May 26, 2010
After seeing Randy’s excellent conversation with Eric Ries (@ericries) at the Startup Lessons Learned Conference, I felt compelled to pick up Randy Komisar and John Mullins’ “Getting to Plan B“. Randy delivered a very succinct and informal series of advice based around why the initial assumptions about a business model will oftentimes not be the path that leads a company to success. Fitting in very nicely with the Lean Startup philosophy he went on to describe his methods to enable a company to test and measure these assumptions and pivot to a new model if necessary. ‘Getting to Plan B‘ is the basis for his chat with Eric, and the expanded thesis on these ideas.
Analogs, Antilogs, and Leaps of Faith
The authors set the stage by describing a few companies that found success after discarding their initial model (yes, the ubiquitous PayPal example is used…). The authors describe taking inspiration from analog companies or models that you want to learn from, avoiding antilog companies that you want to avoid mimicking, and clearly stating the leaps of faith that you need in your business model – e.g. Sony’s leap of faith for the Walkman was that people wouldn’t think that walking around a crowded street with headphones in was antisocial.
The guideline for success they define is the dashboard – A series of measurements that test the leaps of faith the model is based on. Whether it’s the amount of revenue coming in, the number of users signing up for your software, or some other metric specific to your business it’s imperative to understand when success is happening – or more importantly, when it’s not happening. Poor dashboard results may indicate a need for the plan B.
Business Models Examined
The next few chapters in the book have a lot in common with Ram Charan’s ‘What the CEO wants you to know‘. The authors define the essential building blocks of a business model, and offer case studies of how companies have used these elements to drive success. Specifically:
- Revenue Model - Who is going to buy from you and what will they buy? What pain points are you resolving for the customer or what delights are you providing? How frequently will they buy from you? What price are they prepared to pay and how much effort will it take to win them?
- Gross Margin Model - At it’s simplest, how much more will the customer pay you than what the service or goods cost to provide?
- Operating Model - What costs will you incur, and how can you tweak the cost base and margin to give you a competitive advantage?
- Working Capital Model - How can you tweak your revenue and cost base to insure that you always have enough cash on hand to invest in company growth? Can you get better terms from suppliers, or get customers to pay up front?
- Investment Model - How much money do you need to start? Can you grow organically by bootstrapping or do you need a large capital investment up front? If you need to switch to a plan B (or C,D,E) will there be enough money to fund the change in direction?
Some of the theory in ‘Getting to Plan B‘ can be a little dry, but the case studies really brings it to life. It’s unfortunate that Randy’s session from the Startup Lessons Learned conference is not available in video (as far as I can find) as it offered a great run through of the concepts. Overall, I’d recommended it as a good fundamental breakdown of business models elements, tips on tweaking, and excellent case studies. This book and Alexander Osterwalder’s ‘Business Model Generation‘ complement each other well.