Corporate innovation teams are problem-solvers, but often we only solve half the problem. Why build the thing without validating someone will pay for the thing? Here are 5 business model validation tricks, borrowed from startups, that work equally well for scaled enterprises.
THE OLDEN DAYS: A FREE POC
There’s no free lunch, so why should there be a free proof-of-concept (POC)?
Many corporate innovators routinely conduct a POC with a target customer independent of any financial relationship. It’s called a technical POC. If all goes well, they find out that, Yes, it works! … and then hand it off to the marketing team to explore the question of How will it make money for the enterprise?
But we’re in the Business Value Era. The best technology doesn’t win. Good technology with the best business model does.
And the path to validating the business model runs parallel to the technical development, not after it. This is a defining element of lean innovation:
Don’t build anything that a hungry customer isn’t asking you to build, and willing to pay for.
Startups know this, because their investors won’t tolerate a one-dimensional POC. The point of any market test is to validate the assumptions that will make-or-break the venture — whether those assumptions are about (1) user desirability, (2) technical feasibility, or (3) economic viability.
Collectively, these three elements comprise the business model. All three elements have to be good or great for the venture to succeed. Validating the business model holistically, instead of in silos, is the right call, even if it’s sometimes hard to do.
THE NEW WORLD: EARLY BUSINESS MODEL VALIDATION
Pundits say we’re in the fourth industrial revolution, or Industry 4.0. This era of interconnected systems has spawned a diversity of business models with fanciful names: SaaS, freemium, plug-and-play, marketplace.
As these new models have become viable, so have new methods to validate them. Business model validation has gone from art to science in the past decade, thanks to the example set by scrappy upstarts. Befitting their upstart status, these approaches are rough-and-ready, not polished-and-precise.
Here are five business model validation methods startups use that corporate business-builders should know. In each case, the goal isn’t to prove your business model, but to improve it.
1. Pitch Deck Test
The Pitch Deck shares your new concept with target customers in a face-to-face meeting — like a combination explainer and sales pitch. However, it purposefully leaves room for the prospect to validate (or invalidate) key assumptions.
That’s right: you don’t put your best foot forward. First off, you should pitch your concept before you’ve built it — but don’t say that. You’re from Big Co, they know you can build it. Second, you make the pitch a little incomplete. These strategically-placed ambiguities leave room for the prospect to fill in what they would want or expect, and spark questions and insights.
Jenn Hyman, founder of Rent the Runway, famously pitched her idea very early to Diane von Furstenberg. Ms. Furstenberg’s response led to the critical pivot in her business model (as shared in this episode of How I Built This). The Pitch Deck is startup jujitsu, where it seems you have come to answer their questions, but in fact they are answering yours.
2. Revenue Model Visualization
This method shares your revenue model hypothesis in a low-fidelity visual. It invites collaboration and helps partners and customers think aloud about what else is possible. Here’s a simple Revenue Model Visualization. It invites the prospect to use post-it notes to suggest the relative value of different savings categories.
Think this is too simplistic? We used it to validate demand for a fleet telematics solution that became a nearly $200M business by the end of Year 3. And what we learned from this test materially changed the revenue model.
3. Benefits Calculator
This method imagines we are making a sales call to a target early adopter. We ask them about the transaction volumes for their business process. Then, we plug the figures into our Benefits Calculator and say, “Then this is how much you’ll save.” Here is an example benefits calculator for the same fleet telematics offering.
If the prospect challenges what you’re promising, this is a chance to share the features and see if they resonate. If they suggest the savings could be even higher (as happened once for us), this is a clue that you’ve underestimated the potential value. This is the essence of demand validation.
4. Soft Auction
This is another startup jujitsu trick. Many ventures feel small and needy in their early days. The Soft Auction is a way to turn the tables and cause large, hypercompetitive B2B prospects (or partners) to compete for your attention. Just pick the top two or three prospects, and announce that you have created a breakthrough solution and intend to partner with one of them. Set a definitive timeframe to pick your partner, and this will force their decision to either play ball or sit on the sidelines.
Either way, you will learn about the beliefs of these key market participants. And once again, you don’t need to build your solution before you run a Soft Auction. This validation technique can work Big-to-Small (as we did for a smoking cessation solution) or Small-to-Big (for a supply chain SaaS concept). They bid, you win.
5. Reverse Income Statement
Steven Covey famously advised to “Start with the end in mind.” The reverse income statement is a variant of that. It starts with the middle in mind, typically the business you’d like to see in 3-4 years. Set a threshold for the topline and profit level you’d like to reach in Year 4, for example.
Then, using an income statement format, work backwards to see what would have to be true. How many customers would you need to have in Year 1, 2 and 3? Is that remotely realistic? What level of churn? You can evaluate each variable to see if it’s realistic.
We applied this logic to a connected mailbox concept for e-commerce packages. The Reverse Income Statement helped us see that homeowners would need to pay a $400-ish purchase price and $18 per month subscription for a connected appliance they might use 3-4 times per month. The closest analogs were their microwave oven ($250 purchase price) and their cable subscription ($65 per month). Both of those solutions provide daily value, not once per week. This helped pivot the concept toward a more viable application, commercial access control and security.
These five tricks are old hat to startups, but perhaps fresh thinking in some corporate environments. Ultimately, whether you’re a startup or a scaled enterprise, someone should ask you, “What did you do with the money?”
Here’s hoping you can respond, “I did the honorable thing. I tested the elements with the highest uncertainty, I learned, I pivoted, and that’s how we won.”
Because that’s how any venture wins.