Do you have to be market-oriented or is this again one of the buzz words that hides more than its reveals? Or should you be customer driven? Let’s take a look at the two words and concepts and see why Alex and I have chosen not the term market but customers for our canvases.
I just return from a workshop for entrepreneurs in Wolfsburg, the birthplace of Volkswagen. We used the business model canvas to focus the entrepreneurs and their coaches on the core building blocks of a business models.
Interestingly, most participants of the workshop always talked about markets, that we need to be more market oriented, that we have to conquer new markets. But is this true?
Markets, top-down approach
Markets are the sum of customers that spent money and therefore have shown a demand in the market. But a market is abstract and impersonal. You can not sell your product to a market. There is no Mrs Market to write a bill to and that is exactly the problem for entrepreneurs. You might be in a great, growing and profitable market but that does not mean you have one single customer who pays your bills.
Markets is a top-down approach very well suited for analyst and consultants. The market is great for analysis but not good to sell something to.
Customers, bottom-up approach
Let’s take a look at customers. As a business you need an individual client that is willing to pay for the service or product you offer. You need to address somebody who is willing to buy something from you. A market can not buy something from you, regardless how great the market is. A market does not create revenue or sales for you. It is your customer who buys from you, who provides you with the cash-flow you need to run your business.
And you need not one customer but enough to make a living from. That is also important for entrepreneurs. Do you have enough potential customers? How many customers do you need for breakeven? Is this figure realistic? How many customers do you need for a very happy life? But first, you have to excite the potential customers so that they become paying customers.
The customer driven approach to business model design is bottom up vs. the top-down approach of the market. And even in mature and declining markets you can make a good living if you have the right business model.
Please, write business plans for customers
So, please write your business plan around customers and how you will excite them with your offer. It is the value proposition that makes the difference and, of course, the value architecture to fulfill the value proposition. It is great to start with a product idea but it is the value proposition that counts. Think about the job you solve for your customers.
Customer centric business cases
And please, write your business case accordingly. A VC told me recently that he checks all business cases he wants to invest for a little dirty secrete. He makes a small crosscheck between sales figures and sales & distribution costs.
First, he tries to understand the buying cycle of customers. That is how long it takes a customer from the first sales pitch to the final sales and payment. Most of the time, that takes much long than entrepreneurs expect.
The second calculation is how many customer do you have to pitch to in order to get an opportunity and later the lead. He is doing the classical sales funnel. What is in the pipeline and how long does it take a bid to go through your pipeline.
And than his little trick comes in to place. He calculates than how many sales guys you need in order to fill the pipeline with the needed leads to achieve the sales you have used in your business case on the top line. And than he compares this to the sales costs. And most of the time there is a huge mismatch between the sales figure (too high) and the sales costs (too low) and the number of sales you want to hire (too low).
For this successful VC this shows him that you are not customer driven and not sales driven but a victim of the wrong assumption of what a market is. For a business you have to find customers that are willing to pay. So think about customers in the future, not markets.