I had an interesting discussion this week about whether a software company should have its revenue model defined first, or should the software company be focused on other factors such as value proposition and market segmentation. The question by itself is very interesting and typically our initial “gut feel” is to analyze first how much money we can make and make it a profitable business.
Based on my experience, the revenue model does not come first. What comes first, and is typically the most difficult discussion in any management team is to identify the real and true value of the solution that is going to be sold. The other big question is what market segment we should be focusing at.
I told in my previous blog posts that I really did “not get it” when I started my role as CEO for a business intelligence software company while back and thought, like many other technologists, that “our solution would do everything under the sun”. It was just the customers that did not get it. I loved to read a Gartner blog entry this week about the challenges that technologist face when telling the market about the solution. Following example is a typical “pitch” that technologists give of their solution (example by Hank Barnes, Gartner):
“We analyze transactions and clickstreams and combine that with sentiment analysis and text analytics to provide your with deep insight into what your buyers are doing and thinking.”
If you read the sentence carefully, it is easy to say that it is just garbage and does not give anybody anything… This is unfortunately how we often articulate ourselves when offering our solutions.
Back to the initial question about the business model questions. After a tremendous amount of workshops and seminars, it is easy for me to conclude that revenue model is NOT the first one to think about. Revenue model will be a very important element in the overall schemes of things, but if you use Business Model Canvas in your analysis (like we do), it is clear that there are many other questions that one has to answer before the revenue model. First and foremost, is there a market segment that is willing to pay anything for the value proposition that you have defined (the pains that you are taking away from the users and the gains that you are giving your users with your product/solution). I you look at the included Business Model Canvas with the numbers included. That is the typical order which we use when analyzing a business model. In some cases, the market segment is “given” so number 1 and 2 are analyzed at the same time. If you look a the picture below, you can see how each one of the building blocks in a Business Model Canvas relate to each other:
In same cases, the market segment (number 2) is given, so organizations analyze number 1 and 2 together. My recommendation even in those “clear cases” is to really make sure that the market segment is what one expects, as it could be too big, to complex and the value proposition does not fit into all of the scenarios in the target market segment.
I have become a proponent of “storytelling” that is a better way to explain things and for the audience to grasp what you are really trying to accomplish. People want to hear stories, they do not want to hear how many new widgets/features you have developed in your solution. I think the TED speeches is something that every software company management team members should think about when thinking about the solution and how to express its power to the audience.