For startups, 2009 was a good year. More than 20 companies launched at that time, including Uber, Slack, Pinterest, and Blue Apron, eventually achieved $1 billion-plus valuations. Given that those companies were all venture-financed and emerged from Silicon Valley, you might assume that the key ingredients that have ensured their success were cutting-edge technologies, digital platforms, and customer bases that were chiefly made up of digital natives. You would be wrong.
Yes, those companies had great technologies, platforms, and demographics, but the secret of their success turns out to be much more prosaic. Each was able to satisfy real customers who needed real jobs done — and by jobs, I mean a fundamental problem in a given situation that needed a solution. In other words, they had great business models.
Every successful company, whether it knows it or not, owes its success to its business model. I explained this in an article that was published in Harvard Business Review in 2008, before any of those companies began, and, now, 10 years later, that still holds true, as more and more of the business discourse is focused on digital transformation. A digital platform, or a digital solution, may enable a new epoch of transformative growth, but when you get under a company’s hood and look to see what’s really driving it, the engine of transformation turns out to be its business model.
In my article, I identified the four interlocking elements that, taken together, create and deliver value to both companies and its customers:
Customer Value Proposition (CVP), which is a way to help customers get a job done. The more important the job, the lower the level of satisfaction with other companies’ attempts to solve it, and the better and cheaper your solution is than theirs, the more potent your CVP.
The second is a Profit Formula, or how you create value for yourself while providing value to a customer. There are four essential elements to the formula: revenues, cost structure, margins, and resource velocity. The best way to create a profit formula is to work backwards, either starting with the price for lower cost businesses that is required to deliver the CVP, and then determining what the cost structure and other factors need to be or in highly differentiated businesses, start with the needed cost structure and margins that leads to the required price.
Key Resources are the assets that are required to deliver the CVP to the customer at a profit, meaning the people, technology, products, facilities, equipment, channels, and brand.
Key Processes are the operational and managerial capabilities that allow a company to deliver value in a way that can be repeated and scaled. These include manufacturing, budgeting, planning, sales and marketing, and customer service.
Successful business models have an exceptionally strong CVP, and a stable, scalable system in which all the elements mesh together seamlessly while complementing each other. As simple as this framework may seem, its power lies in the complex interdependencies of its parts. Major changes to any one of these elements affect the others and the whole.