Continuing a series of publications on product management, today we will talk about a business plan and a business model.
Business planning is often seen as the job of accountants and financiers, but in practice these tasks are directly related to the activities of the product manager, and of course, the founder of the startup. Why you can’t do without it, what does the dot-com boom have to do with it, and how you can draw up a simplified and easy-to-use business plan, read under the cut.
Course table of contents
1. The Role of the Product Manager and the Framework
2. Market segmentation and competitive analysis
3. Custom personas
4. Testing hypotheses
5. Product positioning
6. Product roadmap
7. Drawing up requirements for development
8. Business Model and Business Plan <- You are here
– To be continued
When it comes to business, it is very important to distinguish between reality and idea. Innovation makes you unique, but without an economic foundation, a company cannot count on prosperity. This is probably why 80% of products fail in the market. To prevent this from happening, you need to assess how viable the idea is and decide whether it is worth spending money and time, investing resources in its development. I do not want to say that you need to give up your ideas, but by critically assessing the prospects, you can adjust the future product, make it more successful.
For better or worse, when it comes to software development, idea often prevails over money. People are just interested in doing something, and that’s not bad. You can generally work on an open source product, for example, if you have another source of income. But when it comes to business, you need to evaluate all aspects of the project implementation, conduct P & L-analysis (Profits & Loss). Counting money is, of course, the business of accountants and financiers. But the analysis carried out also helps to understand how the product should be developed and in what form it will really be in demand on the market.
So is he needed? Or not?
“Why do we need a business plan?” – this question is asked by many startup founders. After all, at the first stage, it seems that everything is already transparent, and no one needs a formal document. The same is often done in large companies, making the decision “Let’s just launch the product, see how it takes off.”
In this situation, a business plan is often prepared for some external person, for example, for banks or investors. In other words, an unsubscribe document is created, which is done because someone requires it. It turns out to be a chicken and egg problem. A business plan looks stupid because no one needs it, and no one wants to make a business plan because for many it looks stupid.
But there is another big problem: who can be convinced by your business plan if it does not convince you? A viable business plan must prove that your time, your money, and your efforts are being spent effectively. And if you are not sure about your business plan, there are questions and doubts about it, for example, if economic parameters do not converge, it is worth taking a step back to clarify your ideas and plans. This is the only way to find the “path to the heart” of the investor, as well as to see in advance the pitfalls that you can run into in the process of implementing your idea.
What does a business plan consist of?
So, a business plan is still needed. But how do you compose it? The classic business plan formula contains the following elements:
Mission statement – Your vision of how your product can improve the world and change society
Business description – Description of the business, disclosure of its essence. In this part, you explain why the product is the backbone of your business.
Business environment analysis – Analysis of what promotes or hinders the development of your product in the environment where you are going to sell it.
Industry background analysis – Analysis of the needs of the industry in which you are positioning your product
Product SWOT analysis – Strengths and weaknesses, real opportunities and threats for your product
Market segments analysis —- Market analysis and market segmentation to help you find a niche that is ideal for your product. We talked about it here
Competitor analysis – Analysis of the competitive environment, which we have already talked about here. And I also talked about this in a separate webinar)
Financial plan – Your financial expectations, which we will talk about in the next post
Go-To-Market plan – Your go-to-market strategy. We will also touch on this topic during the course.
Operations plan (actions list) – A specific list of actions that need to be taken in order for your product to gradually develop and evolve
Roadmap, milestones and achievements – The roadmap we have already talked about. This part helps to shape the pace and stages of product development.
Boring? This is exactly what budding entrepreneurs or product managers think: “Rather than writing all this horror for dozens of pages, we’d better develop it quickly, make a prototype, launch an MVP on the market, and test everything in practice.”
I will not argue, this approach also has a right to life. But even in this case, it is better not to abandon the business plan altogether, but to make it a simplified version, which may look like this:
Business plan = Business model + Financial plan
Business model describes the sales process, it reveals what exactly the business is making money on, and how exactly the sales process takes place. The source of income is often unclear. For example, Google offers a search service but makes money from advertising.
Financial plan allows you to bring together expenses and income to determine how much the business will spend and how much it needs to sell / earn to stay in the black.
Drawing up a business plan from these two points is simply an act of common sense. After all, if we do not have a business model, we do not understand at all why we are producing a product and who needs it. And the lack of a financial plan can lead to the fact that expenses will be much higher than income. And why do we need such a business?
“All that really matters is how you plan to make money.” M. Lewis
Before drawing up your business plan, I advise you to read a wonderful book Michael Lewis, which tells about the events of the late 90s and early 2000s. The dot-com boom that burst like a soap bubble in 2001, according to Lewis, was the result of ill-conceived business models.
Many dot-com companies had cool ideas but didn’t understand how they would make money. Yes, it was obvious that people needed new services, that the Internet was developing. Investors poured money into ideas, but it turned out that without a good business model, they would not pay off. Since then, the industry has developed a clear understanding of how you can make money on IT products:
Software license – eternal ownership of the product
Physical item – devices, storage media
Service or software subscription – constant income from connecting users
Inline ads – a way to monetize free use
Commission for partners for using the platform or application
Escort and support – A good way to get income if the software itself is free. Business users need support.
OEM-Licensing a product or content for resale or use – for example, the Foxconn factory assembles the iPhone, and many companies are developing for well-known brands.
The list is neither complete nor exhaustive, but it covers the vast majority of business approaches.
What are we going to produce?
One way to release a product is to create boxes… You can release some kind of physical product such as Apple iPhone or Amazon Echo Yandex Station.
This approach has a big plus: I sold it and I forgot it. You don’t need to think about a specific consumer, maintain a relationship, because the income is received at the stage of transferring the goods.
But there is also a serious disadvantage – the need to evaluate unit economics, calculate the cost of each instance, control physical logistics, including returns and complaints. Therefore, startups do not create real boxes very often.
Meanwhile, in recent years, platform… You take over the development and integrations, as well as provide sales with partners. After that, you divide the proceeds and do not think about how the partners’ proposals are built. Online stores such as Amazon Marketplace, eBay or Alibaba, as well as Russian Wildberries or Ozon work on the principle of platforms. The Apple Store and Google Play app marketplaces use exactly the same business model. Other platforms are Uber and Yandex Taxi, food delivery services – Delivery Club or Yandex Eda, or even delivery aggregators CDEK, Boxberry, Postamat.
It is convenient to be a marketplace – third-party companies make money for you, but at the same time all integration costs and technical issues fall on your shoulders.
Subscription Is one of the most common business models of our time. In fact, you develop a service and receive recurring payments. Amazon Prime, Yandex Plus, Netflix, Apple One, Elementaree and many others work by subscription. If you are engaged in the development of the service, improve the characteristics of your product, the subscription gives a predictable and stable profit.
By the way, if you want to attract investments, this model is one of the most attractive for investors and gives a larger multiplier to market capitalization.
There is also a model “Razors and blades”…
This sales method was invented in the early 20th century and offers to sell a basic product at a very low price (“razor”) in order to capitalize on repeated payments for consumables at a high price (“blades”). In addition to the premium razors themselves (which are just sold according to this model), sales of capsule coffee makers work in a similar way, in which disposable portions pay off the sale of the coffee machines themselves at relatively low prices. In many countries, you can buy the most modern smartphone inexpensively, but by subscribing to an expensive tariff for a year or even more. Printer makers sell budget models, but they rack up money for cartridges, and the high cost of games for Xbox and Sony Playstation speaks for itself, explaining the affordable console itself.
Finally, it may turn out that not your main users are paying for your product at all. For example, Adobe Acrobat Reader was originally distributed free of charge, and therefore the PDF format has become quite widespread. But the license for Adobe Acrobat Pro cost $ 700. There are, of course, quite a few alternative PDF editors today, but when Adobe first started out, this business model worked very well.
In the world Open source it is also common for large companies to pay to develop a widely used product. These can be payments for support or individual product development. And sometimes paid versions of free solutions are created, but with regular updates, support and guaranteed quality – for example, Virtuozzo product and its free version OpenVZ.
Any product needs a business model
You need to think over your business model correctly, because otherwise you may face an audience reluctance to pay for your product. This does not mean at all that there is no market place for it. Maybe you just haven’t prepared a business plan? By the way, we’ll talk about the financial component of the plan and the pricing in the next post.
→ Video recording of all lectures of the course available on YouTube
Lecture on business plan and pricing: