Andrew Greta's Business Development Blog

“The theory is simple,” he used to relate during deal review meetings as a precursor to any new or “visionary” business proposal. “Regardless of how unique you think your business is, certain core fundamentals remain. If you can’t map out your high-level business model showing inputs, outputs, customers, suppliers, value creation, and strategic barriers on a cocktail napkin for your airplane seatmate at 30,000 feet, you haven’t thought through your pitch.”

“The secret,” he said as he walked us through the process, “is to start with the customer and follow the money. Don’t get hung up on the minutia. Capture the core of your business model that explains the most material 80% of what you do and save the peripheral nitpicking for later follow up.”

1. Customers: A concise summary of who pays you and for what. Capture the main customer group (or groups if they’re big enough to be material). Are they paying directly for discrete goods and services, or is it a subscription-based flat-fee model? What are they getting from you in return? Try to boil this down to a per-unit measure which can roughly equate to average revenue-per-customer.
2. Suppliers: What are the inputs needed to create your product or service? Common big block categories include compensation and benefits for employees (which can be the vast majority of cost for a service business or other high-tech company), assets (like machinery, vehicles, facilities, or computer servers), and raw materials (especially in manufacturing organizations). Are these fixed costs (does your rent bill come due every month regardless of whether you sell a single item) or variable (incurred only when you produce a product or service)?
3. Value Add: What role in the business process is your company playing to add real economic value? Common answers can be assembling raw materials into finished goods (manufacturing), getting physical stuff efficiently through a supply chain (distribution), providing skills and information to help customers make or save money (services).
4. Margin: Once the customer pays you (revenue) and you pay your suppliers (costs), what’s left over is your operating margin. Focus on your core business for the moment and figure this on a cash-basis ignoring additional outflows like interest, taxes, and dividends.
5. Strategic Barriers: Finally, it’s time to explain what keeps you competitive in the marketplace and allows you to reap the margins you enjoy? Is it an advantage in scale that allows you to produce at the lowest cost? Is it high quality and better service? Or is it some sort of barrier to entry like exclusive access to scarce resources or ownership of a key patent. Answering these questions carefully will help you identify the sustainability of your business while pinpointing key threats.

After looking at his seatmate’s business model, my former CEO quickly realized that the would-be entrepreneur was competing on price alone in a commoditized industry. He had negative margins funded by investors (as a customer subsidy) with no barriers to entry. He predicted that once the VC money burned up, prices would increase by necessity and customers would switch to other substitutes. A few month’s later he was proven right – which shows the power of cutting through pulpy marketing spin and buzz to hit hard bone of business fundamentals when evaluating any new opportunity.

I believe all businesses can be modeled at a high level with this approach. But if there are readers who think they’ve got a really unique stumper that’s so out-of-the-box that it can’t possibly conform, let me know here and we’ll see if we can model it out in future posts.

Labels: Pitches, Strategy

posted by Andrew Greta  # 12:04 PM