Table of Contents
Business Model Testing Cycle
BM CONCEPT – [Identify] – ASSUMPTION – [Build] – HYPOTHESIS – [Choose] – TEST FORMAT – [Develop] – TEST SETUP – [Execute] – TEST – [Analyze] – TEST RESULTS
The solution to avoid wasting time, money, resources, and energy is to carry out the testing of the business and guarantee feedback from customers, partners, users, and any other stakeholders involved.
How to Test Business Model in 7 Steps
Develop a Business Model Concept
Asking: [Who is your target customer?] [What are their needs?] [What value do you want to offer them?] [How are you going to deliver this value?] [Why will your business be profitable?]
Identify the Underlying Assumptions
It is important that you are able to separate what is actually real about your business. Organizing assumptions in order of priority, that is, according to which ones can have the greatest impact on your business. The impact and importance should be tested and validated first.
Build Falsifiable Hypotheses
Build specific hypotheses to falsify variable assumptions, which can be assessed together with a pre-established audience. The more specific the hypothesis, the easier it is to verify the results, confirming it or not.
Choose a Test Format
It is important to discuss the possibilities with your team, so you can find the best alternative, together, avoiding waste of time and money.
Develop the Test Setup
Recruit the right people, Create a test plan with deadlines, Design the tools for the test, Decide who will be responsible for the execution, Execute the test, Collect feedback
Execute the Test
Do it according to plan and pre-pared deadlines, don’t worry if something doesn’t go exactly as you imagined. Understanding that the test serves precisely so you have enough time to adapt to the change, take the time to change and repeat the tests if necessary.
Analyze Test Results and Update BMC
Analyze the results and feedback, you will compare the results with the previous hypotheses, in order to decide which can be verified and which have to be falsified. Then update and restart the cycle.
How to Build a Hypothesis
Identify Assumptions
Separate fact from assumption, the data/info you include for sure and real, may turn out to be only an assumption in the end. The more people who participate in the conceptualization, the greater the chance that you will identify what are only possibilities and not facts.
Prioritize Assumptions
It is imperative to organize all the hypotheses, noting which ones are most critical. Start to test the easier assumptions but with high impact, and then to the assumptions not interfere much.
Build Hypothesis
Choose the 1st assumption in order of importance – Define the customer segment with whom the assumption needs to be tried – Determine a metric for the hypothesis
The Iterative Testing Process
It is a cycle, that starts by prototyping your ideas – develop hypothesis – verified or falsified. You will know which tests are going to be run in order to begin the learning loop: Build (Prototyping) – Measure (Results) – Learn (testing). With results/feedback, restart by building a new prototype.
4 Common Tests
Interview Your Customer
Perform 15-20 interviews, Interview in pairs ‘one person makes questions and listens and the other takes notes’, Review the QA after each interview, to adapt the questions accordingly each time, Don’t ask What people want, learn what they need, Don’t make interpretations right away and write down the answers and analyze later, After running the interviews, observe the patterns revealed
Test Your Value Proposition
Develop your value proposition canvas, Invest money on ads/other channels to reach your target audience, Interview them when you identify your early adopters, Test multiple ads to verify which one works out better, Compare results with hypothesis to make a better decision
Create a Prototype
Build MVP (minimum viable product), Check how people interact with the product/service presented, Collect data/info on the interactions, Observe the behavior patterns, Do Not offer more than you can deliver or you won’t be able to collect evidence
Learn from Every Step
Conduct interviews over any experiment, Write down as many insights as possible, Create an MVP to test your hypotheses, Take advantage of the customers you reach through any channel, Always track data in order to verify or refute the hypothesis, Things that haven’t worked also important
How to Reduce Risk/Uncertainty
Three major risks: [Desirability: do my customer want this product/service?] [Feasibility: can the product/service be built and implemented?] [Viability: Will this product/service make more money than the costs involved?]
Tools to Test Risks/Uncertainty: [Desirability: test the assumptions around customer’s problems, the value proposition developed, and the retention strategy for maintenance] [Viability: test all financial aspects of the solution and production, including revenue streams, pricing strategy, and the whole cost structure involved] [Feasibility: experiment with different resources and techs available, as well as key activities and partners, to improve the chances of a sustainable business]
Tools for Business Model Testing
Testing Cards
There are 22 cards with tests that can be carried out in order to validate every aspect of your business model. One side shows the test format and an example, and the other side is a ‘how-to’ guide, to help you out with implementation.
- Problem-Solution Interview: collects info on the pains, wishes, and needs of potential customers. Provide a solution at the end of the interview, and check feedback.
- Toy Prototype: presents a solution in a simple way, to test usability and identify possible problems
- Picnic in the Graveyard: tests what went wrong in past versions, to avoid the same mistakes
- Contextual Inquiry: make customers discover unidentified needs/problems that they did not even know, this could be found in a regular interview
- Survey: offer quantitative data by asking some free-form/close-ended questions
- Letter of Intent: a document that states the features of your solution and a request for a promise to purchase in the future, in order to test the commitment of your customers
- Blog/Post: use online platforms/SNS to gather feedback from potential customers
- Flyer: written content of your product/service and tests the appeal of the offerings
- Event: users interact with solution creators and test it in their early stages, it is useful to get face-to-face feedback
- Online Ads: a quick and cheap way to test the appeal of value proposition, by selecting the target audience
- Piecemeal: a demo built with bits/pieces from different sources, just to test appeal without creating a whole new solution from scratch
- Prototype: an early form of a product to test some particular features before it is fully developed
- Landing Page: a simple version of a website just to present the solution online, with an attractive CTA, where the users register to receive further information
- Explainer Video: explains the customer journey visually and tests the potential for viral scaling
- Pre-Order: buyers commit to acquire the product/service as soon as it is ready, through your own website or some crowdfunding platform
- Wizard of Oz: tests the interest in a solution before making large investments, the customers perceive the service as automated, but it is being manually executed
- Concierge Test: the audience knows they are receiving a manual service, simply to offer feedback on the solution. Only used for a small group of potential customers
- Pop-Up Store: physical and temporary point of sales to test the attractiveness of an idea before launching it on the market
- Price Calculator: establish a price based on parameters ‘usage time, numbers of users, features, or quality’ to help test the interest in a solution as well as its pricing model
- Conjoint Analysis: presents different offers to customers who must decide which offer they prefer
- Price Sensitivity Meter: ask customers which price is considered to be a bargain, getting expensive, too expensive, or too cheap. It helps define the final price
- A/B Testing: compare different versions of the same solutions to test which one works best
Testing Table
It is divided into two sections: 1 for you to develop the hypotheses, and 2 for the business model to test itself. 1st part of hypotheses: you can include the assumptions, the target group for which this assumption is intended who will be tested, and the metrics necessary for validation. 2nd part of the experiments, you will complete all the necessary info for monitoring the testing.
Hypotheses: [Assumption: the most critical assumptions here] [Target Group: define user group that you will test your hypotheses with] [Metrics: specify the minimum baseline for your test to be successful]
Experiment: [Test: use the testing cards to choose the best test case to validate your hypothesis] [Recruiting: specify the size of the test group and how you want to reach out to them] [Deadline: specify when you plan to execute the test] [Responsibility: allocate a person responsible for execution the test]
Discovery Plan
It is imperative that you put together a detailed BM testing plan so you can monitor the schedule and the resources spent. Having the estimated amount of time/resources is the way to make things happen smoothly. It is essential to document the results, by deciding what you are going to do each week until you finish your experiment.
The execution must be followed according to what you inserted in your Discovery Plan. Sometimes, things can go differently than expected. In that case, you will review your progress and make some changes if necessary.
The most important part of business model testing is GETTING FEEDBACK. Any experiment without feedback is meaningless.
Progress Board
It is important for you to monitor and register the whole progress of your business model testing – and the best tool for that is the Progress Board. You can use it to compare with your Discovery Plan to check if everything goes as planned.
The progress board includes all the key assumptions that need to be true for your idea to work out. They must be organized according to their priorities regarding your business, the most critical ones first.
Then insert the test that will be planned, designed, or built, as well as which ones are in execution and collecting data. Analyze all the info/data collected and the feedback received. If needed, you will iterate or pivot your idea, after this, design new tests to validate the new hypothesis.
Access the Quality of Business Model
A good idea is no guarantee of success. For a business to prosper, a lot of planning and monitoring of all actions is necessary before/during/after the implementation of the enterprise.
Ask the following questions for yourself: [What tool/method can I use to evaluate if this model is the right choice?] [What tool/method can I use to analyze and monitor my business on a regular basis?] [What plan do I need to follow to ensure continuous improvement in my business?] [Which tools and metrics must I apply to assess my business?].
Assessing business on a periodic basis will increase the chances of having a successful business model, due to the capability of: [Learning strengths and weaknesses] [Evaluating the team’s performance] [Defining the smart goals] [Delegating decision-making to the right people in the team] [Sustaining market share] [Increasing their cash flow].
You must analyze your business model regularly, to ensure that it is still aligned to market forces. It may lead to small adjustments or even some great alterations. The applicable tools must be adaptable to a variety of different business models for them to prove useful. The following techniques/tools can be applied in order to assess your business model’s quality.
Business Model Canvas & SWOT
A good method of evaluating your business is to evaluate your business model using the SWOT tool.
At first, the SWOT matrix must be used to evaluate the entire BMC as a whole. Then, as a way of double evaluating, one can proceed to the application of SWOT for each of the nine blocks of the Canvas. It results in a more detailed questioning and evaluation of the concepts involved in your business model, in order to avoid unnecessary investments of time or resources.
Evaluation Criteria
The business model is used to describe a company’s unique value proposition [business concept], how the firm uses its sustainable competitive advantage to perform better than its rivals over time [strategy], and whether, as well as how the firm can make money now and in the future [revenue model].
Special Competencies to be evaluated: [the essential measure for evaluating your business model lies in your competitive advantage] [great importance to assess partner’s network due to their power of developing strategic alliances/trade associates/a group of suppliers] [Revelance of customer segments and value proposition are the key to business, knowing who you are selling to and what indeed represents value for them] [Assess the processes that keep the company running, such as internal rules and supply chain management] [Total amount of costs involved, from the conception of the idea to the hands of the end consumer] [Marketing strategy, with plans, priorities, revenue and pricing strategy]
The Nice Framework
There are 4 Criteria to analyze business models, they can be used for e-business and brick-and-mortar.
Novelty: measures the company’s ability, always bringing something new or innovative, in order to make the consumer public perceive a new value proposal within the industry or market.
Lock-in: known as switching costs, it refers to the company’s power to maintain customer loyalty and business partnerships.
Complementarities: this has to do with the company’s ability to build complementary product lines, which make customers want to purchase new products in order to add value to their original purchase.
Efficiency: the ability to be financially efficient, in the sense that the more numerous the transactions carried out, the less the individual cost involved in each one.
4 Performance Indicators to Evaluate Business Model
Efficiency
The ability to deliver the value proposition to the right customer segments.
Uniqueness
Show how novel, innovative, and distinct is the company’s proposal.
Fit
All the 9 blocks are tied up into each other, in a smooth and coordinated way.
Profit Boosters
It refers to HOW and HOW MANY ‘profit boosters’ the business is able to employ in order to increase its returns past the industry average.
6 Questions about the Business Model
- How much do switching costs prevent your customers from churning? It is all about how much money/time/effort is required for a customer to exchange a particular product, service, or brand for a similar competitor. The higher the costs, the less chance of churning.
- How scalable is your business model? It depends on a company’s ability to expand its business model without having to significantly increase its cost structure. In general, the most scalable businesses are digital, based on software/web, as the costs involved do not change much.
- Does your business model produce recurring revenues? It is the revenue that your company receives regularly, and commonly seen with software and services that use a subscription system so that the consumer remains with access to the product or service received.
- Do you earn before you spend? It refers to how much your company plans to receive before spending on production.
- How much do you get others to do the work? It assesses how much the business benefits from other people’s production, which is common on multisided platforms.
- Does your business model provide built-in protection from competition? If you can develop products, services/resources that are practically impossible to repeat, whether it is patent or tech issues, you are adding value to your offer, which your customer will not find in another brand, and that also prevents churning.