September 2020

The fifth of six questions that every business should be able to answer is “how do you make money?”. When I ask leaders this question I typically hear one of two types of answers: where their revenue comes from, or how they manage to profitability. Both answers are really important and which one they give even tells me a lot about their business.

I think it’s important to understand the difference between a revenue model, a business model, and a cash flow model. 

Entrepreneurs are often asked “what is your business model?”. In most cases, I think the one asking the question really wants to know the startup business’ revenue model. Especially amongst tech startups, the term “business model” is often used to describe who pays and how they pay. The answer expected might be “we have a subscription-based model” or an “advertising-based model” or perhaps “ours is a two-sided platform model”. But these don’t really reflect an entire business model.

The simplest definition of a business model is “how a business makes money”, but a more effective definition is “how a business creates value for its customers and captures value from its customers”. The revenue model is the portion of the business model that explains how the business captures value from its customers. It is also important to deeply understand how cash flows through the business. 

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This week we started by deeply understanding your customers and your competitors. Next we sought the right category for your product, and the right competitive strategy for your business. Today, we bring all that together into a single sentence and a single diagram.

The product positioning statement provides a clear, concise, and compelling case for the unique reason customers should buy your product rather than choosing rival options. The Customer Value Map provides a framework supporting that positioning statement within the context of the target customer profile.

These two tools provide a powerful answer to the question “why do customers choose you?”.

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Positioning against the right competitors is important. Deeply understanding the strengths and weaknesses of those competitors is necessary for determining not only why customers choose you today, but how you can continue to win far into the future.

While determining why you win today may be as easy as asking customers, determining your competitive strategy takes careful analysis and unflinching commitment.

The classic framework for competitive strategy was published by Michael Porter in 1980. He introduced three generic strategies: cost leadership, differentiation, and focus. Porter argued that it was critical for a business to choose one, or else they would get caught in the inherent tradeoffs between the different strategies.

In their 1995 book The Discipline of Market Leaders, Michael Treacy and Fred Wiersema took Porter’s model and described the three strategies using language a bit easier for managers to understand and apply.

Answering the question “why do customers choose you” needs to be answered not only for today, but with a long term commitment to a sustainable winning strategy.

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In the Bible, the apostle Paul wrote “Do not be deceived: ‘Bad company ruins good morals.’” Sometimes people assume certain things about us because of those with whom we are associated. Products can suffer the same fate.

Humans, by our nature, like to simplify the process of understanding products. When we hear of a new product, we want to put it into a category so that we can relate it to other products that are similar. The category provides a shortcut for our brain. We know that other products in that category have certain characteristics and we expect this new product to share those characteristics. We also have a sense for which attributes factor into our decision making process when evaluating options within that category.

Being in the right category makes it easy for buyers to understand the product and its value proposition and for the company to highlight the product’s unique value. Being in the wrong category confuses buyers which means the company has to work that much harder to communicate their value proposition. The wrong buyers are initially attracted to the product, they compare the product to the wrong competitors, and they evaluate the product on the wrong criteria.

So, do you know why your customers choose you? The product category that you are aligned with has more to do with it than you might have imagined!

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One of the first questions I often asks startups is about their competitors. Too often, the answer is “we don’t really have any competitors — no one else is doing what we do”. 

Instead, the answer I love to hear is “what do you want to know?” When you’ve done your homework, then you are ready to tell me about direct, indirect, and even home-grown competitors. You can tell me what their strengths are today and what they can bring to bear to improve their position in the future. You can tell me when they win today and why you’re concerned about their ability to win tomorrow.

And you’ll be well on your way to telling me why your customers choose you instead of them.

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