ink cartridges will bear witness to this!

A trend in recent years has however been the growth of companies (often Web 2.0 ones) with uncertain business models. Take Twitter, for example:

“Twitter has become an influencer in the way information is shared around the world. But while its immediacy, transparency and simplicity offer answers about all things both newsworthy and mundane, one big question about Twitter has gone virtually unanswered: how it plans to turn a profit.”

Source: CNN article (July 9, 2010)

Of course, the big challenge for the likes of Twitter, Facebook and other social media sites is that attempts to monetise come at a number of costs, often the privacy of the user and their ability to use the service without interruptions from third party advertisers. Monetising a free service invariably degrades the experience for the customer and hence companies need to walk a fine line as Facebook found to its cost in recent months.

Thinking about your business model

If you are an entrepreneur starting a new business, it is very important that you consider a number of different business models as it is possible to derive revenues from a range of different sources at various stages of the product’s lifecycle.

Businesses can also operate hybrid business models. For example, newspapers make their money from a mix of advertising revenue and the price they obtain for the newspaper. As we have seen in London, models can change over time as the value of certain portions of the business increase in value; for example, the Evening Standard newspaper is now given away free every evening (hence relying solely on advertising income to sustain itself). As U.S. Cambridge, U.K. -based entrepreneur Doug Richards proclaims:

‘One may start a business with the idea that one will sell a product to customers only to discover that no one will pay for it, but they will accept it when it is provided for free. When that’s the case, advertisers may pay for the production and distribution of the product.’

In essence, business models are essentially dynamic as new opportunities can emerge at various points on the value chain. Sticking to the newspaper industry, the dominant online business model for many years was free online content supported by advertising. However, the commercial viability of such a model is not sustainable (most sites lose money) and this tactic also results in lost sales as some people substitute a free digital copy for a physical paid one. The Times in the U.K. has recently changed its model to a ‘paid for’ access one – whether they can make it a success is debatable, given the fact so many free substitutes are only one click away!

Uses for business models

1. Starting a new business
If you are starting a new business (particularly an Internet-based one) and are seeking investment, the business model will be an important element of your business plan. Any prospective investor will be very keen to understand your business model clearly i.e. how you intend to generate cash, and whether it appears that you can do so profitably.

2. Innovation and product design
Business model innovation enables you to take a holistic view of the business to assess unique opportunities that exist outside of innovation solely on the product side. Business models also jump industry so it is a good idea to keep a breast of innovative business models you come across (regardless of the context). One simple (yet common) form of innovation is deploying business models from another industry in your own. As Mark Johnson claimed in ‘Reinventing your Business Model’:

“Business model innovations have reshaped entire industries and redistributed billions of dollars of value.”

The low cost business model pioneered by the likes of Irish airline, Ryanair (replicating the Southwest Airlines model) is now becoming more popular in the hotel industry, for example, where costs are being reduced significantly and entire business models are being reassessed. The CitizenM hotel in Amsterdam airport, in the Netherlands is one such example; staffing levels are far below industry averages as customers are forced to self serve.

“We looked at every process to see where we could streamline,” says Michael Levie of the new hotel chain. “Building costs and personnel costs are the biggest outlay for hotels. So we have no reception or restaurant staff. And the construction is modular. Our hotel rooms are designed as fully fitted units that can be stacked one on top of the other. This way, we’ve managed to reduce the construction time to ten months, saving on costs.”

Over time as new technologies emerge inefficient business models get displaced. One good example is the music industry. While the primary driver of the value is the musician, the actual value created is dispersed in numerous directions as the following post illustrates:

Does a CD have to cost $15.99?

(Source: Almighty Institute of Music Retail)

The value dispersion is instructive and hence it is not surprising that digital delivery of music (disintermediating the distributor) would emerge as a more compelling business model. The launch of the iPad and the growing popularity of devices such as the Kindle are also likely to drive the take up of a new digital orientated business models for the book industry.

3. Creating Revenue Streams
As I mentioned in the opening sections some Internet companies struggle to monetize their customer base. Their business model is effectively parked as a trade off to attracting ‘users’. The logic here is simple; if you offer a free service you remove the biggest risk or barrier to new prospects. Once you have significant volumes of users you can then create a business model to monetise this large user base.
Similarly, in the gaming industry ‘free to play’ has been a popular model where users play the games for free but pay to acquire virtual goods be it tools to play the game better e.g. buying weapons or multiplayer access.

4. Competitive Analysis
A traditional means to assess the attractiveness of an industry was to undertake strategic analysis using the methodology prescribed by Michael Porter in his Five Force Analysis. His core argument was that these following five forces determine the competitiveness of an industry and hence its attractiveness:

1. The threat of the entry of new competitors
2. The intensity of competitive rivalry
3. The threat of substitute products or services
4. The bargaining power of customers (buyers)
5. The bargaining power of suppliers

Understanding businesses from a business model perspective can also be extremely instructive as you can build up a narrative regarding how companies perform certain activities to gain a clear understanding as to their strategies. Using this in tandem with Porter’s Five Forces will give you a good sense of the competitive landscape which can then help you decide on the optimal strategy to pursue and also to preempt competitive threats.

About the Author:
Alan Gleeson is the managing director of Palo Alto Ltd, the UK division of Palo Alto Software.

This is Part I of a three part series.
Part II: Examples of Well-Known Business Models
Part III: Business Model vs. Business Plan

Decisions regarding how you finance your business should be taken very seriously as it is one of the most critical decisions you will make at the start-up phase and forms a key part of any business plan. When considering the different financing options, you need to spend some time learning about the conditions that come attached to early stage capital investment.  By far the best way to finance your business is from current cash flow arising from sales but unfortunately this is not realistic for most start up businesses.

A cursory glance through mainstream newspapers indicates that raising start up finance remains difficult as UK banks are simply not lending money to businesses (especially start-ups).  As Luke Johnson of Beer & Partners argues that;

“Angel investors are the only realistic option for these early-stage companies. Currently banks are barely open for business, or tend to offer loans on unattractive terms, so the need for equity capital is greater than ever. What’s more, since current low interest rates give savers such poor returns, more and more angel investors are emerging that have a strong appetite for direct investment in small companies.”

As Luke Johnson indicates, we have witnessed a growth in the number of angel investors seeking to fill this gap seeking to support entrepreneurs through the provision of early stage capital.

In addition, the ongoing success of the BBC programme, Dragon’s Den (where entrepreneurs seeking investment pitch their business plans to a panel of prospective investors), has added to the growing popularity of angel investment as a primary means by which entrepreneurs secure early stage investment in their fledgling businesses.  However I believe there is an alternative more compelling option which is more appropriate for non capital intensive businesses like Internet start-ups- and it is known as bootstrapping.

Bootstrapping

When you bootstrap your business you look to (a) start your business without any external finance and to (b) manage the business with a very tight control on costs. There are numerous benefits to start-ups in avoiding outside investment (particularly at the pre-revenue stage).

These benefits include;

1. Creating a strong cost discipline
2. Galvanizing staff against profligacy
3. Helping to maintain a focus on driving revenues (while controlling costs)
4. Helping to ensure an ongoing focus on innovation.

By ensuring as low a cash burn rate (rate at which a company uses up cash) as is feasible, you increase the chances of your business succeeding. Similarly, without any debt repayments or obligations to shareholders you can afford to be more flexible with your idea (pivoting to Plan B if need be).

Once you have proof of concept and evidence of demand, it is a lot easier to secure financing at considerably more favourable rates if needed.

As Greg Gianforte author of ‘Bootstrapping: The Secret to Entrepreneurial Success’, declares

‘When you’re Bootstrapping, you’re forced to deal with customers and to fulfill their needs from Day One. If you have a lot of external funding, on the other hand, you can be fooled into thinking you’ve already created an actual business just because you’re paying salaries and rent. But you haven’t. You only have a business when you have paying customers. Bootstrappers know this instinctively, and never lose that customer focus.’

US Entrepreneur turned academic Vivek Wadhwa agrees, arguing in his Techcrunch article ‘Ditch the Biz Plan, Buy a Lottery Ticket’

‘My advice for entrepreneurs in industries with relatively low capital costs (like internet/software) is to bootstrap. Of course, you can start by trying raising venture or angel capital when you have just an idea (you never know, you might get lucky); but don’t waste too much time on it. And don’t get discouraged if they [VC’s] turn you down; you are in the majority. Instead, focus on validating your idea, building it, and selling for survival. ‘

In short, bootstrapping is an excellent way to grow your business (particularly an Internet business) as you really focus on the need to generate profits that can be reinvested to drive further growth.

Finally here are some articles that will give you a better feel as to how you can bootstrap effectively:

How to bootstrap your company to profitability by Spencer Fry

The Art of Bootstrapping by Guy Kawasaki

Bootstrapping your way to Success by Alan Gleeson

Business advisors, experienced entrepreneurs, bankers, and investors generally agree that you should develop a business plan before you start a business. A plan can help you move forward, make decisions, and make your business successful. However, not all business plans are the same, not every business needs the same level of detail. You might develop a fairly simple business plan first as you start a small business, and that might be enough for you. You can also start simple and then elaborate as you prepare to approach bankers or investors.

For a simple example, imagine a woman making jewelry at home and selling it at a local flea market on the weekend. A business plan could give her a chance to step back from the normal flow and look at ways to develop and improve the business. The planning process should help her understand her business. It should help her define what she wants from the business, understand what her customers want, and decide how to optimize her business on her own terms. She might benefit from developing a simple sales and expense forecast, maybe even a profit and loss, so she can plan how to use and develop her resources. She might not need to create detailed cash flow, balance sheet, and business ratios. A simple plan may be just what she needs to get going.

This first stage of a plan, that we call the Concept Kick-Start, focuses only on a few starter elements. The Mission Statement, Keys to Success, Market Analysis, and Break-Even Analysis give you a critical head start toward understanding your business.

However, not all start ups are that simple. Many of them need product development, packaging, retail fittings and signage, office equipment, websites, and sometimes months or even years of payroll before the sales start. Unless you’re wealthy enough to finance these expenditures on your own, then you’ll need to deal with bank loans or investors or both; and for that you’ll need a more extensive business plan. Startup company or not, the plan has to meet expectations.

One suggestion for getting started is to develop your plan in stages that meet your real business needs. A few key text topics might be enough to discuss the plan with potential partners and team members, as a first phase. You may well want to add a basic sales and expense forecast, leading to profit and loss, as next phase. Adding business numbers helps you predict business flow and match spending to income.

This might be an intermediate plan, incorporating a more extensive outline and business analysis:

Ultimately, the choice of plan isn’t based as much on the stage of business as it is on the type of business, financing requirements, and business objective. Here are some important indicators of the level of plan you’ll need, even as a startup:

• Some of the simpler businesses keep a plan in the head of the owner, but every business has a plan. Even a one-person business can benefit from creating a plan document with ideas written down, because the process of producing a plan is useful and valuable.

• As soon as a second person is involved, the need for planning multiplies. The plan is critical for communicating values, goals, strategies, and detailed implementation.

• As soon as anybody outside the company is involved, then you have to provide more information. When a plan is for internal use only, you may not need to describe company history and product features, for example. Stick to the topics that add value, that make you think, that help support decisions. When you involve people outside the company, then you need to provide more background information as part of the plan.

• For discussion purposes, text is enough to get a plan started. Try describing your mission, objective, keys to success, target market, competitive advantage, and basic strategies. How well does this cover your business idea?

• Can you live without a sales and expense forecast? Sometimes the one-person business keeps numbers in its (the owner’s) head. However, it’s much easier to use some tools that can put the numbers in front of you, and add and subtract them automatically. That’s where a plan helps.

• Do you really know your market? A good market analysis can help you see opportunities that might not otherwise be obvious. Understand why people buy from you. What are the needs being served? How many people are out there, as potential customers?

• Do you manage significant amounts of inventory? That makes your cash management more complicated, and usually requires a more sophisticated plan. You need to buy inventory before you sell it.

• Do you sell on credit? If you are a business selling to businesses, then you probably do have to sell on credit, and that normally means you have to manage money owed to you by your customers, called accounts receivable. Making the sale is no longer the same thing as getting the money. That usually requires a more sophisticated plan.

• Do you do your taxes on a cash basis, or accrual basis? If you don’t know, and you are a very small (one person, maybe 2-3 people) business, then you’re likely to be on a cash basis. That makes your planning easier. However, most businesses big enough to work with an accountant and have separate tax statements use accrual accounting because they want to deduct expenses as they are incurred, even if they aren’t fully paid for. By the time you are using accrual accounting, you’ll probably need more sophisticated cash flow tools, and a more extensive business plan.

• As you approach banks and other lending institutions, expect to provide more detail on personal net worth, collateral, and your business’ financial position. Some banks will accept a very superficial business plan as long as the collateral looks good. Others will demand to see detailed monthly projections. No bank can lend money on a business plan alone; that would be against banking law. But a good bank wants to see a good plan.

• If you’re looking for venture investment, take a good look at your plan. Professional investors will expect your plan to provide proof, not just promises. They’ll want to see market data, competitive advantage, and management track records. They’ll want to see robust and comprehensive financial projections. True, you’ll hear stories about investors backing new companies without a plan, but those are the exceptions, not the rule.

So, however you cut it, your business plan is very important, even at the early startup stage, and even if you can keep it in your head. Before you purchase business stationery, telephones, or rent a location, you should do a business plan.

Tim Berry

Palo Alto Software

This article first appears on BPlans.com

As you review implementation results with the people responsible, you will often find the need to set new goals and make course corrections. Keep track of the original business plan and manage changes carefully. Although changes should be made only with good reason, don’t be afraid to update your plan and keep it alive. Business Plan Pro Premier has Planned, Actual and Variance tables, complete with linked formulas, to facilitate active cash flow analysis.

Prescription for live planning

After your plan starts, save a copy of your plan in Business Plan Pro and then type actual results into the sales forecast, profit and loss, and milestones Actual tables. Then watch what the variance views tell you.

Note when actual results indicate you need to make changes.

Stay in the Business Plan Pro Actual mode and make adjustments to future months of your Actual cash plan. After all, it is already more accurate than the original plan, because it has actual results for the months already completed.

As each month closes, type actual results over your revised plan numbers into the Actual area.

The starting sales plan
The example begins in this first illustration with the sales forecast imported from a finished business plan, developed in Business Plan Pro.

Illustration 1: Beginning Sales Plan

Actual results for sales
In the next illustration, you see the actual results for the same company for the first three months of the plan, at the end of March, showing actual sales numbers.

Illustration 2: Actual Sales Results


Plan vs. actual sales
The third illustration below shows you the plan vs. actual results (or variance) for this hypothetical company. The Management Dashboard in Business Plan Pro 11.0 automatically shows plan vs. actual results for the different tables.

Illustration 3: Sales Variance

As you look at the variance for the sales forecast for the first three months, you should see several important trends:

Unit sales of systems are disappointing, well below expectations.

The average revenue for systems sales is also disappointing.

Unit sales for service are disappointing, but dollar sales are way up.

Sales are well above expectations for software and training.

Adjusting the sales plan
One of the main advantages of creating a plan on a computer is how easily you can change it. Month by month, as you record your actual results, you can make changes to your plan in the future months of the actual tables, preserve the plan tables, and be able to see the plan vs. actual variance.

In this example, if the company knows by March that sales will be different than planned in April, they should estimate the revised forecast, as a correction to future results. When the actual results are available, they can then replace the revised plan numbers with actual results. The actual results area can then become a plan area for course corrections.

Compare the difference in the February and March columns in Illustration 1: Beginning Sales Plan (the original plan) above, and Illustration 4: Adjusted Sales Plan in Actual Table, (the actual results area).

Illustration 4: Adjusted Sales Plan in Actual Table

Illustration 4 shows how this company makes its course corrections with revisions in the April and May columns of the Sales Forecast Actual table, even before they happen, to reflect the changes shown in the January-March period. Since the company knew systems sales would be down, they planned on it and made a revised forecast in the actuals area. The same revision affects projected profits, balance sheet, and–most importantly–cash.

Looking to write a small business plan?

If yes, you’ve come to the right place. Regardless of the size of your business, a business plan is an important element in helping you ensure that your small business has every chance of surviving and prospering.

While business plans are synonymous with start-up’s they play a vital role in all businesses from the very smallest to the very largest. There are a number of benefits to business planning aside from seeking to raise finance i.e.

1. To help reduce uncertainty
2. To help manage cash flow
3. To decide on a future strategy
4. To help reduce risk

This BPlans website is packed with small business resources that can help you write a compelling small business plan. Here is a list of some of the key resources on our site that we recommend.

1. Understand how to write a business plan by reading Tim Berrys’ Hurdle Book on business planning.
2. Review a free sample business plan so you get a feel for the business plan layout and contents.
3. Look up examples of mission statements and executive summaries so you can write your own.
4. Consider the benefits of Business Plan Pro in helping you write a business plan.
5. Gain an understanding of cash flow with a cash flow calculator.
6. Read an article on everything from sales forecasting to why you should enter a business plan competition.

The above just represent the tip of the ice berg – Bplans is packed with information to ensure you have all the resources you need to write a small business plan you’ll be proud of.