So you've captured the critical hypotheses underlying
your business model and you've done that with a business
model canvas. Next step is to go through and
test all of those hypotheses to see where you're right
and where you might need to do some adjustments.
Hi, I'm Steve Morris and I use the StartupSOS as channel
to provide practical how to advice for first time
entrepreneurs.
In previous videos, we've gone through how to fill out
your canvas.
Today we're going to focus on how to test those
hypotheses in.
Later videos. I'll go into a lot more pragmatic detail
for a couple of segments of the canvas that are
especially challenging.
So we will have some follow on videos, which means this
is not a bad time to click the subscribe
button, if you haven't done that yet, and click that
notification bell so you won't miss those follow
on videos.
Why are you going to test the hypotheses underlying your
canvas? Well, because it's better
to figure out early if some of those hypotheses
are not true. You can save yourself a lot of time and
hassle by not developing the wrong product
if you go test things first and if there's some things
where you were wrong, you can make some adjustments
early on. Great.
So how exactly do you do that?
How you how do you test those hypotheses?
It really comes down to getting
out of the building, as Steve Blank would say, and
talking to people.
So who exactly are you talking to?
Well, first of all, prospective customers, as you'll
see, they come up in a number of
sections of the canvas.
But there are other experts that you'll want to be
talking to also.
And again, different folks depending on the different
sections. So let's start on the right
with customer segments and walk through the canvas
section by section.
You recall from our previous videos on how
to fill out the business model canvas, the
customer segment is the first critical
thing that you have to decide on in looking
at your business model strategy because different
customer segments can have different value propositions
and the whole rest of the canvas can certainly be
different as a result.
So the advice is always to pick one or at least pick a
really short list, maybe a couple to go
test. If you pick too many, you're going to be spending
all your time testing different models and the risk
is you'll never get done.
So you pick one.
But the real testing then that happens isn't so much
testing the customer segment.
It's testing the value proposition for
that customer segment.
And frankly, if the value proposition doesn't pan out,
you might want to back up and ask yourself, is there
a customer segment that would be a better choice,
that has a more compelling problem that we
can solve. And then you redo
the value proposition and go test that.
So let's assume you've you've chosen your customer
segment. Let's move to step two, which is testing
the value proposition.
So testing every segment of the canvas is important.
But I would say that the value proposition is probably
the single most important segment to test
because it really addresses the question of
if you build it, will they buy it?
Now you need to make sure that you can build it
at a cost that's acceptable given how much you can sell
it for. But still, if you're not solving a compelling
problem, there's not a business there.
And remember, there are a number of things that you're
validating now, a number of hypotheses underlying
the value proposition.
What's the job to be done?
What's the pain the customer is trying to avoid?
What's the gain they want to reach through using
this kind of product? You're assuming and a hypothesis
that they're unhappy with the current solutions
and you believe - another hypothesis - that your
solution is better than the solutions that are
available. All those things need to be tested.
And the way you test those is to go out and talk to
prospective customers in an
interview, preferably an in-person
interview, because what you're really trying to do is
kind of get inside the head of these prospective
customers and really understand how they think about
this. Do you really understand correctly the job to be
done, what the pain is to be avoided, what the gain is
so they want to obtain? Do you really understand why
they don't like the current solutions that they're out
there? It's good to assume that you don't
understand that, right?
Which is why you can't do this as a simple list of
questions that you post on the Internet You're sort of
assuming here that you might not understand all the
questions to ask.
So you want to do probing interviews and that's why
you're going to do them in person, preferably
physically in the same room, or at least maybe over
a video call would be the second best approach
because you're really trying to watch for body language
and really understand where where the emotion
is. What really makes this need important or
frankly. Is it even important at all?
So in-person is the way to do it again.
In a later video will jump into the detail of just how
do you conduct one of these interviews?
Let's move now to the customer relationship.
So you recall that in customer relationship
you're really trying to understand how does the customer
want to buy? What sort of a buying experience do they
want and what kind of a post buy support experience
do they want? Your long term goal in customer
relationship is to have happy enough customers that they
give you testimonials and give you referrals
to new customers.
So that involves, of course, a lot of questions
which not surprisingly are going to come back to the
customer interview.
You'll be asking questions about how
they'd like to buy, how they'd like to be supported
after the buy.
And in general, just sort of understand how they'd
like that whole relationship process to work
between you and them in the vendor customer
relationship.
Next would come channels and these would be,
of course, both the marketing channels and the selling
channels you're going to use in this business.
How do you test your hypotheses there?
It starts with customer interviews because
you want to understand for the marketing questions,
how do these prospective customers learn about
solutions in this particular market?
Those are the marketing channels you'll want to use.
But at the same time, how do they want
to buy from whom?
Is it online? Is it through a direct salesperson?
You need to understand what their preference is - the
way they really do want to buy.
That again also is a customer interview.
But then you'll really want
understand from a business point of view how those
channels work.
And that's where you might want to talk to some
entrepreneurs who have experience using those
marketing channels, using those sales channels
that you think you'll be using, that you're
hypothesizing that you'll be using.
Learning from the experience of others can help you
understand everything from the cost structure of the
channels to things to watch out for.
You can learn a lot by talking to entrepreneurs who've
sold using the marketing approaches and the selling
approaches that you plan to use.
The cost structure of the channel is, of course, also
a good discussion to have with the channel
partners because depending on how your channel strategy
works for selling, if it's a multi-layer channel
like for example, if you're selling through grocery
stores, which might start with a wholesaler,
a distributor, a store chain and then an individual
store, there may be a cut at each step in that process.
So understanding their pricing assumptions
and their discount assumptions, that's an important part
of your model also.
So that would be wrapped up in your channel discussions.
And revenue streams is a similar situation to channels.
Question here is how do customers want
to pay? What makes sense?
What's acceptable for them as a way
to pay for what you're providing and how much
might they pay? Well, clearly talking to customers
is a way to start to understand exactly
what makes sense to them. Does it make sense to them
that this is an asset purchase or is it
a subscription service or is it taxing a transaction?
You need to be sure that the way that you think you want
to charge customers makes sense to them.
So certainly it's part of your customer interview.
But at the same time, you might also want to talk to
other entrepreneurs who use a
similar way of charging customers a similar
revenue stream to what you have in mind.
You're likely to learn things that are useful
to know about how that revenue stream works.
So other entrepreneurs are also
a valuable resource.
For both your channel discussions and your revenue
stream discussions you'll certainly be talking to
entrepreneurs that you don't compete directly with, but
you can probably find entrepreneurs that use similar
channels and similar revenue streams,
but who have a business that really isn't competing
directly with yours.
Another thing, of course, you'll want to test is your
pricing. Is your pricing acceptable?
And that is going to come down to a customer
question.
Is the price acceptable to them?
And there are ways of doing that that will jump into in
a separate video.
That takes us over to the left part of the canvas
where we start getting into more of the activities and
the things that drive cost in your business model.
So you've got activities and key resources
that you'll need to understand and to utilize
for this business.
How do you test the hypotheses that you have
underlying those parts of your business model?
One of the best things to do there is to talk to other
entrepreneurs who have a similar business model,
who are doing similar activities and using
similar key resources so that you understand
how those work.
As before you'll want to talk to entrepreneurs clearly
that you're not going to compete directly with, but
you're looking for entrepreneurs that are going to rely
on similar activities in their business model
and similar key esources.
Especially if you haven't built a business like this
before, you will likely learn a lot
by talking to other entrepreneurs who have
done it.
And in any business, you're going to have partners that
you're going to work with. Some of those may reach back
to your channel strategy. You could certainly have
channel partners both in, say, the marketing part of the
business as well as in the sales part of the business.
But there are a lot of other potential kinds of
partners. You may have R&D partners.
You may have manufacturing partners.
You'll have various suppliers who are partners.
So there are a lot of different kinds of partners and
you need to understand how to work with them,
what motivates them to want to work with you and
how their business model works.
Those are all key hypotheses you've hopefully put
together in your canvas.
How do you understand whether or not those hypotheses
are right? Number one, as in so
many other cases, talk to other entrepreneurs that
are working with those partners that you want to work
with. As usual, you're going to find some that you're
not directly competing with clearly.
You certainly can find people that are working with the
same kind of partners that you'll need to work with.
Also, you can certainly go talk to the partners
themselves about what you're planning
on doing and find out directly from them
what is their strategy, what do they look for in
companies they work with and how does their business
model work? What do they expect from you
if you want to partner with them?
And finally, that brings us to cost structure.
You've made a lot of assumptions about the different
types of costs in this business that we talked
about in the earlier video of filling out your
canvas. How do you go test those hypotheses?
One way is to talk to other entrepreneurs who
have a business model that looks pretty similar to yours
and would have similar cost structure.
So, for example, if you're building a software as a
service business, it's very likely
that your cost structure will look a lot like other
software as a service businesses, including, of course,
those that you don't compete directly with.
Another good resource, though, for testing your cost
structure is to talk with contract CFO, chief
financial officers.
People who work with a lot of different companies, have
seen a lot of different business models, a lot of
different financial statements, and they get
a very good feel for the cost structure of different
models. They can be an excellent source of feedback
on your financial assumptions to give you an
idea of whether or not those seem credible
or if they seem like they need perhaps a little bit of
adjusting.
So that's a quick walk through testing your business
model canvas.
It all comes down to talking to people, to maybe
getting outside of your comfort zone and getting out of
the building and having those discussions.
In later videos we'll talk in more detail about some of
the specific parts of the canvas and go into detail as
to what these interviews might look like.
Be sure and click the subscribe button and the
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If you have any questions or comments, please leave that
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watch the follow on videos that we'll be adding on
this topic of testing your business model
canvas.
That's it for now.
Thank you for watching.