Business model innovation basics II - Board of Innovation

Hey there. This is Ken on from Board of Innovation, and I'll be hosting another webinar on business model innovation. So if you haven't checked out the first one, make sure to do that. We got some really good feedback. In this webinar, we'll be covering how to position your business model and how to determine whether the problem you're building your business around is actually worth solving. So what will you be learning in today's webinar? Well, there'll be two main topics that we'll be covering. One is how to position your business model and to how to size the problem that you're tackling with your business. Now, we'll go into more detail about what this actually means throughout the webinar. So if you are on the last webinar, you will recognize this business model design process. And if this is the first time you see this framework, I highly recommend that you go back and, and see part one of this series. So, as you see, we have these four key stages. Discovery, problem fit, solution fit, market fit. And in today's webinar, when we're talking about how to position your business model and how to size the problem that you're tackling, we're really focusing on the first two stages in this design process, discovery and problem fit. So let's get right into it with discovery. Now, in the discovery phase, we're really focusing on is market exploration. So what does that mean? Well, here are a few key questions that will cover throughout this process and discovery phase. And as I said, it's really focusing on sizing the market and understanding whether, you know, this market is actually worth entering. So we'll be looking at things like how large is this market? How fast is it growing, or is it even declining? Who are the key players in this market, and how is this market evolving overall? What are the future trends that will impact the evolution of this market? So again, the key question that we're covering in the discovery phase is to what extent is this market even worth entering? Now, how far do you go with this research? Well, when you're in the discovery phase and you're doing all this research on the market size and competitors, you don't want to spend too much time, you know, digging into all the details. You know, you want to just have enough information to be able to determine whether this market meets your criteria. So, you know, don't spend weeks and months doing desk research. It's really supposed to be a quick way to, to get an idea of whether you should even be exploring A business in this market. So what does market exploration actually entail? Well, there are two key components that we look at in market exploration, and that's the market, obviously, and the players or the competitors. When we're talking about the market, you know, one key figure we have to address is the total addressable market, and that's tam. Now, for those of you who aren't familiar with what that means. Well, TAM basically represents the total revenue potential of the entire market. So, for example, if you were looking at developing a business in the automobile market, your TAM would be the global car market. Assuming that you're looking at building a business that will tackle the car market globally, then obviously you're. Your TAM would be, you know, owning 100% of the car market all over the world. Alternatively, if you already know that the business that you want to build is a bit more regional and might focus on a specific country or continent or certain region, then your TAM will obviously be the total revenue potential of that region. So, for example, if you know that you want to get into the fast food market in, in North America and only really stick to North America, then your TAM is really the amount of revenue you could make if you owned the entire fast food market in North America. The TAM figure is usually a huge number, you know, and it should be in the billions. Otherwise, if you're targeting a TAM that's, you know, only in the millions or even the hundreds of millions, it's usually not a big enough market. This depends on what your internal benchmarks are. But in general, you know, the bigger the tam, the bigger your ambition. You know, it's really a reflection of how big you want to aim with your business. So understanding how much money is available in the market can give you an idea of how much potential revenue you can actually make in this market. Besides tam, what we also take a look at is, you know, the competition. As I said, we have, we have the market and the players. Now, one, you know, cool tool to visualize the competition is using a competitive landscape. Maybe you've already seen some of these because they're quite well known in the business world. Here we have an example of Airbnb's competitive landscape. As you can see, in a competitive landscape, we have two axes and we usually measure two characteristics and determine, or let's say group competitors in the market that operate on these characteristics. So we can see here, in Airbnb's case, this is actually a slide from their pitch deck. They looked at the competition based on price. So whether, you know, housing or let's say accommodation was affordable or expensive. And the other characteristic they looked at was the type of transaction, whether it was online or offline. So by grouping competitors along these two axes, you can see where the competition is really focusing on where are their potential opportunities and where there are actually empty spots. A lot of people will think that an empty spot in a competitive landscape is actually really good thing. You know, it can be a really good thing because that means, hey, maybe nobody has recognized this opportunity, but oftentimes it actually means that because it's empty and it's not a profitable area. So make sure to not, you know, confuse the two, as we like to say. You know, if there is some sort of empty spot, either, you know, you figured out genius opportunity or you figured out a really bad opportunity. So there's a fine line between the two. A tool that we like to use to really bring that all together, you know, the market size and the competitive landscape is the market scan tool. So again, we have these two axes where you can choose the characteristics that you'd like to map your competitors on. And in the middle, you know, we have the tam, or the market size and the tam and also the cagr, which stands for the compounded annual growth Rate. Now, the compounded annual growth rate actually shows you how this market is projected to grow in the next few years. Again, you can find all this information online through lots of different sources. Don't spend days and weeks, you know, figuring out what the TAM is. Don't spend days and weeks figuring out what the compounded annual growth rate is. Just get an idea from different sources so that you can make, you know, a good enough decision to understand. Is this market, you know, big enough and how is it actually growing? Because you obviously don't want to be entering a market that's projected to be declining in the next five years, because that probably means, you know, your business won't be around for quite a long time. On top of that, you know, after figuring out, okay, what the market size is and figuring out how the competition is laid out in the market, another thing that we like to do in the discovery phase is do a pestle analysis. Now, pestle is actually an acronym, and it stands for political, economic, economic, sociological, technological, environmental, and legal. Now, what all these letters stand for are for trends. So you want to look at political trends, economic trends, technological trends. You know, a lot of people maybe have heard of pestle analysis or they've heard of trend analysis, but they actually don't spend the time doing it. And that's quite a big mistake because again, just like looking at the compounded annual growth rate, you want to understand how this market will evolve in the future. So if you're, you know, planning to build a business in a market that will be disrupted, let's say, by artificial intelligence in the next five years, well, then you have to understand that your solution, if it doesn't incorporate some sort of artificial intelligence, your solution might probably won't be there for long, and your business won't be there for long. So really, don't underestimate the power of looking into these trends, because again, you want to. The goal of building a business is to build a sustainable business. And so looking at how the market is growing and how the market is evolving based on these trends is extremely crucial. So by the end of the discovery phase, you know, you should have an idea of what the market, how big the market is, so the size and how it's growing. So again, looking at the TAM and the compounded annual growth rate, you should have an idea of the key players in the market through the competitive landscape, and you should have an idea of the key forces that are impacting the future of this market through the pestle analysis. Again, the discovery phase is not meant to be a very long phase in this whole business model design process. It's really just to give you an idea of whether, you know, we should even enter this market. And again, a lot of people completely ignore the discovery phase and just go straight into problem exploration and building solutions. But ultimately they then realize, wow, that this market isn't even actually that big. So again, even though this phase is short, make sure you do it. Because if you realize that the market is not worth entering, well, then you save yourself a whole lot of time, energy and resources down the road. So now, having gone through discovery and having determined that, hey, this is a market that is worth entering, it's time to go into the problem fit phase. Now, in the problem fit phase of the business design process, we really want to now look at user problem exploration. So in the discovery phase, we're looking at market exploration. In the problem phase, we're looking at the user problems and exploration. So in the problem fit phase, some key questions that we want to cover are which problems do users face, obviously, but more importantly, how valuable are these problems? How much money is being spent on solving these problems? How much money is actually being wasted as a result of inefficiencies that these problems bring along, which user segments face these problems? And again, how large are these segments? And Also similar to the discovery phase, we wanna understand how this problem that the user faces will evolve in the future. Because again, you don't want to be building a business around a problem, you know, that won't exist in the next five years. So ultimately, the key question that we'd like to answer in the problem fit phase is which problems and customer segments should we focus on? So with that being said, how do we analyze or identify user problems in the first place? Well, again, if you come back to the business model design process, we have two tracks going on at the same time, desirability and viability. So from the desirability perspective, you are identifying user problems through design thinking, you know, doing customer interviews, observing customer behavior, and really finding out what their pains are from a qualitative perspective. So on the problem fit phase, from a desirability perspective, you're really digging into the problems that the customer is facing. But the question is, what about the business side behind this? You know, we maybe have identified problems that customers face, but is there actually a business to be built around solving these problems? It's. And this is where we come to problem sizing, which is a very valuable technique that, you know, can help you determine whether, which problems to focus on, which segments to focus on, and to determine, again, whether this problem that customers complain about is actually worth solving from a business perspective. So the key question we want to answer with problem sizing, is there business potential in solving the problem? Because again, a lot of companies, organizations, startups, they really focus on identifying user problems and once they've identified user problems, they go straight away to building solutions. But oftentimes they don't take that extra step to realize, okay, how much money is actually being spent on this problem? How much money could we make by solving this problem? Which segments actually face this problem and which segments should we focus on? It's great to focus on the desirability aspect because you need to find a product market fit. But if you're ultimately tackling a problem that customers complain about, but they're not willing, you know, to spend money on solving that problem, or there's just not enough people facing that problem, then it's going to be really hard to build a business. So not only do we want to identify, you know, pains and problems that customers face, but we also want to identify valuable pains and valuable problems and also valuable customer segments. So in this part, we're now going a step deeper into the market size and really focusing on the serviceable, attainable market, the sam. So as you can see, in this graph, in this graphic, it's one step deeper compared to tam. So your SAM is the total revenue potential of your target market segments. Again, again, if you are focusing on building a business in the car market, your TAM might have been the global car market. And now you've realized through problem sizing, hey, there's an opportunity to really focus on the secondhand car market. So your SAM would obviously be the secondhand car market. And again, similarly, if you are focusing on building a solution or building a business in the fast food market in the US through customer segmentation and problem sizing, you may realize, oh, actually, you know, we really want to focus on the west coast in the US So our total revenue potential in the west coast of the US will be our SAM figure. What's important when looking into SAM and looking into problem sizing is to understand that our solution is not for everyone, but it is for someone. This means that again, in order to build a business, you can't target the entire market at once. You know, you have to really identify which segments are valuable, which segments experience these pains and which segments. Is it worth it for us, given our resources to tackle a common mistake that many startups, companies, and again, it's only startups or small companies, but even large corporates, common, common problem that they all make is that they build a solution for a problem, but they want to address the entire market, right? So they try to build a solution that incorporates, you know, a bit of this and a bit of that, and as a result they only deliver 80% of value to 100% of the market. But 80% of value for a customer is simply not enough. So the better approach and the smarter approach is to identify those segments and Instead of delivering 80% of value to 100% of the market, deliver 100% of value to 80% of the market, or even smaller to 50% of the market to 20% of the market. You know, this is where it's really important to get into customer segmentation. And there are a few techniques that you can use in order to segment your market and to identify which segments are worth targeting. We have geographic segmentation, which is probably the most common and most basic form. You know, you can segment your market based on cities, countries, continents, you can segment based on regions, you can even segment it based on climates. Again, geographic segmentation is very basic. You just use objective data and it's usually the starting point for segmentation because it leads to very broad segments. A second level of segmentation is looking at socio demographics. So this is where you look at factors such as age, income. If you're in a B2B context, you might look at company size, you might look at industry. So you're still looking at objective data, but now it's getting a bit more detailed. And oftentimes socio demographic segmentation works hand in hand with geographic segmentation. So you know, you might figure out a segment such as millennials in Southeast Asia, you know, millennials being the south, the sociodemographic target, Southeast Asia being the geographic segment. So oftentimes they work hand in hand. Now, the last segmentation technique here, psychographic segmentation, is the richest and deepest form of segmentation because you're no longer just looking at objective data like countries, income levels, industries, you're really getting qualitative data from users and customers with psychographics. So with psychographic segmentation, you're really looking at users, behaviors, their motivations, their attitudes. And the only way you can actually get this type of data is by doing interviews with customers. So you can do that obviously through face to face interviews. You can do that through surveys, questionnaires. The point is, the key to successfully doing psychographic segmentation is to get that customer data, to get that customer insight. Because once you're able to really understand what motivates them, what, what values they have, you're able to really craft finer segments. And as a result, you're really able to build better products because you know what their underlying needs are. You're better able to craft your marketing because you know how to target these people, because you understand their psychology. And obviously as you can see, the more data that you have, the better you can segment. So the quality of your segmentation is really reflected by the quality of your data, as you can see in this example that we have here. Let's say, you know, you're targeting the laundry market. You realize, hey, that there's a business opportunity in this market. Which segment of this market, you know, should we target? So you might start off with some socio demographic segmentation based on data that's easily available. So you might look at income classes and realize, okay, there's high income customers and low income customers. These are two segments of the market. And then within each, you know, you have seen singles and families again, now we're segmenting a bit further, but still based on, you know, sociodemographic data. You might even go one step further and look at profession as a filter for segmentation. So you know, you might realize that there are high income singles that are white collar professionals and you might realize that there are low income singles that are university students. So this sociodemographic segmentation can only get you so far. You can only segment so far based on these different variables. So if you want to go a level deeper, that's where you start. You know, you need to start getting that customer data. So after, you know, you identify, hey, white, high income, single white collar professionals might be an interesting market to target. You realize that there are different Personas within that market. So you might realize through your interviews and questionnaires that there are people that are really hyper productive. And for them, you know, doing laundry is just another task that they need to do in order to maximize their time to focus on other high priority activities. So they just want to outsource their laundry. You might realize that there's another group of people in that market that are clean freaks who love to do their laundry because they love to keep their house super clean. Within the university student market, you might find a group of people or find a Persona of, let's say, lazy couch potatoes. So these students who really hate doing their laundry, they can do it. They have maybe washing machines accessible to them, but they're just really lazy. So again, you can only get to this last form of segmentation once you figure out what motivates these users, what values they have, what behaviors they exhibit. So the more data you can collect, the more rich the data becomes, the more rich your segmentation also becomes. Now, a tool that we like to use to help us with segmenting the market and also quantifying the segments is our problem sizing tool. So let's walk through an example to better understand how we actually use this and how we quantify these segments and more importantly, quantify the problems that these segments face. So again, relating back to the previous example of laundry market, let's say we identify that the major problem that people face is washing their clothes. You know, through our customer interviews, we realize that these users, they just hate doing their laundry. It's really time consuming, it's really hard to plan it in their schedule. Through our segmentation techniques, we realize that there are two target segments that we would like to focus on. One being white collar professionals and the other being university students. So now that we've identified this from a qualitative perspective, let's start looking into the numbers. So if we look at our hypothetical market, we realize that there are 15 million white collar professionals. We look at how often do they encounter this problem of washing their clothes. Well, we make an assumption that on average they do Two loads a week. So on a yearly basis, they wash their clothes 104 times. Now, the next question is, how much time or money do they spend each time they wash a load of laundry? Well, we make an assumption that they spend about 50 cents per wash on energy and detergent costs. And we make another assumption that since these are white collar professionals, and since they have high income, we assume that they own a washing machine and that they purchase it for about $500. So a washing machine that's purchased for $500 with a 10 year lifespan means that it costs them $50 a year. And if we do 104 loads per year, this comes down to 48 cents per wash. So ultimately, it costs these white collar professionals about $1 per wash. To be more precise, it's 98 cents. So knowing these figures, we can now calculate the size of the problem. How much does washing clothes actually cost this target market segment on an annual basis? Well, all we have to do is multiply these figures. 15 million times 104 loads times 98 cents. And we see that washing clothes costs these white collar professionals about one and a half billion dollars a year. Now, let's compare that to the university student segment. So we see that in our hypothetical market that There are only 5 million university students, so it's a third of the size of the white collar professional segment. We make the assumption that university students also wash their clothes about two times a week. So on an annual basis, they do about 104 loads per year. We also make the assumption that they spend about 50 cents per wash on laundry, detergent and energy costs. However, we make the assumption that they don't own washing machines. Instead, these university students have to use public facilities like a laundromat. So we make the assumption that they spend about $4 per wash every time they go to a laundromat. So if we now multiply these figures to get the problem size for university students, we see that the problem size for this segment is actually $2.3 billion. Now, this is really interesting because the university student market is only a third of the size of the white collar professional market, but the problem size is actually larger, it's almost twice as big. So. Well, the point of this problem sizing tool is to really help us identify which segments face a greater problem from a monetary perspective, because we know that both of them hate washing their clothes, and it's a real problem. But by quantifying the segments and quantifying the problem per segment, we get a better idea of how to prioritize our solution. So with this, we might actually say, hey, university students, it's a smaller market, but, you know, the problem is much bigger for them. So let that be our first niche market. Let's target university students first, and so let's build a solution that solves their needs first. Ideally, you want to do this for multiple segments, right? So in this example, we have two. But when you're doing this for your own business case and thinking of your business model, you want to do this for as many segments as possible so that you can really understand, you know, which segments we should focus on and you can compare them on a quantitative basis, not only on a qualitative basis. What we also do with this problem sizing tool is look at the evolution of the problem. So linking this back to the discovery phase, where we looked at the pestle trends, we also want to see how these pestle trends will impact the problem. So we have these evolution boosters and evolution setbacks. In the evolution boosters, we see that the population is growing. So this obviously means that more and more people will need to do their laundry, which is great for building a business in this market. Also, we see that there's a rise of fast fashion, so people are buying more, more and more clothes way more often, which means that they have to do their laundry more often. So these are two trends that are positively impacting the problem size. On the flip side, we have some setbacks, such as the sharing economy. Because of the rise of sharing economies, people might not actually be buying their own washing machines any longer or not as much as previously. So obviously this means that maybe our assumption, when we look back to the white collar market, our assumption that these white collar professionals actually own a washing machine might be wrong. So by, you know, looking at these evolution setbacks and also the boosters, we might have to adjust some of these variables. Likewise for the ecological awareness trend, because more and more people are becoming aware of the impact of unnecessarily using too much electricity on the environment. People might actually start washing their clothes less in the upcoming years. Which means that our assumption that people wash their clothes twice a week, so 104 times a year, might actually decrease in the upcoming years. So again, the point of these two boosters and setbacks is to really look at the trends and critically take a look at the size of the problem. You know, will this one and a half billion dollar problem or does $2.3 billion problem actually increase in the upcoming years, or will it decrease? What factors are going to impact that problem. And, you know, as I mentioned before, the real goal of this exercise is to do this from multiple segments, to really be able to compare the different segments and the values of the problem per segment. You know, you might have five segments, you might have 10, you might have 99, like Jay Z. But the real goal, you know, of this exercise is to make you aware that these segments are not all created equal. And maybe smaller segments that might not look attractive because of their size, they actually might be attractive based on the size of the problem. So, so it's really important that you do this for multiple segments and then compare them to understand which ones should we prioritize. That's it for this webinar. I hope that you guys really enjoyed it and gained some value out of it. In my opinion, I think problem sizing is one of the most valuable techniques and tools that everyone should use when crafting their business model. Unfortunately, most people ignore this element of business modeling because they just focus on the desirability aspect. They might identify a problem that a user or customer faces, but then they don't take that extra step to quantify the problem. So what ultimately ends up happening is they might build a great product that solves a really, you know, painful problem, but they don't build a great business because there is no or there's not enough value behind that problem. So again, when you are, you know, in the process of designing your business model or in the process of maybe innovating your business model by targeting new segments, make sure to really do that technique. If you have any questions, you know, feel free to reach out to me. You can connect with me on LinkedIn, you can shoot me an email. I'd also love to hear your feedback on this webinar in terms of Board of Innovation. You can also follow us on LinkedIn. You can check out our website where you can get some of these tools that we showed for free. You can check out some other webinars that we have. And more importantly, by staying connected, you can stay up to date for the future webinars that will be coming along in this series. So with that being said, thank you for your time and attention, and I look forward to seeing you on the next webinar.