Gennaro Cuofano's Blog, page 209

30 Best Businesses To Start With Little Money In 2020

Some business ideas to start with little money are:

Affiliate Marketing,
Infoproducts,
Email marketing,
Google AdSense,
Consulting,
Branded stories,
Paid reviews,
Banner Ads,
Sponsored Blog Posts,
Members Only Content,
Paid Business Directory,
Become a Coach,
Accept Donations,
Charge For ‘Premium’ Content,
Sell Your Blog,
Build your SaaS,
Speaking Gigs, Create & Sell Your Product,
Write Tutorials & Guides,
Live Workshops,
Find Sponsors For An Event,
Generate ‘leads’ for other companies,
Create a job board,
Advertise pages,
Host paid webinars,
Writing Gigs, 
Online platform for off-line local shops,
Get your local business listed online,
Buy existing online properties.

Ideas are overrated, yet they still matter to get started!

The dream of many is to be their own bosses, work a few hours per week, and have the chance to spend the rest of the day doing the things they are passionate about. But as the say goes “work hard and you will become rich.”

It is true that working hard is a good start, but do you want to work hard all your life just to reap the benefits when you’re too old? Although working hard is the prerequisite, working smart is the enhancer that can bring you to the desired success.

The past has been built over ideas. Ideas have changed the world; ideas are the foundation of a business. Is this really true? In part, it is, although we like to believe that great ideas change the world and that those who can conceive them will thrive, this is half of the story.

We, humans, are hard-wired to have business ideas, as Thomas Edison used to say, “I pull ideas out of the air.” Therefore creativity is far from being something special but rather something common to all human beings. This means that you too can have smart ideas and test them!

Ideas need to be tested in the real world, quickly!

Many of us have feelings at all times that people have stolen business ideas from us. Some of us to have the feeling at times to have thought about creating Tesla or SpaceX even before Elon Musk did.

What makes the difference between an idea, which succeeds, and one, which does not, is the willingness to test that idea in the real world, therefore to transition from theory to reality. Elon Musk had the desire to test ideas that seemed to make sense in theory but that are very hard to prove in the real world. This is where execution becomes key.

Many ideas will fail a few will become successful, those who do will become your cash cows

As the story goes Thomas Edison before discovering one of his greatest inventions had to try and fail 10,000. Whether or not the story is real, the point is that business ideas are worth not much if there aren’t people willing to test them out while being ready to fail many times before that idea may work.

History has shown us that many times great inventions come out of serendipity rather than a preconceived plan. In most cases, though you need an idea and a very actionable plan!

Welcome to the entrepreneurial age

We all assume that history goes from ebb and flow and in part this is true. In ancient history, Greeks were the fathers of our western civilization. Yet Hellenism (the diffusion of the Greek civilization) happened thanks to Macedonians, a small, barbarian population, located North of Greece.

Indeed, while Greeks lived in Theory-land for many centuries, Macedonians and in particular Alexander the Great in just a few decades spread the Hellenism culture throughout the ancient world. Alexander the Great was one of the primary examples in history of people with the entrepreneurial mindset.

Anyone can become an entrepreneur

If I asked you, “what is the best way to go from A to B?” You would mock me by thinking how trivial this question is. After pausing for few instants, you would answer without hesitation “of course through a straight-line.” Although many of us get the concept in Theory-land few of us apply this concept in reality.

This is due to our domain dependency. In short, we seem to be able to grasp a concept theoretically, but then we seem not to be able to bring this concept to the real world. With no surprise, many academics may have incredible expertise in their subject, but no clue of how that subject applies in the real world.

Therefore, the point here is that you can start at this moment to be an entrepreneur if you have the willingness to do so. I know what is the first objection you are going to move is, “Hey man, all you are saying here is very cool, but how am I supposed to start a business if I have no money?”

You need a few heuristics to be a successful businessman

Robert Allen in his book “Nothing Down” tells us how to start a real estate business with no money down. On the other hand, Robert Kiyosaki also tells us what the principles to follow to become real estate investors are.

Few principles are important when starting as a real estate beginner investor. Three of those principles are:

You have to buy your real estate at a 30% discount (at least)
You are not buying it for yourself
A property is an investment just if it has positive cash flows

As for the first point, anyone would agree with that. But how can you find a property, which is selling at a 30% discount? One of the most basic principles, which amateur investors seem not to grasp is that you have to make a deal when you buy rather than when you sell.

In other words, most amateurs make the mistake of buying properties and hoping them to increase in value over time. Indeed, you do not have to accept the price set by the seller as given, but rather to challenge that price.

Good real estate deals are available at any time. Therefore, do not get emotional if you are losing what it seems at first to be a good deal. Sure enough, you will find an even better deal moving forward.

How to find good deals? You have to find a motivated seller, someone who is trying to cash out, and that would accept 30% to 50% less on the property. Although occasional, those cases are fewer extra-ordinaries that you might think.

Here we go to our second point, which is “you are not buying the house for yourself.” Too often when buying a prospective property buyer get also attached to it, and they end up living in the property rather than treating it as an investment. Thus, once you buy the property, rent it. The property is a tool to become financially free. Let the property work for you rather than you sacrificing your life for the property.

The third and crucial point that few seem to understand is that “the property is not an investment unless it generates future cash flows for you.” In other words, assuming you buy an apartment for $150,000 and get a mortgage for the full amount; assuming a monthly rate of $1,000 you want to rent the place out for at least $1,200. In short, the rent has to cover for the monthly mortgage rate plus all the other expenses, so that eventually will have a positive cash flow.

Those are very simple heuristics. If you follow them religiously you can make it too!

26 business ideas to get started with no (or little) money down

In this article, we’ll see 26 business ideas to build a profitable small business online. The objective is to give you a list of easy to implement ideas that with low financial investment can work out.

It’s important to remark that to build an online business, initially, it is critical to put the so-called sweat equity.

1. Affiliate Marketing

For instance, Patt Flynn made $51,877.40 of affiliate earnings in September 2017. It is worth exploring the list of affiliations that smartpassiveincome.com shows on its reports to see what kind of affiliate links might work for you too:

Amazon.com (Book/Equipment Referrals)
 


AWeber (email marketing)
 


Bluehost (web hosting)
 


ConvertKit (email marketing)
 


Create Awesome Online Courses (online teaching)
 


Fizzle (online learning)
 


LeadPages 
 


LegalZoom
 


Libsyn
 


Long Tail Pro Keyword Research Tool
 


Market Samurai
 


Marketing Impact Academy with Chalene Johnson
 


Music Radio Creative
 


Samcart
 


SumoMe
 


Teachable
 


The FB Advantage
 


WP-Wishlist

2. Infoproducts

Info products are also a great way to monetize as they allow you to get a 100% cut of the revenues you make. Imagine you’ve produced an ebook or online course that sells anywhere from $20 up to $399.

A few dozens customers are enough to make you the passive income you need to do what you like and live a good life. Of course, easier said than done.

3. Email marketing 

When I speak to some of my clients they often ask, is email marketing still a valid way to make money?

The question comes from the fact that we all hear stories of AI and machine learning and tend to think that email marketing is too old school as a monetization strategy.

In reality, this is wrong! There are companies like AppSumo and digital marketers, like Tim Ferris and many others that still make a consistent amount of money through an extensive email list.

4. Google AdSense

I’ve never suggested AdSense as a valid monetization strategy unless you have such a large website that this strategy becomes profitable. If you have a small blog, Google AdSense won’t pay the bills.

Also, I honestly don’t like my users see banners all over the pages of my site when instead I can keep my content clean and more focused on user experience rather than make a few dollars with – at times – spammy banners.

5. Consulting

This is a viable alternative for anyone, from small to large WordPress websites. This is a strategy I’m testing as of the time of this writing. Of course, if you offer consultancy, this needs to be in line with the editorial strategy of your blog.

If you’re a food blogger, you can’t sell yourself as a business consultant, but rather as a food consultant. The only limitation of this strategy is that if your blog grows fast, then you won’t be able to get all the projects that come in.

However, if you wish to build a consultancy boutique and hire other people to help you out this might scale. If instead, you wish to keep a solo business this strategy will work only as long as you’re able to work on the projects that come in through the blog.

6. Branded stories

Many see sponsored content, not as a viable way to monetize a blog. I don’t think this is the case. If you offer value to your users, you can still offer content that is relevant, and that makes you money.

Let’s say a company pays you to talk about their startup. If what the startup does is truly interesting; if you have an honest interest and you know your audience would like that story, then this might be a great way to monetize.

Branded stories if your blog has qualified traffic can make you good money for minimum work.

7. Paid reviews

Like branded stories, the people from your audience are looking for tools and services that can help them grow their online business.

You can get paid by companies that offer those tools or services to post a paid review. Once again, this model works – I believe – only if you’re honest with yourself and your audience.

In short, I’d ask the following questions: do I use this service to grow my business? Do I find it valuable? Would my audience find it helpful too? If you answer yes to those questions then why not do it.

But don’t accept just the first person that knocks on your door. I’ve been receiving several offers in the past year to do paid reviews, but I didn’t do it because I either wasn’t using their tool, service or I didn’t think that would have been valuable to my audience.

8. Banner Ads

It’s tough to make money in an era where people developed a high degree of banner blindness. However, if you have a large website, with consistent traffic this also might be a viable option.

9. Sponsored Blog Posts

Just like branded stories or paid reviews, sponsored blog posts might work well as a monetization strategy.

Of course, you have to make clear what represents a sponsored content, and I believe you must do it only if you find relevant the sponsored content.

Otherwise, you risk undermining the trust your audience has for you. Plus, if you don’t believe in something this will be clear from your writing.

In short, a lack of belief in the product/service = bad writing = no conversion.

10. Members Only Content

If you have a small audience that follows you with determination why not make some part of your content only accessible to members?

11. Paid Business Directory

If you have a directory website that has gained substantial traffic, you can have areas of the site which are paid. Take for instance the listing of the 100 most popular business blogs.

You could ask those business blogs if they wish to pay a monthly fee to have an honest review of their blog.

Once again, this model works if you take the time to do proper research and you add value to your audience. Creating a listing only won’t add any value neither for the business listed nor for your audience.

12. Become a Coach

If you often write about self-growth and leadership, then you might be the right person to candidate yourself as a coach. Many people need a person that keeps them accountable.

Be it the creation of a blog, a diet or just professional growth, if you’re good at setting up objectives and keep people accountable, then becoming a coach might be a good monetization strategy.

Of course, do it because you’re passionate about helping others. Otherwise, this will reflect in your service, and you will not last long.

13. Accept Donations

Yes, that’s right. You only need a PayPal donation button to become a millionaire! As you might imagine, I’ve been cynic here.

However, adding the donation button won’t cost you any work, and it still gives people the option to thank you for what you do with a small donation. Why not try this out?

14. Charge For ‘Premium’ Content

Let’s say you’ve written a five thousand words tutorial on how to build an SEO strategy from scratch. Rather than make it accessible entirely, you could offer a sneak preview and ask your audience to pay to have the whole tutorial.

If you’ve spent time doing your research, people might pay for it.

15. Sell Your Blog

Well, if you got bored to write about the same topic, yet your blog is successful. Why not sell it? Some people make a living just by flipping websites.

16. Build your SaaS

If you’re building an online business, chances are you don’t want to set up a complicated business, that requires much work and responsibility.

That applies to a SaaS (Software as a Service). While this can be very profitable. It also requires a lot of work regarding the development and support of your customer base.

If you’re trying to have more freedom, this might not be for you.

17. Speaking Gigs

Many like to influence other people’s lives through speaking. If you’re one of them then why not start asking to get paid for a speaking gig?

The first time you might get only the reimbursement of the expenses, the second time a bit more than that.

Third, you’ll have a business.

18. Create & Sell Your Product

This is by far one of the most profitable monetization strategies. However, this is might also be the hardest to achieve.

Building your product means investing thousands of dollars in developing it.

Thus, it only makes sense if you have enough people willing to pay for it. One way to understand whether that is viable is to check whether people would be willing to finance your project? How?

With crowdfunding, for instance.

19. Write Tutorials & Guides

You don’t have to be a world-class expert to write a tutorial or a guide to a topic. Let’s say you’ve matured a competence that makes you in the top percentile of people in that industry you can sell your capability through tutorials and guides!

20. Live Workshops

People like live workshops. So if you’re recognized locally why not bring your audience off-line for a live seminar? This is a good monetization strategy to connect for real with your audience while making money

21. Find Sponsors For An Event

If you’ve been blogging for a while and you have a loyal, local audience. Why not host your event? Finding sponsors that can help you organize it might be easier than you think!

22. Generate ‘leads’ for other companies

For companies that sell certain services (think real estate, insurance or car dealerships) a lead might be worth also thousand of the dollar.

If you write about topics that are in the right context for those services why not help them find new leads, while you get a fixed rate for each lead you find for them?

23. Create a job board

Do you write about professional growth or how to freelance? Why not have your job board? Headhunters and companies offer great rewards for finding valid candidates to fill their vacancies.

24. Advertise pages

If you have a few, very popular pages. You can make those available to third parties to sell their services. The agreement will be on that specific page. In this way, you can experiment and offer a good ROI to the business that will use that page to have more leads.

25. Host paid webinars

Let’s say you’ve attended a webinar from another blogger that helped you get better at writing. You paid for that webinar.

Why not ask that person to host his webinar on your blog? He’ll get new customers, and you’ll get a cut of the revenues. In the end, your audience will also learn something new

26. Writing Gigs

Your blog is your professional portfolio. If people like what you write, why not have a CTA to offer a writing gig? If you don’t have a full-time job, this might be a great freelancing opportunity!

27. Crowdfunding

You can test your business ideas also by leveraging crowdfunding platforms. That will enable you to demo your product and service before developing it. If you have a small audience that is a good way to test their interest. 

28. Online platform for off-line local shops

Let’s say you have a website that is up and running. You have been mostly selling your own products. Although it has been good. You’re now in a scenario where there is less demand for your product, yet the market is eager for a variety of products in your niche.

What can you do? Well, why not transitioning your business model from product-based to platform-based? Imagining you have physical products, you reach out to a local shop that does not have a digital presence and offer them a performance-based listing.

You do the set up for their main product pages on your website, and for each transaction coming in you split the revenues.

29. Get your local business listed online

If you have a restaurant business but don’t have a website or a strong digital presence. What about partnering up with existing blogs, or social media pages in the space?

Research those websites who are strong in your vertical and offer them an aggressive commission if they get you sales through the door. Or use listings like Google My Business to create a free website in a few minutes.

30. Buy existing online properties

Rather than starting from scratch what about buying an existing website? If you have ever started a blog, you know how hard is to make it take off. You can instead buy an existing website.

It’s not easy to find good digital properties for sales, so you can either look upon existing repository for listed websites on sale. Or just search on Google those properties that seem interesting. 

Reach out to them with a potential offer.

If you need business ideas for your next online venture you might want to check this out: 

Top 12 Business Ideas with Low Investment and High Profit:

Become a blogger
Become an online instructor
Become a professional photographer
Become a ghostwriter
Become a Chatbots maker
Become an affiliate marketer
Become a career coach, resume writer or LinkedIn profile writer 
Become a business development contractor
Become an infopreneur 
Become a websites flipper 
Become an SEO consultant
Become a contractor headhunter

Business resources:

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
The Complete Guide To Business Development
Business Strategy: Definition, Examples, And Case Studies
What Is a Business Model Canvas? Business Model Canvas Explained
Blitzscaling Business Model Innovation Canvas In A Nutshell
What Is a Value Proposition? Value Proposition Canvas Explained
What Is a Lean Startup Canvas? Lean Startup Canvas Explained
What Is Market Segmentation? the Ultimate Guide to Market Segmentation
Marketing Strategy: Definition, Types, And Examples
Marketing vs. Sales: How to Use Sales Processes to Grow Your Business
How To Write A Mission Statement
What is Growth Hacking?
Growth Hacking Canvas: A Glance At The Tools To Generate Growth Ideas

Business models case studies:

How Amazon Makes Money: Amazon Business Model in a Nutshell
How Does WhatsApp Make Money? WhatsApp Business Model Explained
How Does Google Make Money? It’s Not Just Advertising! 
The Google of China: Baidu Business Model In A Nutshell
How Does Twitter Make Money? Twitter Business Model In A Nutshell
How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
How Does Pinterest Work And Make Money? Pinterest Business Model In A Nutshell
Fastly Enterprise Edge Computing Business Model In A Nutshell
How Does Slack Make Money? Slack Business Model In A Nutshell
Fastly Enterprise Edge Computing Business Model In A Nutshell
TripAdvisor Business Model In A Nutshell
How Does Fiverr Work And Make Money? Fiverr Business Model In A Nutshell

The post 30 Best Businesses To Start With Little Money In 2020 appeared first on FourWeekMBA.

How To Use Mind Maps To Sketch A Business Model

Business modeling is a discipline that helps us experiment with the business we’re creating in the real-world so that we can quickly test the underlying assumptions of a business model and iterate to build a viable business with a long-lasting advantage. Mind mapping can help you sketch that business model.

Read : 30 Successful Types of Business Models You Need to Know

How to use mind mapping to sketch your business model

As explained over and over again on FourWeekMBA, business models are useful tools that entrepreneurs can use to sketch their business on a piece of paper. Yet, that business model will mostly not work, as it will need several iterations before finding the key building blocks which make it viable in the real world.

This is an ongoing, continuous process of experimentation and iteration. We used a FourWeekMBA partner’s tool (MindMeister mind mapping tool) to sketch a business model template that you can download and start using.

Business_Model_MindMap_By_FourWeekMBA-MindMeisterDownload

Other handpicked related resources:

Business Strategy: Definition, Examples, And Case StudiesWhat Is a Business Model? 30 Successful Types of Business Models You Need to KnowBlitzscaling Business Model Innovation Canvas In A NutshellWhat Is a Value Proposition? Value Proposition ExplainedWhat Is a Lean Startup Canvas? Lean Startup Canvas ExplainedThe Rise of the Subscription EconomyWhat Is Business Model Innovation And Why It MattersThe Five Key Factors That Lead To Successful Tech StartupsHow To Use A Freemium Business Model To Scale Up Your Business

The post How To Use Mind Maps To Sketch A Business Model appeared first on FourWeekMBA.

The Self-Evolved Leader: Leadership Lessons For The 21st Century

The Self-Evolved Leader by Dave McKeown is a practical guide for those leading teams who wish to adopt new ways of thinking which will take their leadership skills to the next level.

What is a Self-Evolved Leader?

A Self-Evolved Leader is someone who is able to achieve the following:

Get more done in less timeInstead of lurching from crisis to crisis spends time on the medium-long term development of the teamGet better results from the teamIncrease the value brought to the team and in turn the organization and community



Why is there a need for Self-Evolved Leadership?

Our current models of leadership no longer work.  The idea that the leader is there to be a hero for the team, to swoop in and solve every problem, which leads to helplessness and disempowerment.

Cycle of mediocrity

This behaviour leads to the cycle of mediocrity in which a leader confuses busyness with progress. They race from meeting to meeting, phone call to phone call with little time to consider the decisions they’re making daily. With the best intentions, they make the decisions for the team which cripples effectiveness.

In the cycle of mediocrity, we see the leader’s focus on tactics and daily actions rather than quarterly and annual horizons.

How to master the craft of leadership

Self-Evolved Leadership starts with your personal commitment. The pursuit of lifelong learning is crucial. 

The mind-set of a Self-Evolved Leader



They pursue an objective understanding of their leadership effectivenessThis means seeking feedback on all aspects of their leadership, even if it’s unflatteringThey take responsibility for their developmentSelf-Evolved Leaders put themselves in positions to learn and they seek out opportunities to growThey focus on practice and reflectionSelf-Evolved Leaders put into practice what they’ve learned and assessed their progress



The Key Elements of Self-Evolved Leadership

To build a Self-Evolved organization a Leader needs to develop the following three key elements:

Create a shared vision for the team

A powerful, inspiring, compelling vision for the Leader’s team helps align people around a common goal

Establish a pulse – build an implementation rhythm

Implementation should be steady and consistent and when carried out in this way a Leader will find a pulse. A pulse provides a focus for execution yet still allows you to remain flexible and agile

Key disciplines

Disciplines are hard to master but they are the only way to lead to ongoing behavioral change. They will help the Leader fulfill the team vision effectively.

There are eleven key disciplines (six micro disciplines and five core disciplines) essential for every Self-Evolved Leader. 

The six micro disciplines are:



Take a pause – this will help you to regain composure in times of stressExist in the present – this is hard to do in a fast-moving organization, however, it will help build stronger relationships with everyone you work with, generate creative solutions and reduce stressSet the context – help everyone you engage with understand wherein the team’s pulse conversation it sits and the broader impact of their decisionsBe intentional – know what you want to get out of any major interaction whether it’s a discussion, event, project or meetingListen first, talk second – let everyone else share their perspective on a matter before you do. You’ll get a stronger decision almost every timePush for clarity – this can help keep your team aligned



The five core disciplines of a Self-Evolved Leader are:



Reclaim your attention – Manage your attention to devote full focus to the task, person, or project at handFacilitate team flow – Manage the inputs to your team in a way that gives them authority and responsibility for tasks and projects so that your team grows and you stay focused on achieving your current goalsSupporting high performance – Help your team to assess challenges, weigh their options and take actionHaving symbiotic conversations – Providing an atmosphere of openness, transparency, and trust so your team knows they can share their perspective without fear of repercussion with the choice to opt-in or out of the outcomeBuilding shared accountability – Create an environment where your team has the desire, skills, and tools to deliver excellence as a group working to and celebrating collective goals



Conclusion

Leadership is something that should be practiced daily. Stay true to the desire to grow and develop as a leader, keep pushing for better, keep striving for excellence and resist mediocrity.

Bio: Dave McKeown helps individuals, teams, and organizations achieve excellence by doing the ordinary things extraordinarily well. He is the CEO of Outfield Leadership and author of The Self-Evolved Leader – Elevate Your Focus and Develop Your People in a World That Refuses to Slow Down (Greenleaf Book Group).

Other handpicked related resources:

Business Strategy: Definition, Examples, And Case StudiesWhat Is a Business Model? 30 Successful Types of Business Models You Need to KnowBlitzscaling Business Model Innovation Canvas In A NutshellWhat Is a Value Proposition? Value Proposition ExplainedWhat Is a Lean Startup Canvas? Lean Startup Canvas ExplainedThe Rise of the Subscription EconomyWhat Is Business Model Innovation And Why It MattersThe Five Key Factors That Lead To Successful Tech StartupsHow To Use A Freemium Business Model To Scale Up Your Business

The post The Self-Evolved Leader: Leadership Lessons For The 21st Century appeared first on FourWeekMBA.

Context-Based Market Entry Strategies For Startups

An entry strategy is a way an organization can access a market based on its structure. The entry strategy will highly depend on the definition of potential customers in that market and whether those are ready to get value from your potential offering. It alls starts by developing your smallest viable market.

Market types

Let’s start with some basics of classic economics.

[image error]A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.

While the definition above is helpful to get us started. There is a more practical way we can define market types.

[image error]Market types will influence the whole organizational structure, the funding needed and the strategy adopted to enter or sustain a business in the marketplace.



[image error]Professor Steve Blank helps us with a simpler definition of markets, also more in line with the kind of context often startups have to deal with.

You can read the full guide on the market types below. In the next paragraphs, we’ll see how to tackle each market and what entry strategy you can use.

Read: What Are Market Types? Four Types Of Markets To Build A Business

Existing market: bootstrap and niche down



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In an existing market made of existing customers and potential competitors, a business can already gain a lot of traction and feedback from an existing customer base. The real matter is really understanind how to provide more value.

In those cases, some powerful entry strategies are:

A 2x better solution priced the same than existing alternativesA solution that offers much more value to a subset of the customers of existing alternatives

In short, in an existing well-defined market, while there might be many ways to enter. An effective strategy is to identify a subset of customers (a niche) which you can target and provide the most value.

Thus, it’s possible to start by bootstrapping your business:

[image error]The general concept of Bootstrapping connects to “a self-starting process that is supposed to proceed without external input.” In business, Bootstrapping means financing the growth of the company from the available cash flows produced by a viable business model. Bootstrapping requires the mastery of the key customers driving growth.

Identifying a niche, is a key element to get started with a small set of potential customers able to give you feedback as you grow.

Sometimes whether to start from a niche or microniche is a matter of understanding how competitive and saturated is an existing market.

As a rule of thumb, a market that is extremely saturated will require you to drill it down until you find the smallest customer base to kick off your business.

For instance, if you’re starting today an online bookstore, sure you can start by making it the “everything store” (oops that seems it was already invented two decades ago and it is called “Amazon”) but that might be soon doomed to failure.

Instead, you want to be very specific. Something like, “I’ll start an online bookstore with the most curated books you can find about biographies from entrepreneurs of the 18th century.”

There might be a few thousand people across the world, interested in that. But those few thousand people are ready to become your raving fans and customers.

[image error]A microniche is a subset of potential customers within a niche. In the era of dominating digital super-platforms, identifying a microniche can kick off the strategy of digital businesses to prevent competition against large platforms. As the microniche becomes a niche, then a market, scale becomes an option.

Read: Microniche: The New Standard In The Era Of Dominating Tech Giants

Resegmented market: craft a value proposition based on the key players’ weaknesses



[image error]Identify a gap in the value proposition of existing competitors. What is that those large companies or existing, consolidated players can’t offer which you can instead?

Imagine you enter an industry dominated by other players. For instance, what about starting a search engine today? Or also back in 2008?

That doesn’t sound like a brilliant idea unless you know what your search engine can offer which Google can’t.

That is how DuckDuckGo started in 2008, when Google was already the dominant player in the search industry, together with a few other giants:

[image error]

DuckDuckGo is throwing the user’s data on the fly. Would Google’s business model be sustainable in the first place if it was to throw away the users’ data?

Probably not, and that is what makes DuckDuckGo value proposition clear: “I give you what Google can’t.”

Thus, when entering a resegmented market, where there might be an opportunity at the low-end of this market (DuckDuckGo started in 2008, when privacy concerns were still minor, compared to these days):

Find a gap in the existing value proposition of existing, dominating players (incumbents’ value gap analysis)Offer what they can’t, because it’s against their core business model (an offer they can’t replicate)Look for the smallest set of unhappy customers for those incumbents ready to buy an alternative (minimum viable market)



New market: figure out a commercial use case



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Opening up a new market seems to be the hidden dream of many entrepreneurs. That’s because, for a while, that new market might be extremely profitable, and with low competition (the so-called first-mover advantage).

Yet opening up a new market, not only is a risky move, but if that market holds up, new companies might quickly replicate what you’re doing, thus making your first-mover advantage turn in their favor (Google was a latecomer in search, and so Facebook was a latecomer in social media).

But how do you enter (actually create and define) a new market? In that case, it’s all about finding the commercial use case, which is initially big enough either to develop an initial, potential customer base (made mostly of innovators).

In this case, it makes sense to look for funding, because, potential investors can validate your idea in the first place (if they’re willing to put money it might be the first sign of a potentially worth it commercial application).

Or ask “is there a way for me to test the idea without making it technically complex?”

For instance, let’s say your idea is to start a software company, yet developing that would require hundreds of thousands of dollars.

What if you develop a simple App instead? Costing a tenth of that, developed in a tenth of the time, yet a good starting point to understand whether the idea is commercially viable at that moment (what’s not commercially viable today might be so in the future)?

That would give you the option to expand the project (and its technical requirements) and ask for funding based on a concrete idea backed up by data from potential customers.

Clone market: borrow whole or part of the successful business model

When some business models have proved viable in specific industries, instead of starting from scratch, why not take what exists out there and apply it in a new geographical area?

Similarly, if a business model proved viable in industry, would this work in other industries? For instance, when Uber model proved viable (at least from a scalability standpoint), new applications of the model started to sprout:

[image error]On Product Hunt, there is a curated list of startups applying the Uber model to other industries.



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Another example is how Baidu took advantage of the proven model of Google to dominate in China. Baidu‘s founder in 2000 after gathering financing from an early-stage venture capital firm launched in China. Today Baidu has most of China’s search market share.

Also, when applying and modeling what works you need to add a twist, which is often what makes the business model sustainable. Copycat alone won’t work for long.

Today, and already at the time, Baidu was a company that had its own specificities given the fact the established model for the search was getting developed in the western context.

Read: Baidu Business Model

Key takeaways



Entering a new market requires also a basic understanding of the structure of that market There are several entry strategies we can use, and some of them depend from the market type we’re enteringThere isn’t a definite strategy to enter each market, however, we can draw from some examples in the business world and apply it back to our business

Other handpicked related resources:

Business Strategy: Definition, Examples, And Case StudiesWhat Is a Business Model? 30 Successful Types of Business Models You Need to KnowBlitzscaling Business Model Innovation Canvas In A NutshellWhat Is a Value Proposition? Value Proposition ExplainedWhat Is a Lean Startup Canvas? Lean Startup Canvas ExplainedThe Rise of the Subscription EconomyWhat Is Business Model Innovation And Why It MattersThe Five Key Factors That Lead To Successful Tech StartupsHow To Use A Freemium Business Model To Scale Up Your Business

The post Context-Based Market Entry Strategies For Startups appeared first on FourWeekMBA.

What Are Market Types? Four Types Of Markets To Build A Business

A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.

Why does it matter to understand the market type?



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Understanding the market type will change the way you’ll need to structure the organization, whether or not you’ll need outside funding and how to position your business in the marketplace.

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Market types in classic economics

In classic economics there are four main types of markets:

Monopoly: in a monopoly, there is a single supplier for a product/service thus able to influence market demand. Oligopoly: a few suppliers control the market demand. Perfect competition: where buyers and sellers are present in equal measure. Monopsony: a single buyer influenced the market demand. Think of how in the rocket industry the US government is the primary buyer (even though private contractors recently entered the industry).



Market types in the startup world



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Entrepreneur, and professor Steve Blank usually defines market types according to four main contexts:

Existing market with well-defined companies and customers.Resegmented market dominated by one or a few players.Newmarket where competitors do not exist and it’s very hard to define the customer.Clone market, a market where, due to geographical or cultural barriers, a business model can be cloned and transposed.



Defining your market type

There are many other ways we can categorize the kind of market we are in. But it’s important to start with a simple exercise in mind, to understand the territory in which you’re operating. 

For that matter the market type will determine:

The time to market for our product/service and whether you can test quickly and cheaply.The market readiness to accept our product/service and thus the way you’ll need to structure our organization to market that product. Positioning.

Let’s look at each of those based on the market type.

Time to market: how long will it take to launch?

Market types influence also the time to market because if you’re operating on an existing, defined market, with defined demand and existing players, in most cases the product you’re trying to build might comprise technology, know-how and its components that might be easily available.

In that case, the time to market might be relatively short, thus it’s possible to build a product/service with little financial resources.

And based on it, we can answer the following:

Do we need venture capital or external funding?

In a new market or resegmented market (and in some cases in a clone market) the company you’re trying to build might actually need external funding, be it government funding, venture capital, a product development roadmap within a larger organization or as a joint venture.

The primary reason is it’s very hard to get any feedback from the market, as there are no well-defined customers in the first place.

Think of companies, that as of now are trying to build a viable business in the blockchain forming industry. Those companies, in most cases, will need funding, as the technology and application might be sounding but not ready yet to be marketed.

Can we talk to potential customers?

In the opposite scenario, where there is an existing market with well-defined rules, customers and competitors, and where the product you’re trying to build is not complex, or technologically advanced, you can demo it quickly to potential customers, thus you better bootstrap it.

[image error]The general concept of Bootstrapping connects to “a self-starting process that is supposed to proceed without external input.” In business, Bootstrapping means financing the growth of the company from the available cash flows produced by a viable business model. Bootstrapping requires the mastery of the key customers driving growth.



Experimental process: can we get ahead of feasibility?

Imagine the case the product will be ready in a few years, are we still sure it makes sense to test it in the first place?

The market might change quickly, and what works today might not work in the future. Indeed, timing is extremely important and running tests on products that might be ready in a few years might be a waste.

Does it mean you won’t need testing before launch? You do need to test whether there is at least interest from the market or to figure whether the product you developed is the right commercial use case (among the potential applications it can have).

Indeed, among the greatest failures for new products are lack of interest from potential customers, poor distribution and inability to generate excitement around a potential new product (demand generation).

Therefore, while testing a product before starting the development is great for those products who are not creating new industries in the first place (think of a product that improves 2x compared to existing alternatives).

For those products who are creating whole new industries, it becomes harder to use an experimental process where it’s possible to gather feedback from existing customers (there are no existing customers).

In some of these scenarios, venture capitalists, governments or organizations with massive budgets are betting on the future. For instance, if you take a company like Alphabet, within it has an investment arm, placing bets on how the future might look like.

Whether the market will like it, it’s not an issue. The primary issue is whether it will work; if it will create a new market and how big that might be.

[image error]Google has a diversified business model, primarily making money via its advertising networks that, in 2019, generated over 83% of its revenues, which also comprise YouTube Ads. Other revenue streams include Google Cloud, Hardware, Google Playstore, and YouTube Premium content. In 2019 Google made over $161 billion in total revenues.



Market readiness: are we still talking enterprise?

When building up a valuable business there are several steps to take, depending on the stage your company is at and the complexity of the product and how ready is the market to accept that product.

Some of the questions you want to answer when dealing with market readiness are about the kind of organization structure you need to build a successful company based on the customer type.

In that case, you need to understand whether you’ll need to deal with a large enterprise customer, or you can push the product already as a consumer product.

In short, in a new market, there might be a few key customers, before the market expands and reaches its peak. And as it does you might be able to move from enterprise product to consumer product.

But in between, you will need to understand the market type to structure your organization.

Are we investing in marketing and automation?

In general, if a product can be launched on a large existing market, it can work well as a consumer product. Thus, at the organizational level, it makes more sense to structure the organization around marketing and product development to build a large customer base (consumer product/platform/service).

Do we need salespeople instead?

If in a market there are a few clients, mostly made of complex organizations or large businesses, in that case, you better structure your organization with competent salespeople, able to close deals and product development instead will be about a tailored product, customized to clients’ need (enterprise product/platform/service).

Positioning: broad, niche or microniche?

In most cases, when a new brand is getting built the more it starts from a niche (unless you have massive budgets to burn) the better it will be able to grow organically.

That’s because none knows your company, and before it can scale, it needs an experimental stage, where it can gather feedback from a larger and larger audience.

However, positioning can be also defined by market types. A complex product in a new market will need to be defined by providing as much value as possible to a microniche, or a small set of customers.

A product launching on an existing market, which has well-defined demand, consumers and understanding of the product offered can be also tackled broadly.

The exception to all rules

In late 2019, Elon Musk launched the Cubertruck, which redefines the whole concept of the truck, not only from a functional standpoint but from a cultural standpoint.

If you are Elon Musk you can do that. And in any case, also Tesla is leveraging on existing know-how and distribution.

Thus, also in this exception, there are three key points to account for:

Demand generation: Elon Musk is a celebrity, able to tap on a massive audience, and he’s built a name for launching breakthrough products. Tapping on existing know-how: While Tesla is redefining the concept of what a truck means (this is more cultural than functional), it is also tapping on existing facilities and know-how. In short, it has lower feasibility issues than, say, a company launching such a product from scratch. Tapping on existing distribution: Elon Musk also leverages an existing customer base eager to get hold of the next Tesla cool car.



Key takeaways



Market types tell us the structure of the interactions between a group of consumers and producers, what’s the balance between those and if they are well defined in the first place.Market types can be classified in various ways. In classic economics, we have four types of markets (monopoly, oligopoly, perfect competition, monopsony). In the startup world, we can also redefine them according to the definition of potential customers (new markets, resegmented markets, existing markets, and clone markets). Market types will help us understand what kind of organization we are going to build based on time to market, the type of customer we’ll deal with and whether we’ll need external funding or we can bootstrap the business. Market types will also help in defining the positioning of our brand.

Other business resources:

What Is Business Model InnovationWhat Is a Business ModelWhat Is Business DevelopmentWhat Is Business StrategyWhat is BlitzscalingWhat Is a Value PropositionWhat Is a Lean Startup CanvasWhat Is Market SegmentationWhat Is a Marketing StrategyWhat is Growth Hacking

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A Quick Glance At Zara Business Model

Zara is a brand part of the retail empire Inditex. Zara business model, with over €18 billion in sales in 2018 (comprising Zara Home), and an integrated retail format with quick sales cycles. Zara follows an integrated retail format where customers are free to move from physical to digital experience.

Origin story and business model transformation

Born in a small town in Spain (Villamanín), Amancio started as a delivery boy in A Coruña, a city, and the municipality of Galicia, Spain. 

As a delivery boy, he got the chance to learn the fundamentals of the garment retail business.

And over the years, he learned that by better organizing the manufacturing and delivery of garments, he could sell those materials at a more competitive price.  

He first started to apply this model to its first brand during the mid-70s. 

This retail model would work so well that Amancio would expand all over Spain and internationally. 

As its first brand, Zara, expanded exponentially over the years he consolidated his empire under the umbrella of a holding company, Inditex (it took decades and many failed attempts).

Today Inditex comprises eight core brands, following similar retail formats, of which Zara is the largest and most prominent and Amancio Ortega, its founder, among the wealthiest men on earth.

With €18 billion in revenues in 2018, Zara itself had undergone a process of business model transformation, which started with one thing in mind: giving more options to its customers. 

Indeed, while starting 2012, Zara consolidated its stores under a flagship model, it also invested massively on integrating the experience of its customers to make them seamlessly jump from physical to digital, without any friction.

The flagship retail model consists of consolidating existing physical stores to have a single location in an exclusive area of the city. Therefore, on average, in 2018, Zara expanded its retail space by 50%. 

Instead of locking the experience of customers to those physical stores (where Zara had invested billions), the company, in parallel, invested in technologies that enhanced the digital experience.

In short, if today you go to Zara and with your phone can directly scan products to see their availability and order them online in other Zara locations, this is thanks to a deliberate process of transformation of its retail format. 

Customers are not locked in a single experience but allowed to browse the shop and chose whatever format fits them the most. 

This is the power of business model transformation, and it starts with a single focus: enhanced customer experience!

Zara as one of Inditex retail formats

Inditex among the largest fashion retailers in the world with eight retail formats:

Zara & Zara Home, Pull&Bear,Massimo Dutti, Bershka, Stradivarius, Oysho and Uterqüe

The Zara retail format follows an integrated offline-online store network. The key element that has made Zara’s store successful over the years has been its ability to anticipate and react to customers’ demands.

[image error]Overall Inditex store models which create direct access from consumers with the brands part of the various Inditex retail models. Inditex retail empire has eight key brands that follow a similar retail format, of anticipating or swiftly adapting to customers’ requests, thus making its products appealing to a large customer base. (image source: Inditex Annual Report)



Zara flagship store retail model

Over the last years, Zara has been implementing an integrated retail format leveraging on physical flagship stores, located in exclusive central locations across the world.

As reported on Inditex annual reports, the new flagship store opening, starting in 2018 Zara flagship stores were on average 59% larger than the first wave of stores opened in 2012 (from 1,452 m2 in 2012 to 2,184 m2 in 2018).

Primary drove by new store openings, larger flagship stores and consolidation of smaller stores within a larger flagship store.

RFID technology and Integrated experiences



[image error]An example of the potential customer journey of Zara’s customers, depending on the channel chosen to purchase a product. (image source: Inditex annual report)

RFID stands for “radio-frequency identification” and it is widely used in retail to track the journey of customers across several physical and digital touchpoints between the customer and the brand.

[image error]All the digital channels used by Zara as additional digital touchpoints, working either as independent touchpoint compared to physical stores. Or as touchpoints enhancing the physical experience. For instance, enabling customers to check the availability of products in-store, or to order them online (image source: Inditex annual report)

Starting in 2007, championed by Zara Home and Zara started a process of digitalization to build a stronger relationship with customers to prevent them to be tied to the physical stores.

This process ended with the transition in an integrated store model. To complete this process, Zara had to undergo several initiatives to create a trackable experience from the supply chain to the retail experience.

Some of the services implemented to enrich the customer experience were:

Click&Collect (order online and pick-up in-store), Self-service checkouts,Automated online order pick-up points,Same-Day Delivery for online orders,And Next-Day Delivery.



Key takeaways

The key elements of Zara business model are:

Product expansions and quick sales cycles combined with continuous product variety to anticipate or react to customers’ wants.Integrated shopping experience thanks also to new technologies: from RFID to integrated stock management or additional services to enhance the retail model (Click&Collect service, Self-service checkouts, Automated online order pick-up points, Same-day / Next-day delivery).Upgrading of physical stores gradually transformed into the Flagship store, located in exclusive locations, which were on average 50% larger compared to 2012. The expansion of physical stores has also been coupled with the upgrading of the online sales platforms, thus incentivizing customers to a purchasing experience more congenial to their needs.

In short, Zara quick delivery, fast inventory, seamless customer experience enabling customers to jump to its physical store, but also to shop online helped it further consolidate throughout the last decade of digital transformation.

Related business models

Luxottica Vertically Integrated Business Model In A NutshellNike Business Model: Demand Generation As Weapon For Business GrowthBrunello Cucinelli: The Humanistic Enterprise Business ModelBernard Arnault Empire: LVMH Group Business Model In A NutshellHow Does TOMS Shoes Make Money? The One-For-One Business Model ExplainedFamily-Owned Prada Business ModelTiffany Business Model

Other business resources:

What Is Business Model InnovationWhat Is a Business ModelWhat Is A HeuristicWhat Is Bounded RationalityWhat Is Business DevelopmentWhat Is Business StrategyWhat is BlitzscalingWhat Is a Value PropositionWhat Is a Lean Startup CanvasWhat Is Market SegmentationWhat Is a Marketing StrategyWhat is Growth Hacking

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Strategy Vs. Execution: Is It The End Of Strategy?

I still remember that day. I was sitting in class, during my MBA, diving into an HBR case study.

We had 30 minutes to read and process it and understand what the best solution for the Barilla case study was.

The case (for what I recall now) was based on an issue Barilla (one of the largest Italian pasta manufacturers) was facing during the 1990s, caused by a huge demand fluctuation (what in supply chain management is called “bullwhip effect”).

In short, as you move up in the supply chain, it becomes harder and harder to predict the volume of demand. 

Therefore, Barilla was trying to solve this issue, which caused considerable inefficiencies to its manufacturing capacity. 

Several things make this happen, from asymmetric information throughout the supply chain to behavioral factors (such as incentives or disincentives within and outside the organization). 

I’m not going to give you the solution here (I don’t want to kill the fun), but let’s say that it’s all about strategy!

Strategy in a vacuum

When I used to develop my business understanding through those “real world” cases, I felt I had learned universal strategic laws applicable to the business world. 

This illusion stayed with me for a few years after business school; until I found myself trying to build a real business from scratch.

What I figured later was to forget most of the things I had learned. 

Strategy, I learned it is something that gets developed after the fact (in most cases).

In short, in the real business world, you make hypotheses, you test them, they do not work, most of the time, and you go back and reconsider. 

Therefore, a good strategic tool isn’t one that allows us to theorize much, but instead, it’s a tool that makes us test a lot. 

As I’ve helped grow a startup from scratch and I’ve grown my own business from scratch in the last years, I noticed how those ideas that seem trivial (you give for granted they’ll work because they make sense) in reality won’t work at all!

You go back, tweak, re-test, it won’t work, try again, and after a continuous, painful (it becomes fun only when it starts to work) process things start to finally work. 

Only at hindsight

That is when we go back and say “my strategy is working.”

But really, what does that mean? 

After all, you got a process, a set of ideas that will turn out to be only in a very small percentage successful.

And only fewer of those successful ideas will really make a difference, until that one idea might be wildly successful, to pay off for all the others that just didn’t work!

So what’s strategy? 

The way I learned to see it, strategy is the choice you make as a business person about the kind of business that you want to build in the long-term. This long-term vision is especially defined via negativa (the way you absolutely do not want your business to look like in a few years). 

The rest is a set of tactics and short-term experiments that require tenacity, speed and the willingness to bet against your own initial ideas that made so much sense, that indeed didn’t work at all!

Belo some frameworks for quick experimentation:

Business model canvasBlitzscaling canvasPretotypingValue innovation and blue ocean strategyGrowth hacking processPirate metricsEngines of growthRTVN modelSales cycleComparable analysisPorter’s five forcesAida modelPESTEL analysisTechnology adoption curveBusiness model essenceFourWeekMBA business model frameworkTAM, SAM, and SOMBrand BuildingValue Proposition DesignProduct-Market FitFreemium Decision Model Organizational Design And StructuresSpeed-Reversibility MatrixMinimum Viable ProductSWOT AnalysisRevenue ModelingBusiness ExperimentationBusiness Analysis

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Business Principles At Times Of Coronavirus

Quarantined in a country that has been locked entirely (I’m based in Italy), it’s interesting to notice a few things.

To give you a bit of context, the official spread of the virus in Italy started a couple of weeks back, when an entire local community in northern Italy was found positive to Coronavirus.

I was expecting this moment to happen. 

Each day I stocked the groceries and food that would keep my family and me for a month. 

I got psychologically prepared for it as I knew it was coming. I didn’t panic because I was prepared. 

I also gathered the books I wanted to read and organized to work remotely. 

At this moment it’s interesting to notice a few trends here in Italy. Some of them are related to forced digitalization. Italian schools that have been using a traditional model developed at the beginning of the 20th century had to adapt to this new normal swiftly.

And how, while some industries (travel, and physical leisure) are struck, some other industries might actually benefit from this crisis (all the digital businesses related to entertainment, education, and remote working). 

Beyond those trends, I want to emphasize here a few principles that, given the urgency, I had to internalize quickly to prepare myself for this crisis and go through it at best.

Life and business principles from a highly uncertain world

This is a moment where being a hero as an individual means avoid any contact, isolate yourself physically, and wait. Indeed, as a person, you might also be the host of the virus, thus helping it spread further. 

In short, this crisis is emphasizing the value of inaction. 

Some of the lessons I’ve learned so far during this period will be with me for my entire life, and I want to summarize them below: 

Interaction vs. action: think dynamically

In an hyper-connected world, many still think in terms of actions.

But actions are just the first order of a chain of events. Instead, you want to shift your mindset toward interactions.

In short, when you take action, are those actions triggering a set of interactions? If so, what might be the consequence of those interactions? Think dynamically, not statically!

In the virus case, when you get out of your home, if you are a potential host, a single action (going out) might represent a chain of interactions (all the people you meet, and the people that in turn, they will meet) with potentially negative consequences for the collective.

Thus, to prevent this from happening, the most effective strategy is isolation.

This is an example of a single action that might trigger a series of interactions with negative consequences.

In business, though, also the opposite is exact. What are those single actions that can trigger a positive chain of interactions? 

A bit sooner is much much better than a bit later

The fact that I anticipated the moment where we would all be locked in, I also prepared for it slightly before anyone else.

This precaution made me shop, for instance, when none was doing it. Thus when everyone else panicked, I could stay home, ready for what was coming next.

I didn’t act way before than the rest, I just slightly anticipated what moment moving somewhat sooner than the mass was and it was a huge, exponential advantage.

When crises are coming, there is a tipping point, where it seems everyone gets worried at the same time. Anticipating that moment slightly, it will give you a massive advantage.

On the opposite side, being just a bit late in anticipating a crisis will put you in a much much worse situation, where you’ll find yourself stuck panicking with anyone else.

Therefore, there is a point in which things get worse so rapidly that any further delay in action will be much much worse, like a negative spiral that strengthens.

But how do you anticipate a crisis in the first place? This leads us to the next critical point.

Precaution is the ultimate form of intelligence

When uncertain times are coming, you can try to be smart in two ways: one is to predict exactly what’s coming, the other is just apply the precautionary principle.

The former requires you maximum precision in understanding what’s happening and anticipating it. Therefore, a small mistake in forecasting will mean a huge drawback as you will take proportional action based on the foreseen risk.

The latter instead is way more effective. You don’t need numbers, statistics, or knowing in which measure will the risk materialize.

All you have to do is to prepare as the worst possible scenario was coming. Of course, you might be wrong as well, as things might be even worse than you thought, but thinking in those terms will already put you ahead of anyone else, thus reducing drastically the chances of being hit.

In short, precaution itself is the most extreme form o intelligence in uncertain circumstances.

And the interesting thing is you don’t need to know what’s coming or being able to exactly anticipate, you only need to be extremely conservative, even though that might seem paranoid or irrational. 

Value of inaction as an organic growth strategy

As business people, we value action as the basis for our success. These uncertain scenarios though teach us that we need to learn how inaction can benefit us. 

In this crisis, isolation and patience are the most important virtues. But this also connects to business. When growing a company we’d like to see it grow steadily and linearly, which makes us optimize for growth.

While this process might smooth our revenues over time, it might also make our business riskier when hard times come. In this, inaction means to let your business also grow organically, aware of the fact that there is no particular action you can take in the short term to smooth this process. 

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Financial Structure Modeling And Analysis In A Nutshell

In corporate finance, the financial structure is how corporations finance their assets (usually either through debt or equity). For the sake of reverse engineering businesses, we want to look at three critical elements to determine the model used to sustain its assets: cost structure, profitability, and cash flow generation.

How companies think

Understanding the financial structure of an organization can also inform a lot about the collective incentives which push the company to “behave” in a certain way. 

In short, an organization is a scaled entity; it doesn’t “think” as an individual. Instead, it follows simple dynamics driven by specific incentives.

To understand those incentives, my argument is to look at three key elements:

Cost structure, Profitability, And cash flows.

In short, from the way an organization “decides” at a collective level how to spend money to finance its long term assets, what part of the business drives profitability, and how it generates cash to sustain its operations, you can get its logic in the marketplace. 

Let’s look at each of them to understand how they can help us understand any organization.

Cost structure



[image error]The cost structure is one of the building blocks of a business model. It represents how companies spend most of their resources to keep generating demand for their products and services. The cost structure together with revenue streams, help assess the operational scalability of an organization.

The cost structure informs the way a company decides to spend its money, and how those financial resources are used to sustain its core asset.

For instance, when it comes to Google, a good chunk of ongoing expenses are spent to keep its search platform running.

[image error]The traffic acquisition cost represents the expenses incurred by an internet company, like Google, to gain qualified traffic on its pages for monetization. Over the years Google has been able to reduce its traffic acquisition costs and in any case to keep it stable. In 2017 Google spent 22.7% of its total advertising revenues (over $21 billion) to guarantee its traffic on several desktop and mobile devices across the web.  

Looking at the cost structure doesn’t mean only to look at what’s generating revenues right now. It’s also important to look at those costs that help a company renew its business model.

For instance, Google’s Alphabet spends substantial resources to keep its other bets running

In short, we want to have use a counterbalanced approach:

Look at the costs that are financing the core assets that fuel the current business model.Look at the costs that are financing future core assets that will trigger a new business model.



Profitability



[image error]Netflix is a profitable company. It generated over $1.2 billion in 2018, a 116% increase compared to 2017, primarily driven by substantial growth in paid memberships. However, Netflix has negative cash flows as it invests massively on content license agreements and original content.

Profitability is the ability of a company to generate more income than it spends. As simple as that. For instance, in the graph above you can appreciate how Netflix is a profitable company, its income far exceeds its expenses (we’ll see in the next paragraph why we need to counterbalance profitability with cash generation).

Profitability informs where a company generates most of its income. Usually, the higher margin part of the business is also the most interesting. For instance, Google generates most of its money from its ad network. While its network members’ side is way less profitable.

[image error]Google has a diversified business model, primarily making money via its advertising networks that, in 2019, generated over 83% of its revenues, which also comprise YouTube Ads. Other revenue streams include Google Cloud, Hardware, Google Playstore, and YouTube Premium content. In 2019 Google made over $161 billion in total revenues.

Google tough has to keep its less profitable side of the business because it works as an amplifier for its core profit generation center. Therefore, profitability needs to be assessed from several perspectives:

Usually, the higher-margin side will be also the most important. Think of how Google ad network is also the core cash machine. Other with lower margin sides might be used to push the core asset of the organization.

There are a few exceptions to this rule. One example is Amazon, in that case, to really understand the company you need to look at a third element: cash flow generation.

Cash flow generation




[image error]Free cash flow is the cash a company generates through its operations, once you take off the non-cash expenses, changes in working capital and capital expenditures. Thus this is the cash “free” to distribution that a company can potentially invest back into the growth of the business.



[image error]Amazon is a profitable company. Its operating income and net income passed $12.4 billion and $10 billion respectively in 2018. The operating income was driven primarily by Amazon AWS, contributing $7.29 billion. Amazon has been consistently profitable since 2015 when it posted 596 million in profits.

When you look at the core business model of Amazon (e-commerce platform) you can appreciate how it runs at very tight profit margins.

As of 2019 Amazon has much wider overall profit margins but this is primarily thanks to Amazon AWS, Amazon Prime and other services that run at a higher marginality.

Instead, while Amazon‘s core e-commerce platform ran at tight margins over the years, in reality, it generated a substantial amount of cash flows, which made it possible to fuel and finance the growth of the business.

[image error]

Therefore, looking at cash flows help us have a more balanced view of the overall business.

As an opposite example, Netflix running at wider profit margins, it also runs negative cash flows, due to its operating model, where the company anticipates cash to produce shows which will be available on the platform to sustain it subscription revenue model, and it will be repaid over the years.

Key takeaways



The cost structure can help us understand how companies spend money to keep fueling the growth of their core assets. At the same time, it’s important also to look at those costs who are not generating revenue but might help a company build the next core asset.Profitability helps assess what part of the business generates more income, thus it’s also the most important piece of the business. In some cases, organizations keep less profitable units, if those help fuel the core part of the business. Profitability needs to be balanced with the cash flow generation. Indeed, a company like Amazon generates tight margins on its e-commerce platform, but that is balanced by the fact, the same business unit also generates abundant cash to finance the aggressive growth of the business.

By looking at those three aspects it is possible to understand the financial model of any organization.

Other business resources:

What Is Business Model InnovationWhat Is a Business ModelWhat Is A HeuristicWhat Is Bounded RationalityWhat Is Business DevelopmentWhat Is Business StrategyWhat is BlitzscalingWhat Is a Value PropositionWhat Is a Lean Startup CanvasWhat Is Market SegmentationWhat Is a Marketing StrategyWhat is Growth Hacking

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What Is The Customer Value Chain And Why It Matters

In the book Unlocking The Customer Value Chain, professor Thales Teixeira explains it as a framework of all the steps or activities that customers have to go through to acquire products and services. The customer value chain then helps to map the journey of our customers from their viewpoint.

Why the customer value chain matters

There used to be a time when the value chain was primarily intended as “the process or activities by which a company adds value to an article, including production, marketing, and the provision of after-sales service.” (source: Google)

While this is still a valid definition, if we change perspective and we look at it from the customer viewpoint, the value chain is “a conceptual idea that explains in a framework all of these steps or activities that customers have to go through in order to acquire products and services.” (Thales Teixeira in the FourWeekMBA interview)

This is one of the most valuable concepts to internalize if you’re launching or running a business in a market controlled by large tech players.

If they disrupted old players, there is always a step of the value chain that you can unlock. 

Customer-centrism as a market force



[image error]Customer obsession goes beyond quantitative and qualitative data about customers, and it moves around customers’ feedback to gather valuable insights. Those insights start by the entrepreneur’s wandering process, driven by hunch, gut, intuition, curiosity, and a builder mindset. The product discovery moves around a building, reworking, experimenting, and iterating loop.

The penetration and maturity of the web favored those companies who could tap into customers’ wants and needs, to also to understand better than anyone else the products they wanted.

This focus on customers enabled companies to build competitive advantages by building valuable business models.

Where in the previous era, companies could gain a competitive advantage by optimizing business processes. In the new era, those companies that built value for customers could gain a lasting advantage.

From vertical integration to unbundling



[image error]Unbundling is a business process where a series of products or blocks inside a value chain are broken down to provide better value by removing the parts of the value chain that are less valuable to consumers and keep those that in a period in time consumers value the most.

A classic way for companies to build a lasting advantage in the previous era was the optimization of the supply chain and the integration of each step of it to produce products at a lower cost.

Until new players, primarily born in the web era (like Amazon) learned to break the value chain of dominating companies to build a whole new business model.

Key takeaways

Some key elements to take into account are:

A business model is about delivering value and capturing a portion of that value in the form of revenues and profits and figuring out who this value‘s captured from is very important.The customer value chain is a conceptual idea that explains in a framework all of these steps or activities that customers have to go through in order to acquire products and services.The web-shaped the business world with three waves: unbundling (breaking the product), disintermediation (breaking the supply chain), and decoupling (breaking the customers’ value chain).

Suggested resources:

What Is Business Model Innovation And Why It MattersWhat Is a Business Model? 30 Successful Types of Business Models You Need to KnowThe Complete Guide To Business DevelopmentBusiness Strategy: Definition, Examples, And Case StudiesBlitzscaling Business Model Innovation Canvas In A NutshellWhat Is Market Segmentation? the Ultimate Guide to Market Segmentation

Read next: 

Discussing Business Model Innovation With Felix Hofmann [Interview]Lessons On Running Lean With Ash Maurya [Interview]Pretotyping: How To Find The Right Idea To Avoid Business Failure With Alberto Savoia [Interview]Innovation Strategy Lessons With Greg Satell [Interview]

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