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This book is dedicated to the FourWeekMBA community, which has helped me gain
a Ph.D. in the real business world, without going back to Academia. In the process,
I have become a better business person and helped thousands of people to do the
same. In the future, I hope this project can reach even more people, in as many
countries as possible!

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● The 100+ Business Models Book
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Week One: Mastering The Financial Game 13

Financial Accounting 13

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 Who was the father of the Double-Entry System? 13
Double-Entry System in a Nutshell 14
Financial Statements in a Nutshell 14
What is an asset? 14
What is a liability? 14
What is equity? 15
The accounting equation 15
What is a balance sheet? 15
What Are Revenues and Costs? 15
What is the purpose of the income statement? 15
What is the purpose of the accounting discipline? 15
Time to Master the Accounting Game 16
Financial Accounting Case Study 16
Broken Inc. Is Temporary Unbroken 18
Fixing the Finances of Broken Inc. 20
How to Balance a Balance Sheet: Balancing Things Out 21
Summing up and Conclusions 21
Connecting the dots 22

Financial Statements & Analysis 23

Why Ratio Analysis? 24
Financial Ratio Analysis and interpretation 25
Key financial ratios 25
Types of financial ratios 26
What is liquidity? 26
What are the main liquidity ratios? 27
Current Ratio 27
Quick Ratio (Acid or Liquid Test) 28
Absolute Ratio 28
What is profitability? 29
What are the main profitability ratios? 29
Gross Profit Margin 30
Operating Profit Margin 30
Return on capital employed 31
Return on Equity 31
What is Solvency? 32
What are the main solvency ratios? 32
Debt to equity ratio 32
Interest Coverage Ratio 33
Debt to Assets Ratio 33
What is efficiency? 34
What are the main efficiency ratios? 34
Inventory Turnover 34
Accounts Receivable Turnover or collection period 35
Accounts Payable Turnover Ratio 35

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 What is valuation? 36
What are the main valuation ratios? 36
Earnings Per Share 36
Price/Earnings Ratio 37
Dividend Yield 37
Payout Ratio 37
How, why, and when to use financial ratios 37

Week Two: Business Model Engineering 159

Business Strategy 38
Is a business strategy the same thing as a business model? 38
What is the business model essence? 39
Is business strategy a science? 39
Survivorship bias 40
Lindy effect and aging in reverse 40
Caveat: Frameworks work until suddenly they don’t 41
Master a business strategy process 41
Business strategy case studies 41
Alibaba Business Strategy 41
Alibaba vision, mission, and core principles 42
Alibaba ecosystem and value proposition 43
Amazon Business Strategy 44
Amazon vision, mission, and core values 46
Start from a proof of concept, then scale up 46
Decentralized and distributed value creation: the era of platforms and ecosystems 46
Apple Business Strategy 47
Airbnb Business Strategy 51
Baidu Business Strategy 52
Baidu mission: two-pillar business strategy, and value propositions acting as a glue for its
key users/customers 53
Booking Business Strategy 54
Booking mission, value proposition, and key players 55
DuckDuckGo Business Strategy 55
Google (Alphabet) Business Strategy 56
Understanding Google’s moonshot thinking and a breakthrough approach to business 57
Key takeaway 58
When did my love for business modeling start? 59
What is a business model and why is it important? 59
A quick history of business models 60
A business model is not a business plan 61
A business model is not a revenue generation strategy 63
The importance of business model design 64
Business modeling is about experimentation 65
Technological innovation vs. business model innovation 66

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 Why business model innovation matters so much 66
Competitive moats are generated around business model innovation 67
Business model innovation as a traction model 68
What are the primary components of a business model? 69
The business model canvas perspective 69
The FourWeekMBA perspective on business model components 71
How many types of business models exist? 72
Vision vs. Mission: why understanding the difference between them is important 73
50+ business model examples in a nutshell 74
A mix of chain and franchise business model 74
Ad-supported (subsidized) business model 75
Affiliate business model 75
Aggregator business model 76
Agency-based business model 76
Asymmetric business models 77
Attention merchant business model 78
Barbell business model 78
Bidding multi-brand platform model 79
Blitzscaler-mode business model 80
Blockchain-based business models 81
Bundler model 82
Cash conversion cycle or cash machine model 82
Discount business model focusing on high quality 83
Distribution based business model 83
Direct-to-consumers business model 84
Direct sales business model 85
E-commerce marketplace business model 86
Educational niche business model 87
Family-owned integrated business model 88
Feeding model 89
Freemium model (freemium as a growth tool) 90
Freeterprise model 92
Gatekeeper model 94
Heavy-franchised business model 94
Humanist enterprise business model 95
Enterprise business model built on complex sales 95
Lock-in business model 96
Instant news business model 96
Management consulting business model 97
Market-maker model 97
Multi-brand business model 98
Multi-business model 99
Multi-sided platform business model 99
Multimodal business model 100

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 Multi-product (Octopus) business model 101
On-demand subscription-based business model 102
One-for-one business model 102
Peer-to-peer business model 103
Platform-agnostic model 104
Privacy as an innovative business model 105
Razor and blade revenue model 106
Self-serving model 106
Space-as-a-service model 107
Subscription-based business model 107
Three-sided marketplace model 108
User-generated content business model 109
User-generated AI-amplified model 110
Unbundler model 110
Vertically-integrated business model 111
Key takeaways 111

Week Three: Master The Customers 112

Radio and Mass-market 113
Television and mass market 113
The internet, Google, and its AdWords 114
Social networks, Facebook, and its advertising network 116
If you want to know where the advertising money is… 133
Everything you need to know about market segmentation 117
What is market segmentation? 118
What are the bases of market segmentation? 118
Why, when, and how to create a market segment 119
Requirements for market segmentation 120
Measurable and identifiable 120
Accessible 120
Different 120
Substantial 120
Durable 120
Types of market segmentation 120
What is demographic segmentation? 121
What is geographic segmentation? 121
What is behavioral segmentation? 122
What is psychographic segmentation? 122
The four-level of market segmentation 123
Mass marketing and the shotgun approach 123
Segmented markets 124
Niche marketing and micromarketing 124
One-to-one marketing 124
The most powerful online tools for the marketer 125

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 Google Analytics: from behavioral to psychographics advertising 126
Retargeting and the art of repeating the message 127
Google’s in-market audiences 128
Facebook audience insights 129
Key takeaway 131

Sales vs. Marketing 159

Distribution can be a branding hack 133
Some practical suggestions for your sales processes 133
How much to spend on Marketing vs. Sales? It’s all about the product and the target customer 134

Week Four: Growth And Distribution 159

Why a distribution channel strategy matters 135
Types of distribution channels 135
Distribution channel vs. supply chain 136
Supply chain vs. demand chain 136
Internal vs. external 137
Process-centric vs. customer-centric 137
Why you need to understand the demand chain 137
B2B, B2C, and distribution channels 138
Traditional distribution channels vs. digital distribution channels 138
Distribution management: marketing or sales? 139

Pricing: What Model Will Work For You? 140

Pricing strategy and revenue modeling 140
AppSumoed: transforming subscriptions in lifetime deals 141
Auction: the winner takes it all 141
Bundled: more for less 142
Consumption-based: pay what you consume 142
Couponized: discounted as default 143
Fixed-price: the safe price 143
Pay-as-you-go: charge it up and go 143
Pay as you want: customer-made pricing 143
Platformed: get a cut on one or both sides 143
Psychological pricing: change the product’s perception 144
SaaSified: transform a product into a service 145
Subsidized: let the rich pay for the poor 146
Uberized: dynamic pricing 146
Unbundled: let them get what they want 147

Business Development 147

Business Development vs. sales 148
The successful business developer thinks like a marketer but acts like a salesman 148
Business development is about nurturing the right relationships with partners that can become
distribution channels 148
Business development guides marketing automation 149

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 Business development scales up businesses 149
Business development is about a growth mindset 149
Business development requires a high level of understanding of a potential partner 149
What activities does business development imply? 149
The sales pipeline is a basic tool for a business developer 150
What actions can the business developer perform to improve the sales pipeline? 151
What’s a secret weapon for the business developer? LinkedIn 152
A crash course in sales canvassing 152
Why can sales canvassing matter? 153
Understanding the strength and unicity of the product/service 153
Focus on the problem and payoff 153
Set a target customer 153
Have a script but leave it flexible 154
Rejection is part of the process 154
Focus on a single channel but leverage on several media 154
Examples of sales canvassing 154
A crash course in sales and marketing alignment best practices 154
Marketing and Sales working together 155
Lead generation 155
Automation 155
Viral marketing 155
More sales best practices to apply to your business 156
Action plan 156
Customer targeting 156
Sales canvassing 156
Sales scripts 156
Email templates 157
Personalized message 157
Value proposition 157
10x goal setting 157
Understand the client business model 157
Follow-up 157
Fill your pipeline, always! 158
Keep in touch 158
Deliver value before closing 158
Outstanding support 158
At the end of it, it’s about listening 158

Growth Marketing 159

Why growth hacking is critical for your online business 159
What is Growth Hacking? (and what is not!) 160
The Growth Hacking Mindset 161
From Personal to Incremental: Two Approaches to Learning 161
The Power of Yet: The Growth Mindset 162
It Got to Be Data-Driven: The Feynman Approach 162

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 The growth hacking methodology 162
T-shaped: To be a growth marketer multidisciplinarity is the rule of thumb 163
Growth Hacking is about the whole funnel 163
Top growth channels used by marketers 164
The importance of direct traffic to assess your branding strategy 164
Guest blogging 165
Interviews 165
Social media 165
Community building 165
Get off-line 166
Spark curiosity 166
Why organic traffic means a sustainable business 166
An integrated SEO strategy that brings together social media and content marketing 166
Gain referral traffic to diversify your acquisition channels 167
The 10 building blocks of the growth hacking canvas 167
Key takeaway 168

Product-Market Fit In A Nutshell 168

The Lean Startup Methodology in a nutshell 169
The Minimum Viable Product in a nutshell 170
Problem/Solution Fit comes first 171
Product-market fit myths 171
Myth #1: A product-market fit is a one-time event 171
Myth #2: Product-market fit is a linear process 171
Myth #3: Product-market fit is a one-time achievement 171
Myth #4: Product-market fit = no competition 171
Connecting the dots 172

The Five Stages Of A Technology Adoption Life Cycle 172

Why is the technology adoption life cycle useful? 173
What are the stages of a technology adoption life cycle? 173
Innovators 174
Early Adopters 174
Early majority 174
Late Majority 174
Laggards 174

Business Model Canvas In A Nutshell 175

Business model canvas in a nutshell 176
Key partners 176
Key activities 176
Value proposition 177
Customer relationship 178
Customer segment 178
Key resource 179
Distribution channel 179

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 Cost structure 180
Revenue stream 180
Google business model canvas case study 181
Google key partners 181
Partnership agreements 182
Open handset alliance 182
AdSense network 182
Webmasters 183
Google key activities 183
Google’s value proposition 183
The value proposition for billion of users 183
Tools and productivity apps 183
Google advertising business 184
Google AdSense 184
Google customer relationships 184
Salesforce able to support AdWords (now Google Ads) businesses 184
Privacy 184
Google customer segments 184
Free internet users 184
Agencies, marketers, and businesses 185
Publishers 185
Google key resources 185
Google distribution channel 185
Google cost structure 185
Google revenue streams 186
Key takeaways 186
Beyond the Business Model Canvas And Into The VTDF Framework 186
VTDF Business Model Template 187
Value model 187
Value propositions 188
Mission and vision 189
Technological model And R&D Management 189
Distribution Model 190
Financial model 191
Revenue model 192
Cost structure 192
Profitability 193
Cash generation and management 193
Key takeaways 193
Competitor Analysis with the VTDF 194
Why competition in the business tech world looks slightly different 194
Breaking down the competition in the business tech world 194
Current Customer Overlap 195
Current Technology Overlap 195

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 Current Distribution Overlap 195
Current Financial Model Overlap 195
Future Technology Development 195
Case Study: Tesla 195
Automaking 196
SPORT & PERFORMANCE 196
SUV 196
TRUCK 196
CITY CAR 197
Energy Generation & Storage 197
Autonomous driving 197

TAM-SAM-SOM 198

Week Five: M.O.V.E. Framework (Time For Action) 200

Mindset 200
Never run out of ideas 201
Why anyone can be creative 201
Getting into the Flow process 201
Creativity can be manufactured 202
Acquisition of creativity and interest 202
Curiosity and interest 202
Cultivating flow 202
Habits of strength 202
Mastering your internal traits 202
Apply your creative energy 203
Problem finding 203
Divergent thinking 203
Choosing a special domain 203
Funneling ideas 203
Don’t be scared to throw 99% of your ideas 203
Are you passionate about it? Or are you willing to put together a team that might be
passionate about it? 203
Idea validation: Is there a market demand? 204
Find your sweet-spot 204
In search of your blue ocean 205
Find your niche, or better yet your microniche 206
How do you pick a microniche? 206
Pretotype 210
Iterate up to market-fit 210
Operations 211
Stay lean 211
Stay focused and SMART 212
Stay fast and frugal 213
Velocity and Momentum 213

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 Switch on the engines of growth 213
Growth framework 214
Execution 214
Key takeaways 214
The power of the brand and your brand identity 215
What’s your essence? 215
Master the problem 216
Building companies to mastering the problems 217

Week One: Mastering The Financial Game

Financial Accounting
When humans lived in the savannah, they lived in small groups, which would consist approximately of
no more than a few dozen individuals. Through the millennia the human tribes evolved in groups that
became larger and larger until they became societies. Societies are characterized by large groups of
people that interact on a daily basis. Those people are in some way associated with religion, culture,
and commerce. While religion and culture evolved mainly by word of mouth, commerce instead needed
to develop other (more complicated) tools to thrive. In fact, if a little society consisted of a few hundred
merchants; and if we consider all the possible interactions that could happen between them, they would
easily amount to millions of transactions. Therefore, the sole word of mouth wasn’t sufficient for
keeping track of all those transactions. That is where “writing” came in handy. The ancient
Mesopotamian merchants, thus, started to develop tools that would allow them to track all the goods
exchanged. This evolution continued up to Middle Ages Florence. At that time, Florence was a
metropolis (we can compare it to modern New York), and commerce had boomed. In fact, merchants
from all over the world flowed into Florence to buy and sell any goods.
The commercial routes between Florence and Venice were quite trafficked. Not surprisingly Florentine
merchants had to come up with a tracking system that would allow them to consistently keep up with
the millions of transactions taking place in Florence. Most probably the Florentine merchants initially
came up with several systems for tracking those transactions. Thus there was no standard or consistency.
Somehow by the fifteenth century, a tracking system called “double-entry” (developed in Venice) took
over and became the most used accounting system at that time.

Who was the father of the Double-Entry System?

Luca Pacioli (a mathematician and Franciscan Friar from Tuscany) formalized the double entry in his
Summa de Arithmetica, in 1494. In his work Luca Pacioli tells us that any business to be successful
necessitates three things:

● Capital (cash or credit).

● A good accountant.

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 ● A good internal system.

For “capital,” Pacioli intended mainly cash (he understood way before Franklin that “cash was the
king”), but also credit. In other words, Pacioli believed that trust was the pillar of any business. He used
the word credit because it comes from the Latin word “credo,” which means, “trust.” The second and
third aspects are crucial as well. In fact, a good accountant has to have a basic understanding of
mathematics (very basic). And he has to be able to effectively use an internal system, which he calls a
double-entry system. That system became the official system of the western world. And it is still in use
today. How does it work?

Double-Entry System in a Nutshell

The double entry is merely a tracking system. Each transaction is classified according to two entries
(hence it is called double-entry): debit and credit. In short, like a computer language is expressed in bits,
which consist of a bunch of 0s and 1s, accounting language is expressed in debits and credits. What do
those terms mean? Debit comes from the Latin “debitum,” which simply means, “What is owed.” Credit
instead comes from the Latin “creditum” that can be translated as “having been loaned.” But what is
owed or loaned? The only good exchange in the accounting world is money. Therefore, when we say
debit and credit, it always refers to assigning a $ amount to the goods or services sold or bought by the
organization. Therefore each time a transaction needs to be recorded in the accounting journal (so-called
General Ledger) the money needs to be debited to an account while credited by another account. In this
way the transaction balances. Before you can record your first transactions, you must have a basic
understanding of the primary financial statements: balance sheet and income statement.

Financial Statements in a Nutshell

The central premise of accounting is to keep track of a bunch of transactions taking place in a particular
period. For some reason, the double-entry system prevailed. This system says that each time you record
a transaction, you must debit one account and credit another account. But what is an account? An
account is merely a way of classifying different transactions. In fact, in bookkeeping exist five main
accounts:

● Asset.
● Liability.
● Equity.
● Revenue.
● Cost.

What is an asset?
In short, the assets are all those resources that the company has at its disposal to run the business in the
short and long term.

What is a liability?
The liabilities instead are mainly the money borrowed to acquire those resources.

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What is equity?
Not all the resources (assets) are acquired through debt (liability). In fact, you may invest some of your
money into the business to buy the machinery or other stuff that will help you to run it. In this case, the
money you put into the business is called equity. That’s it.

The accounting equation

For instance, if you open an ice-cream shop, you will buy the machine (asset) by borrowing some money
from the bank (liability) and by putting some of your money (equity). Consequently, the value of your
machinery (asset) will be equal to the borrowed money (liability) plus your own money (equity). From
here the so-called accounting equation A = L + E.

What is a balance sheet?

Those three accounts (Assets, Liability, and Equity) comprise the so-called Balance Sheet. Thus, for
any given instant of the life of your business, the balance sheet will tell you what the $ amount of assets
the company owns is and how those assets have been acquired (Either through debt, also called liability,
or through equity, also called capital). Consequently, the $ amount of liability and equity must balance
with the $ amount of assets the company owns. Pretty straightforward! Isn’t it? If you didn’t get it yet,
don’t worry we are going to see some beneficial practical examples. Knowing how much assets,
liabilities, and equity the company owns or owes at each instant, (in accounting lingo) is called
“financial position.”

What Are Revenues and Costs?

On the other hand, we are still missing two accounts: revenue and cost. The revenues are merely the
money flowing into the business at any given period. The costs are all the expenses flowing out at any
given period. The costs can be broken down in several ways. By subtracting the costs to the revenues
of the business you get what is called Net Profit/Loss; which in accounting jargon is also called “bottom
line.” Those two accounts together form the so-called “Income Statement.” Accountants use a lot of
other names for it (Profit and Loss or Statement of comprehensive income), which all mean the same
thing.

What is the purpose of the income statement?

Therefore, the primary purpose of the income statement is to show how much money went in and out,
and if the balance was positive or negative. Keep in mind that “money” does not mean “cash.” in fact,
often accounting runs on an “accrual basis.” It simply means that transactions are recorded in the income
statement independently from cash disbursement. A cash basis, instead, indicates that transactions are
recorded only when cash is passed from hand to hand.

What is the purpose of the accounting discipline?

We saw that the accounting equation’s primary purpose is to keep things in balance. It makes perfect
sense. In fact, in the real world, if you put $5 in your pocket, you will still find $5 (unless you are a
magician, which in the accounting world is called “fraudster”). Things get a little bit trickier in

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accounting. Keep in mind that the double-entry system has been designed to understand where the
money came from. Imagine the case in which you have a $100 bill. You put it in your pocket. After a
few weeks you take it out, but you completely forgot where it came from. Did I borrow it from someone?
Was it the money I saved? Did anyone pay me for the work done? You don’t have an idea! While you
can afford to let this happen in the real world, this must never happen in the business world. Companies
often buy and sell hundreds of goods or services. This generates a huge volume of transactions. Thus,
knowing where anything comes from it is crucial for three main reasons:

● Internal control.
● Tax compliance.
● Performance measurement.

First, as you can imagine companies without an efficient system that keeps track of all their transactions
would not be able to know what happens within the organization. This can lead to fraud, bad
management, and so on. Second, the government also requires companies to submit their tax returns.
To do so, businesses must keep track of all their transactions and know how to classify them. Third,
another branch of financial accounting (ratio analysis) is also crucial to understand how the business is
managed from several perspectives.

Time to Master the Accounting Game

So far we saw that the accounting world uses two main documents (balance sheet and income statement)
to answer two central questions:

● First, how much of my assets have been acquired through debt and capital?
● Second, are my assets generating a net profit or a net loss?

By answering the first question, we can determine the financial position of the organization. By
answering the second question, we can understand if the assets we bought are generating profits. Hence,
we can determine if it is worth going on with the venture. A third document is crucial to understand
business performance as well (the cash flow statement). Yet, if you master the balance sheet and income
statement you are on the right path to developing more profound business acumen. The two questions
above are crucial to understanding how to record transactions in the accounting books. Hence, we will
do this exercise by thinking about situations that may present in your life. This time though each time
you put a $100 bill in your pocket you have to answer the two questions above. Let’s start then, action!

Financial Accounting Case Study

You are broke, 0$ in your pocket! But you have to pay the rent! It amounts to $500. The landlord is
coming tomorrow. How do you fix this situation? Although you are a grown-up, it is an emergency
situation. Thus, you put your pride aside and ask your parents. They love you of course. Therefore, they
give you money. We are going to assume that your right pants’ pocket is a venture. We will call it
“Broken Inc.” Broken Inc. has now one shareholder (yourself) and a bank (your parents). How do we
record this transaction in the accounting world? Easy. Do we have to answer the first question: how did
we acquire that money? Since your parents gave them to you, we will assume that you are proud enough
to give them back, once you earn them. Thus, we will consider $500 as a loan. According to the
accounting equation, Assets are on the left side, while Liability and Equity on the right side:

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To record transactions, accountants use a visual aid called T-Entry (nowadays it’s all done automatically
by the software. This may seem like a good thing, but often it’s not. When folks don’t take the time to
understand how accounting works from its foundation screw-ups are guaranteed in the long run):

As you can see on the left side we have debit and on the right side credit. This means that each time we
want to show that our assets increased we just debit them (remember assets are on the left side of the
accounting equation) and vice versa. Instead, each time we want to show that our liability or equity
increased we just credit them (remember that liability and equity are on the right side of the accounting
equation) and vice versa. To recap:

● To show an increase in assets we debit them. To display a decrease in assets we credit them:

● To show an increase in liability or equity we credit them. To show a decrease in liability or

equity we debit them:

We can now put things together:

Let’s record the transaction. Broken Inc. received $500. It is a loan. This means that now in Broken Inc.
bank account (your pocket) there is $500. But it is a loan. In fact, they will be given back to the bank
(your parents).

We will record the transaction in the following way:

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Therefore, your pocket (which is your cash account) will be debited. Why? It is a short-term asset. On
the other hand, we will credit the $500 to an account that I arbitrarily called “Parents’ Loan.” Why? It
is a liability. In other words, we showed that your cash account increased by $500. But we also know
why that happened. Your parents gave you the money. Hence, once you will go back in a few weeks
and look at Broken Inc. balance sheet, you will know where the $500 came from. As you can see from
the image above, the T-Entry is immediately translated into your balance sheet. In fact below the t-
entry, the balance sheet (BS) shows that you have $500 in assets but also $500 in liability. Thus even
though, in the present, you have $500. You know that in the future you must return them back.
Remember those are virtual transactions. It means that they take place only in your accounting books.
In reality, you have $500, and that’s it! But accounting is a little bit trickier than reality because it needs
to answer the two questions we saw at the beginning of the paragraph.

Broken Inc. Is Temporary Unbroken

In Scene One your parents saved your rear. The landlord is knocking at your door. He will ask for the
rent. The only liquid money available will disappear in a few minutes. For now, though you don’t worry
too much. You open the door, and the landlord is already with his hand forward waiting for the $500.
This means that you will put the hand in your right pants’ pocket. We will consider the rent’s money as
an expense that Broken Inc. is incurring. In fact, expenses are often connected with the assets. For such
reasons on our income statement, we will place them on the left side. On the other hand, we will place
the income on the right side. In other words, our income statement will look like the following:

This implies two things:

● To show an increase in expenses, we will debit them (they are on the left side of the t-entry)
and vice versa.
● To show an increase in revenues, we will credit them (they are on the right side of the t-entry).

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Thus it will look like the following:

You have the insight to record the transaction now. Since you paid the rent to the landlord, this is a
“rent expense.” yet to pay it by withdrawing the money from Broken Inc.’s pocket account. Therefore:

As you can see in the upper part, we recorded the transaction. We showed an increase in rent expense
by debiting it and a decrease in Broken Inc. Pocket (asset) by crediting it. On the below part you can
see how your financial statements look like (balance-sheet + income statement are called so). Thus, the
Income Statement (IS) shows a net loss of $500, while the balance sheet (BS) shows only $500 in
liability. There is something wrong here. Do you notice anything? Not yet? Let me give you an insight.
It is not by chance that the “balance” sheet is called so. In fact, it must always balance. Always!
Therefore, when you see the asset side showing a different amount compared to the liability + equity
side, something is wrong. In this case, nothing is wrong. We just missed a step. In fact, to match the
asset side with the liability & equity side of the balance sheet, we have to connect it to the income
statement. How? We must report the losses in the equity section of the balance sheet. In fact, in
accounting when you have a net loss on the income statement, it will also be shown as “accumulated
loss” on the balance sheet. Once we do so the BS will balance out:

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As you can see the liability and equity cancel each other out. Therefore, eventually, your balance sheet
will have $0 in total assets and $0 in liability plus equity (the parent’s loan cancels out with the
accumulated losses, which makes the equity account negative). Broken Ink. is in financial distress again.
It is time for you to fix its finances since you are its greatest asset. It is time to earn some money!

Fixing the Finances of Broken Inc.

You decide to pay back the money your parents gave you to pay the rent. Therefore, you look for a job
and finally find it. You will be working as a waiter in a restaurant, earning a fixed salary of $1,000 per
month. Mr. Sal agrees to pay you in advance (he is very kind). Thus, you finally get the paycheck. The
paycheck is going to be income for Broken Inc. Finally, you will not show a net loss. Thus, you record
the transaction on Broken Inc. accounting books:

As you can see in the upper part, we recorded the t-entry. In short, we debited Broken Inc.’s pocket to
show that the cash account increased by $1,000. Also, we credited the salary account to show that it

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increased by $1,000. As you can see below the t-entry, the entry on the left (Broken Inc. pocket account)
is translated on the balance sheet. The entry on the right (salary) is translated into the income statement.
Since the salary offset the rent expense, you now have a net profit of $500. That net profit was also
translated on the balance sheet as accumulated earnings. Neat! Finally, Broken Inc. paid all its debts,
and it has a $500 surplus. Don’t you think it is time to pay back your parents’ loan?

How to Balance a Balance Sheet: Balancing Things Out

You proudly walk toward your parents’ house. In a week things have changed. You grew up and learned
the lesson. It is time to repay your parents. You get in the house. Your mother is in the kitchen. She is
cooking for you. You sit at the dinner table and announce to your parents that you found a job.
Therefore, you give them back the $500 they borrowed from you. Broken Ink is 100% yours now! You
are your own master. Let’s see how to record the last transaction:

As you can see we debited the Parents’ Loan (liability) to show its decrease. On the other side, we
credited the Broken Inc. Pocket account (asset) to show its decrease. This transaction only affected the
balance sheet. In fact, the left side of the t-entry zeroed out the loan. The right side of the t-entry resulted
in a $500 decrease in the same account. The income statement was unaffected. In short, Broken Inc. has
$500 in cash, which are all yours, since those are accumulated earnings. Congratulations!

Summing up and Conclusions

Throughout this short manual, we saw that accounting was already used in ancient Mesopotamia. The
double entry system was developed in Venice but formalized for the first time by a Tuscan
mathematician, Luca Pacioli. In his work, Summa de Arithmetica, Pacioli delineated the three most
important aspects of any business:

● Capital (cash or credit).

● A good accountant.

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 ● A good internal system.

Also, we saw that the two main documents that describe the situation of any business are the balance
sheet and income statements. Together they form the so-called financial statements. Those two
documents classify the accounting transactions under three main accounts:

● Asset.
● Liability.
● Equity.
● Revenue.
● Cost.

Assets, Liability, and Equity are shown under the balance sheet, for which the primary purpose is to
show the financial position of the organization. The “balance” sheet is called so because the Asset side
always has to match up with the Liability and Equity side. From this premise we get the accounting
equation A = L + E. after that, we have the income statement, which classifies the transactions in Income
(or revenue) and Cost (or expense). Its main purpose is to show whether the business has a net profit
(total revenue is higher than total costs) or a net loss (total expenses higher than total revenues).
Together those two statements answer two central questions:

● First, how much of my assets have been acquired through debt and capital?
● Second, are my assets generating a net profit or a net loss?

Connecting the dots

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Financial Statements & Analysis
“It has been my experience that competency in mathematics, both in numerical manipulations and in
understanding its conceptual foundations (accounting), enhances a person’s ability to handle the more
ambiguous and qualitative relationships that dominate our day-to-day financial decision-making”
Alan Greenspan

Even though financial statements are produced for internal management as well, most of the time they
are pointed externally. The main financial statements are the Balance Sheet, Income Statement, and
Cash Flow Statement. Each of these statements has a different purpose, and together they give us
specific information in regard to: “Return, Risk and Cash”. First, if you look at the income statement,
there is no way you would make any assessment about the risk of the organization at that particular
point in time or the cash produced in a certain period. Instead, the Income Statement (or Profit & Loss)
will show you the return generated by the business. Second, if you want to understand how an
organization acquired the resources to operate the business, you have to look at the balance sheet.

Balance Sheet. How does the balance sheet assess the risk of an organization? Simple: there are two
ways a company can acquire resources, either through Equity or Debt. As you can imagine, too much

23
debt can be dangerous. What would occur if you run a business and suddenly your creditors ask for the
money you owe them? You would go bankrupt. Instead, when debt in proportion to the equity is dismal,
this makes your organization creditworthy and safer. Third, it happened many times in the financial
world history to see profitable companies bankrupted due to poor cash management. The cash flow
statement helps you to answer questions such as: How much cash did we make? Where did the cash
come from? In fact, an organization can find cash through three main activities: Operating, Investing,
and Financing. The main purpose of the Balance Sheet is to show the risk of the business at a particular
moment you are looking at it. In Fact, if you look at the balance sheet on January 1st it won’t be the
same on January 2nd. Of course, this is true for the P&L and CFS (Cash Flow Statement) as well, but
the balance sheet is an instant snapshot of the business more than a collage of pictures taken in different
moments, like the Income Statement.

Income Statement. The main purpose of the income statement is to show the return of the business in
a certain period: Quarterly, Biannually, or Yearly. The income statement is built around the bottom line,
the “net profit”. Do not be surprised to notice your eyes unexplainably falling on the net income. In
fact, accountants make it as visible as a fluorescent fish ready to mate. This distracts you by other
metrics on the Income Statement that are as important as the Net Income.

Cash Flow Statement. The main purpose of the CFS is to show the cash generated by an organization
in a certain period: Quarterly, Biannually, or Yearly. It doesn’t matter how much profits a business is
making, one way to know whether the business will survive in the next future is to look at the cash.
Generating cash is no an easy task and the organizations that are able to keep their profits stable and
generate enough cash to sustain their operations and invest for future growth are the ones who thrive.

Let me use a real-life analogy here. If you are a photographer in order for you to do your job, you must
have a professional camera. In addition, you can take instant pictures or build a collage of pictures you
have taken in the last three months, and remember the camera will work as soon as the battery will be
charged. Indeed, you can compare the single picture or “instant picture”, on your balance sheet, while
the “collage” pictures taken in the last three months, at your P&L. Furthermore, you want to see what’s
the level of charge of the battery and how long the camera will operate. The battery life can be compared
to your CFS. Indeed, a lack of cash for a business is almost like a lack of oxygen for an individual.
According to your needs, you can look separately at each statement. However, if you want the whole
picture of the business you must look at all of them concurrently.

A financial ratio, instead, is a metric usually given by two values taken from a company’s financial
statements that compared give five main types of insights for an organization. Things such as
liquidity, profitability, solvency, efficiency, and valuation are assessed via financial ratios. Those are
metrics that can help internal and external management to make informed decisions about the
business.

Why Ratio Analysis?

Ratio Analysis allows us to answer questions such as: How profitable is the company? Will the
organization be able to meet its obligations, in the short and long-term? How effectively is the
organization using its resources? Of course, some of the ratios (such as the profitability ratios) if not
assessed against other ratios do not mean anything. Also, if you want to know more about one company
you have to analyze it in comparison with other companies which present the same characteristics, such

24
as industry, geography, customers and so on. For example, if you are performing an analysis of Apple
Inc., you cannot compare its ratios with Coca-Cola. Instead, you should compare Apple Inc. with
Samsung or Microsoft. Therefore, the ratio analysis is a tool that gives you the opportunity to interpret
the information provided by the P&L and BS to understand how the business is operating in the
marketplace.

Financial Ratio Analysis and interpretation

By looking at the primary financial statements (Balance Sheet and Income Statement), you won’t be
able to find an answer unless you ask the right questions. Although the financial statements give you
already a great deal of information about the business, there is still something missing. Financial ratios
are a simple way to interpret those financial statements to extract critical insights to assess a company
from the inside or the outside. In short, either you are a manager looking for ways to improve your
business. Or you’re an analyst trying to figure out insights about an organization whose financial ratios
will help you out.

Key financial ratios

There are several financial ratios to assess the health of a business. Some of the key ratios used by
managers include the following:

1. Current Ratio.
2. Quick Ratio.
3. Operating profit margin.
4. Net profit margin.
5. Debt to equity ratio.
6. Inventory Turnover.

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 7. Return on equity.
8. Earnings per Share.
9. Return on assets.

As we’ll see through this guide the choice of a financial ratio is also in accordance with the industry
and business models we’re analyzing.

Types of financial ratios

Financial ratios are great “financial heuristics” to have a quick glance at the business performance.
Those financial ratios, in particular, help us assess five things:

● Liquidity.
● Profitability.
● Solvency.
● Efficiency.
● Valuation.

Each of those aspects it’s essential for a business’s sustainable short and long-term growth.

What is liquidity?
Liquidity is the capacity of a business to find the resources needed to meet its obligations in the short-
term. For such reasons, the liquidity on the Balance Sheet is measured by the presence of Current
Assets in excess of Current Liabilities or the relationship between current assets and current liabilities.
Why do we need to assess the liquidity of a business? For several reasons; Imagine, you are establishing
contact with a new supplier. There is no precedent history between you two. The supplier wants some
sort of guarantee that you will be able to meet future obligations. Therefore, he asks for a credit report
about your organization. This report shows whether an organization has enough liquidity to sustain its
operations in the short-term. How? Based on the main liquidity ratios of your organization a rating will
be assigned. The rating is a grade the organization gets if it meets specific criteria. Based on that rating
the supplier will decide whether to entertain business with you or not. Of course, the Rating itself is
more qualitative and quantitative. In other words, the numbers provided by the liquidity ratios will b e
intersected with other metrics (such as profitability ratios and leverage ratios). Another example,
imagine you want to open an overdraft account with a local bank. The same scenario applies since the
local bank will assess your credit score before approving the overdraft. Thereby, the bank will look at
your BS and see how liquid the organization is.

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What are the main liquidity ratios?

Current Ratio

This ratio shows the relationship between the company’s current assets over its current liabilities. It
measures the short-term capability of a business to repay for its obligations:

Current Assets / Current Liabilities

Example: Imagine, your organization, in Year-Two has total current assets for $100K and total current
liabilities for $75K. Therefore: 100/75= 1.33 times. Your current ratio is 1.33.

Is it good or bad? Well, it depends.

You have to compare this data with the previous year’s ratio. Also, it depends on the kind of industry
you are operating within. Of course, a clothing store or specialty food store will have a much higher
current ratio. Thereby the current assets will be 4 or 5 times the current liabilities, mainly due to large
inventory. Other companies, such as the ones operating in the retail industry can have current ratios
lower than 1, due to favorable credit conditions from their suppliers. This allows them to operate with
a low level of inventory. For example, companies such as Burger King will have a ratio as high as 1.5,
while companies such as Wal-Mart as low as 0.3.

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Quick Ratio (Acid or Liquid Test)

On the Balance Sheet (BS) the items are listed from the most liquid (cash) to the least liquid (inventories
and prepaid expenses). The first section of the BS shows the current assets subsection (part of the Assets
section). Current Assets are those converted in cash within one accounting cycle. Therefore, while the
current ratio tells us if an organization has enough resources to pay for its obligations within one year
or so, the Quick ratio or acid test is a more effective way to measure liquidity in the very short-term.
Indeed, the quick ratio formula is:

Liquid Assets / Current Liabilities

How do we define liquid assets? Liquid assets are defined as Current Assets – (inventory + Prepaid
expenses). Although inventory and prepaid expenses are current assets, they are not always turned into
cash as quickly as anyone would think.

Example: Imagine that of $100K of current assets. Of which $80K are liquid assets, the remaining
portion is inventory. The liability stays at $75k. The quick ratio will be 1.06 times or $80K/$75K.
Therefore, the liabilities can be met in the very short-term through the company’s liquid assets. To
assess if there was an improvement in the creditworthiness of the business we have to compare this data
with the previous year. Although, a quick ratio of over 1, can generally be accepted, while below one
is usually seen as undesirable since you will not be able to pay very short-term obligations unless part
of the inventory is sold and converted into cash.

Absolute Ratio

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This is the third current ratio, less commonly used compared to current and quick ratio. If the quick
ratio is more stringent in comparison to the current ratio, the absolute ratio is the strictest of the three.
This is given by:

Absolute Assets / Current Liabilities

Liquid assets – Accounts receivable = Absolute Assets. Generally, cash on hand and marketable
securities are part of the absolute assets. The purpose of the absolute ratio is to determine the liquidity
of the business in the very short-term (a few days). Using one current ratio or the other is really up to
you, and it depends on the kind of analysis performed. Of course, if you want to know if an organization
would be able to pay in the three-month time frame, then, the Quick Ratio may be a more appropriate
measure of liquidity compared to the Current Ratio. In addition, I find much more reliable the Quick
Ratio compared with the other two Liquidity Ratios. For two simple reasons, on the one hand, the
Current Ratio is not stable enough to tell whether a company will be able to meet its obligations in the
short-term since it comprises items such as inventory and Prepaid Expenses which are hardly converted
into cash. On the other hand, the Absolute Ratio takes into account just those items, (Cash, cash
equivalents, and short-term investments) which are very volatile. Indeed, I would not be surprised if
you saw the Absolute Ratio swinging from one excess to the other. In fact, companies usually invest
their cash right away in other long-term assets that will produce future benefits for the organization.
Therefore, unless you are Microsoft, which saves billions in cash reserves, I would not rely on the
Absolute Ratio as well.

What is profitability?
Profitability is the ability of any business to produce “earnings.” The Financial Statement, which tells
us whether a company is making profits or not is the Income Statement (or Profit and Loss Statement).

What are the main profitability ratios?

In order to understand if a business is making profits we have to look at its Net Profit Line also called
“bottom line” since we always find it as the last item shown on this statement.

The main profitability ratios used in financial accounting are:

● Gross profit margin.

● Operating profit margin.
● Return on capital employed (ROCE).
● Return on equity (ROE).

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Gross Profit Margin

This is the relationship between Gross Profit and sales, and it is expressed in percentage:

(Gross Profit (Revenue – CoGS) / Sales) x 100%

Imagine, company XYZ had $100K in Gross profit and $250K in Sales, for Year-Two, therefore:

(100/250) * 100% = 40%

It means that 60% of your income is used to cover the cost of goods sold. This ratio is critical, since
for many organizations, in particular, manufacturing, most of the costs are associated with CoGS (Cost
of Goods Sold). For example, if you have to produce an Ice cream, you have to buy raw materials to
make it. Also, someone has to “assemble” the Ice cream before it can be sold. Well, the raw materials
and the work needed to produce the final product are considered CoGS. In other words, those are the
costs required before the Ice cream can be sold. Therefore, this measure can be beneficial to assess the
operational profitability of the business. In short, the Gross Profit Margin tells us whether we are
properly managing our inventories as well.

Operating Profit Margin

This is a relationship between Operating Profit and Sales, and it is expressed in percentage:

(Operating Profit (Revenue – CoGS – Op. Expense) / Sales) x 100%

Imagine, in Year-Two, the Operating profit was $25K, and your revenue $250K. Therefore:

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 (25/250) * 100% = 10%

This measure compared to the Gross Profit Margin has a wider spectrum, and it assesses the profitability
of the overall operations. Indeed, the operating profit is considered one of the most important metrics
within the P&L. Indeed, the Operating Profit can be influenced by managers’ choices. Why? Managers
cannot control Taxes and Interest payments (although they can reduce the leverage). Therefore, the
Operating Profit is the measure that truly tells us how the management is administrating the business.
For such reasons, it is one of the most important metrics.

Return on capital employed

This measure assesses whether the company is profitable enough, considering the capital invested in
the business. Indeed, it tells for each dollar invested in the business, how much return is generated.
Indeed, the ROCE is the relationship between Operating Profit, and Capital Employed, expressed in
percentage terms. Let’s see below what is considered capital employed:

(Operating Profit / Capital Employed (Total Assets – Current Liabilities)) x 100%

Imagine, company XYZ operating profit for Year-Two is $100K, and the capital invested in the business
(your total assets – current liabilities) is $500K. The ROCE will be 0.2 or 20% ((100/500) * 100%).
Therefore, for every dollar invested in the business the company made 20 cents. The higher the ROCE,
the better it is for its stakeholders. Consequently, increasing ROCE overtime is a good sign.

Return on Equity

This is the relationship between net income and shareholder equity or, the amount of revenue generated
by the shareholder’s investment in the organization. This is one of the most used ratios in finance. The
formula for the ROE is:

(Net Income / Shareholders Equity) x 100%

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Imagine the net income of Company XYZ in Year-Two was $20K and you invested $100K. Therefore
the ROE is (20/100) x 100% = 20%. Also, increasing ROE is a good sign. It means that the shareholders
are getting rewarded overtime for their risky investment. This leads to more future investments by other
shareholders and the appreciation of the stock. The ROE itself is often used without caution. In fact, the
problem of this ratio lies in its denominator. Indeed, the management can control Shareholders’ Equity.
How? For instance, the Net Income is produced through assets that the company bought. Assets can be
acquired either through Equity (Capital) or Debt (Liability). Consequently, when companies decide to
finance their assets through Debt, usually revenue accelerates at a higher speed compared to interest
expenses. This leads to a higher Net Income, although a lower Shareholders’ Equity. That, in turn,
generates an artificially high Return on Equity. For such reasons, it is important to use this ratio
cautiously and in conjunction with other leverage ratios as well (such as the Debt to Equity ratio).

What is Solvency?
The solvency ratios also called leverage ratios to help to assess the short and long-term capability of an
organization to meet its obligations. In fact, while the liquidity ratios help us to evaluate the very short-
term health of a business, the solvency ratios have a broader spectrum. Be reminded that the assets can
be acquired either through debt or equity. The relationship between debt and equity tells us the capital
structure of an organization. Until debt helps the organization to grow this leads to an optimal capital
structure. When, instead, the debt grows (and interest expenses grow exponentially) too much this can
be a real problem. Consequently, the Solvency Ratios help us to answer questions such as: Is the
company using an optimal capital structure? If not, is debt or equity the problem?
If the debt is the problem, will the company be able to repay its contracted debt through its earnings?

What are the main solvency ratios?

The main solvency ratios are:

● Debt to equity ratio.

● Interest Coverage Ratio.
● Debt to Assets.

Debt to equity ratio

This ratio explains how much more significant is the debt in comparison to equity. This ratio can be
expressed either as a number or percentage. The formula to compute the debt to equity ratio is:

Total Liabilities / Shareholders’ Equity

The debt to equity ratio is also defined as the gearing ratio and measures the level of risk of an
organization. Indeed, too much debt generates high-interest payments that slowly erode the earnings.
When things go right, and the market is favorable companies can afford to have a higher level of
leverage. However, when economic scenarios change such companies find them in financial distress.
Indeed, as soon as the revenues slow down, they are not able to repay their scheduled interest payments.
Therefore, those companies will have to restructure their debt or face bankruptcy, as happened during
the 2008 economic downturn to many businesses. Imagine that you own a Coffee Shop and in the
second year of operations, (after many investments to buy new fancy machines) the balance sheet shows
$200K in total liabilities and $50K in equity. This means that your debt to equity ratio is 4 or 200/50.

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Is it good or bad? Of course, a gearing ratio of 4 is very high. This means that if things go wrong for a
few months, you will not be able to sustain the business operations. Not all contracted debt is negative.
Indeed, debt that allows you to pay fixed interest helps companies to find their optimal capital structure.
Instead, any increase in interest payments may result in burdening indebtedness and consequently to
financial distress. The debt to equity ratio of 4 is extremely high although we want to compare it against
the previous year’s financials and the leverage of competitors as well. If we go back to the coffee shop
example, the debt to equity ratio of 4 is ok if all the other coffee shops in the neighborhood operate with
the same level of risk. It can be that operating margins for the coffee shop are so high that they can
handle the debt burden. Imagine the opposite scenario, where all the coffee shops in the area operate
with a leverage of 2. If the price of the raw materials skyrocket, you will have to raise the cost of the
coffee cup. This, in turn, will slow down the revenues. While many coffee shops in the neighborhood
will be able to handle the situations, your coffee shop with a gearing of 4 will go bankrupt after a while.

Interest Coverage Ratio

This ratio helps us to further investigate the debt burden a business carries. In the previous example, we
saw how the leverage could lead to financial distress. The interest coverage tells us if the earnings
generated are enough to cover the interest expenses. Indeed the interest coverage formula is:

EBIT / Interest Expense

The EBIT (earnings before interest and taxes) has to be large enough to cover the interest expense. A
low ratio means that the company has too much debt and earnings are not enough to pay for its interest
expense. A high ratio means instead the company is safe. Keep in mind that being too safe can be
limiting as well. In fact, an organization that is not able to leverage on debt may miss many opportunities
or become the target of larger corporations. Imagine that your coffee shop at the end of the year
generated $10K in net income. The Interest expense is $120K and taxes $20K. How do we compute the
interest coverage ratio?

1. Take the net income, $10K, and add back the interest expense, $120K. This gives you the EBIAT or
earnings before interest after tax. The EBIAT is 10 + 120 = 130.
2. Take the EBIAT and add back the tax expense. Therefore you will get the EBIT. The EBIT is 130 +
20 = 150.
3. Take the EBIT and divide it by your interest expense. Therefore, 150: 120 = 1.25 times.

This implies that the EBIT is 1.25 times the interest expense. Therefore the company generates just
enough operating earnings to cover its interest. However, it is very close to the critical level of 1. Below
one the company is risky. Indeed, it may be short of liquidity and close to bankruptcy anytime soon.

Debt to Assets Ratio

This ratio explains how much debt was used in acquiring the company’s assets and it is expressed either
in number or percentage. The formula is:

Total liabilities / Total Assets

Imagine your coffee shop shows on the balance sheet $200K of total liabilities and $50K of equity.
How do we compute the debt to asset ratio?

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1. Compute the total assets: $200K of liabilities + $50K of equity = $250K.
2. Compute the debt to asset ratio: $200 of liabilities / $250 of total assets = 0.8.

This means that 80% of the company’s assets have been financed through debt. A ratio lower than 0.5
or 50% indicates a fair level of risk. A ratio higher than 0.5 or 50% can determine a higher risk of the
business. Of course, this ratio needs to be assessed against the ratio from comparable companies.

What is efficiency?
Efficiency is the ability of a business to quickly turn its current assets in cash that can help the business
grow. In fact, the way you manage inventories accounts receivables, and accounts payables that are
critical to the short-term business operations.

What are the main efficiency ratios?

They assess if an organization is efficiently using its resources. The primary efficiency ratios are:

● Inventory Turnover.
● Accounts Receivable Turnover or collection period.
● Accounts Payable Turnover.

These ratios are called turnover since they measure how fast current and noncurrent assets are turned
over in cash.

Inventory Turnover
This ratio shows how well the inventory level is managed and how many times inventory is sold during
a period. The faster an organization can turn its inventory into sales, the more efficient and effective it
is. This ratio is expressed in a number. The formula is:

Cost of Goods Sold / Average Inventory Cost

Imagine that your coffee shop at the end of Year Two sold $100K of coffee cups, with a $40K gross
income. The inventory at the beginning of the year was $6K and at the end of the year was $8K. How
do we compute our inventory turnover ratio?

1. Compute our CoGS. As you know we had $100K in sales and $40K in gross income. Therefore our
CoGS will be 100 – 40 = $60K.
2. Compute our average inventory. The beginning and ending balances were respectively $10,000 and
$12,000, therefore our average inventory will be: (10,000 + 12,000)/2 = $11,000.
3. Compute the inventory ratio given by COGS/Average inventory, therefore: 60,000/11,000 = 5.45
times.

This means that in one year’s time the inventory will be sold 5.45 times. How do we know how long it
will take for the average inventory to be turned in sales? Well, to compute the days it will take to turn
the inventory in sales, compute the following formula:

365 days/5.45 times = 67 days

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Through this ratio, you know that every 67 days your inventory will be turned in sales. A high inventory
ratio indicates a fast-moving inventory and a low one indicates a slow-moving inventory. Of course, a
ratio of 5.45 is great since it means no capital is tied up to inventories and you are using the liquidity
more efficiently to run the business. However, this ratio needs to be compared within the same industry.

Accounts Receivable Turnover or collection period

This ratio measures how many times the accounts receivable can be turned in cash within one year.
Therefore, how many the company was able to collect the money owed by its customers. It is expressed
in number, and the formula is:

Sales or Net Credit Sales / Average Accounts Receivable

The net credit sales are those that generate receivable from customers. Indeed, each time a customer
buys goods, if the payment gets postponed at a later date, this event generates receivables on the balance
sheet. Therefore, the transaction will be recorded as revenue on the income statement and an account
receivable on the balance sheet. Imagine the coffee shop you run sold $100K of coffee bags, of which
$50K in gross credit sales. Of the $50K in gross credit sales, $10K of coffee bags was returned. The
accounts receivable previous year balance was $12,000, while this year $10,000. How do we compute
the accounts receivable turnover?

1. Compute our nominator, net credit sales. This is given by the gross credit sales minus the returned
product. Therefore: 50,000 – 10,000 = $40K of net credit sales.
2 Compute the average inventory that is given by the average between previous and current year,
therefore: (12,000 + 10,000)/2 = $11,000 average receivable.
3. Compute the receivable turnover given by the net credit sales over the average inventory. Therefore:
40,000/11,000 = 3.64 times.

It means that the receivables were turned into cash 3.64 times in one year.
To know how many days it took to collect the money lumped in the receivable we will use the formula
below:

365/3.64 = 100

The receivables were turned into cash in 100 days. This is a good receivables level it means that you
can collect money from your customers on average every 100 days. When the receivable level is too
low, usually companies turn their attention to the collection department and make sure they make the
collection period as short as possible. Indeed, this will give additional liquidity to the business.

Accounts Payable Turnover Ratio

This ratio shows how many times the suppliers were paid off within one accounting cycle. This ratio is
expressed in number, and the formula is:

Credit Purchases / Average Accounts Payable

The payable turnover ratio is the flip side of the receivable ratio. The credit purchases are those, which
generate payable on the company’s balance sheet. Therefore, each time purchase on credit is made, this
will show as CoGS on the income statement and an account payable on the balance sheet. Imagine that

35
at the end of the year $25K of raw materials from suppliers, although, $5K was returned. The accounts
payable was $5K in the previous year and $7K this year.

How do we compute the accounts payable turnover?

1. Compute the net purchase amount given by the gross purchase amount minus the returned supplies,
therefore: 25K – 5k = $20K of net purchases.
2. Compute the average payable. In year one the payable was $5K and $7K in year two. Therefore: (5K
+ 7K)/2 = $6K in accounts payable.
3. Compute the payable turnover given by the net purchases over the average accounts payable =
20K/6K = 3.3 Times.

The supplier during the current year was paid 3.3 times; it means that every 110 days (365/3.3) the debt
with the suppliers has been paid off. Keeping a high payable turnover is crucial to conduct business.
Indeed, suppliers will assess whether or not to entertain business with an organization based on its
capability to quickly repay their obligations.

What is valuation?
Valuation is a very tricky part of finance. Indeed, valuing a company means assessing how much that
is worth. Valuing is so hard since the resources a company has been organized in a way for which it
becomes challenging to determine the final value. In addition, we have the human capital aspect that is
also very difficult to assess. For such reasons, valuation can be considered more of an art than a science.
We are going to list the main valuation ratios here. Indeed, it is essential as well to know what are the
main valuation ratios also to understand whether a company is over or undervalued. In other words,
valuation ratios assess the perception of the market of a certain company. This does not mean that “Mr.
Market” is always right. Quite the opposite; for instance, if we find a company that is doing extremely
well regarding profitability, liquidity, leverage, and efficiency but Mr. Market does not like it; it might
be useful to understand why. If the reason stands behind things that Mr. Market knows and we don’t, I
still would not buy it. On the other hand, if Mr. Market simply does not like that stock because it
considers it “boring,” then I would give a thought about buying it.

What are the main valuation ratios?

The primary valuation ratios are:

● Earnings per Share.

● Price/Earnings.
● Dividend Yield.
● Payout Ratio.

Earnings Per Share

This ratio tells us what is the return for every single share. The formula is given by:

(Net Income – Preferred Dividends)

/ Weighted Average Number of Common Shares

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When the ratio is increasing over time it means that the company may represent a good investment for
its shareholders (although it must be weaved with other ratios before we can assess whether it is a good
investment).

Price/Earnings Ratio
This ratio tells us how many times over its earnings the market is valuing the stock:

(Net Income – Preferred Dividends)

/ Weighted Average Number of Common Shares

A higher Price/Earnings ratio can be useful to a certain extent. For instance, technological companies
tend to have a higher P/E ratio compared to others. Although, when the P/E is too high this may be due
to speculations.

Dividend Yield
This ratio tells us how much of the stock value has been paid toward dividends. In other words, how
much (in percentage) shareholders are getting back from their investment in stocks:

Dividends per Share (Dividends/Outstanding Shares)

/ Stock Price

Indeed a higher Dividend Yield is a good sign, and it means that the company is rewarding its
shareholders. Also, stocks with historically high dividend yields have often been sought as good
securities by stock market investors. But how do we assess whether the dividends yield is high enough?

Payout Ratio
This ratio tells us whether a company is paying enough dividends to its shareholders, and its formula
is:

Dividends per Share / Earnings per Share

The payout ratio must be assessed case by case on the one hand. On the other side, a meager payout
ratio is less attractive for investors, who are looking for higher returns.

How, why, and when to use financial ratios

Many “analysts” and “investors” are deceived by the use of the valuation ratios. Those ratios help us to
have an understanding of how Mr. Market values a business. On the other hand, we want to use
valuation ratios in conjunction with liquidity, profitability, efficiency, and leverage. In other words,
decide before to start your analysis beforehand what will be the ratios that will guide you throughout
your analysis. For instance, if you are going to analyze a technological business, you will use different
parameters compared to a manufacturing one. Indeed, in the former case, it might be more appropriate
to use liquidity ratios when assessing the financial situation of a tech company rather than efficiency
ratios (a tech firm hopefully does not carry inventory); in the latter case, instead, it might be more
appropriate to use the efficiency ratios when it comes to manufacturing companies. In fact, on one hand,
tech companies operate in a more competitive environment, where changes happen swiftly (and
therefore revenues plunge quickly). In such scenarios holding a safe (financial) cushion, it is more

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appropriate. For such reasons, the Quick Ratio is going to tell us a lot about the business. On the other
hand, when analyzing a manufacturing company, the efficiency ratios may tell us much more about the
business. Indeed, in such a scenario, the way inventories, receivable, and payable are managed can be
crucial to give enough oxygen to the business itself. Therefore, in conjunction with the quick ratio, the
inventory turnover, accounts receivable, and accounts payable turnover will give us a more precise
account of the business. One last important point is that Ratios help us in the understanding of the past
and the current situation. Although the past and the present are essential to interpret the future, they can
be deceitful as well. Therefore, when analyzing any organization, it is essential to be guided by caution.
Having highlighted this point, let’s move on to dirt our hands now.

Week Two: Business Model Engineering

Business model engineering is about dissecting any business so that you can take advantage of those
learnings and apply them back to your own business. Business engineering according to the
FourWeekMBA point of view has three key domains:

● Business Strategy.
● Business Model Design.
● And Business Model Innovation.

Business Strategy
At this stage, it is important to clarify a few critical aspects. As an HBR working paper entitled “From
Strategy to Business Models and to Tactics” pointed out:

Put succinctly, business model refers to the logic of the firm, the way it operates and how it creates
value for its stakeholders. Strategy refers to the choice of business model through which the firm will
compete in the marketplace. Tactics refers to the residual choices open to a firm by virtue of the business
model that it employs.

Is a business strategy the same thing as a business model?

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A business strategy is a deliberate vision to get toward a desired long-term goal. A business model is a
great tool to execute a business strategy. Yet while achieving a long-term goal a business strategy sets
a vision, mission, and value proposition that can be executed through several possible business models.
When one of the drafted business models encounters the favor of the market that is when a business
strategy becomes successful!

What is the business model essence?

Keeping in mind the distinction between business strategy and business models is critical. The other
element used in this guide is a business model essence. Shortly, I’ve been looking for a way to
summarize the key elements of any business in a couple of lines of text:

A Business Model Essence according to FourWeekMBA is a way to find the critical characteristics of
any business to have a clear understanding of that business in a few sentences. That can be used to
analyze existing businesses. Or to draft your Business Model and keep a strategic and execution focus
on the key elements to be implemented in the short-medium term. Therefore, for the sake of this
discussion, you’ll find for each company’s business strategy, a business model essence that will help us
navigate through the noisy business world. From there we’ll see what the business strategy of a company
is.

Is business strategy a science?

Business strategy is more of an art than a science. In short, a business strategy starts with a series of
assumptions about how the business world looks like in a certain period of time and for a certain target
of people. Whether those assumptions will turn out to be successful will highly depend on several
factors. For instance, back in the late 1990s when the web took over, new startups came up with the
idea of revolutionizing many services. While those ideas seemed to make sense, they turned out to be
completely off, and many of those startups failed in what would be recognized as a dot-com bubble.
While in hindsight certain aspects of that bubble came up, which highlighted aspects of the bubble (like
frauds, or schemes), in general, some of the ideas for which startups got financed seemed to be

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visionary. For instance, some startups tried to bring on-demand streaming on the web (which today we
call Netflix, one of the most successful tech companies). The problem is those ideas proved to be too
early to prove successful. They made sense but from the commercial standpoint, they didn’t. Thus, if
we were to use the scientific method, once those assumptions would have proved wrong in the real
world, we would have discarded them. However, those assumptions proved to be wrong, in that time
period, given the current circumstances. Therefore, while we can use the scientific inquiry process in
business strategy, it’s hard to say that it is a scientific discipline.
So what’s the use of business strategy? In my opinion, business strategy is useful for three main reasons:

● Focus: choose one path over another.

● Vision: have a long-term strategic goal.
● Commercial viability: create a self-sustainable business.

As a practitioner, someone who tries to build successful businesses, I don’t need to be “scientific.” I
need to make sure not to be completely off track. For that matter, I aim at creating businesses. Thus, I
need to understand where to focus my attention in a relatively long period of time (3-5 years at least)
and make sure that those ideas I pursue are able to generate profits, which – in my opinion – might be
a valid indicator that those ideas are correct for the time being. If those conditions are met, I’ll call it a
“successful business.” Those ideas will become a business model that executes a business strategy. This
doesn’t mean those ideas, turned into a business model, pushed into the world will always be successful
(profitable). As the marketplace evolves, it will need to adjust, and tweak a business model to fit with
the new evolving scenarios, and I’ll need to be able to “bet” on new possible business models.

Survivorship bias
Survivorship bias is a phenomenon where what’s not visible because extinct isn’t taken into account
when analyzing the past. While we analyze the past based on what’s visible today. This error happens
in any field, and in business, we might get fooled by that as well. In short, when we analyze the past we
do that in hindsight. That makes us cherry-pick the things that survived and assume that those carry the
successful characteristics we’re looking for. For instance, for each Amazon or Google that survived
there were hundreds if not thousands of companies that failed, with the same kind of “success” of
characteristics of Amazon or Google. If survivorship bias is a common phenomenon, how do we avoid
falling into it?

Lindy effect and aging in reverse

Nicholas Nassim Taleb in his book Antifragile popularized a concept called Lindy Effect. In very simple
terms the Lindy Effect states that in technology (like any other field where the object of discussion is
non-perishable) things age in reverse.
Thus, life expectancy rather than diminishing with age, it has a longer life expectancy. Therefore, a
technology that has lived for two thousand years, it has a life expectancy of another thousand years.
That is a probabilistic rule of thumb which works on averages. Thus, if a technology (say the Internet)
has stayed with us for twenty years, it doesn’t mean we can expect only to live for another twenty years
at least. But as the Internet has proven successful already, the Lindy Effect might not apply. In short, as
we have additional information about a phenomenon the Lindy Effect might lose relevance. For
instance, if I know a person is twenty, yet sick of a terminal disease, I can’t expect to use normal life
expectancy tables. So I’ll have to apply that information in understanding the future.

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Caveat: Frameworks work until suddenly they don’t
When you stumbled upon a “business formula” you can’t stop there. That business formula, if you’re
lucky will allow you to succeed in the long term. Yet as more and more people will find that out, that
will lose relevance. And the matter is, the reality is a villain. Things work for years until they suddenly
don’t work anymore. We’ll see some frameworks, but the real deal is not a framework but the inquiry
process that makes us discover those frameworks. In short, the value is in the repeatable process of
discovery and not in the discovery itself. A discovery once spread it loses value.

Master a business strategy process

There isn't a size-fits-all business playbook that you can apply to all the scenarios. Some of the business
case studies we’ll see throughout this article will show companies that have dominated the tech space
in the last decade and more. While the playbook executed by those companies worked for the time
being. That doesn’t mean you should play according to their playbook. If at all you’ll need to figure out
your own. Thus, what matters is the process behind finding your business playbook and my hope is that
this guide will inspire you and give you some good ideas on how to develop your own business strategy
process!

Business strategy case studies

We’ll look at a few case studies of companies that at the time of this writing are playing an important
role in the business world.

● Alibaba Business Strategy.

● Amazon Business Strategy.
● Apple Business Strategy.
● Airbnb Business Strategy.
● Baidu Business Strategy.
● Booking Business Strategy.
● DuckDuckGo Business Strategy.
● Google (Alphabet) Business Strategy.

Alibaba Business Strategy

Business Model Essence: Online Stores Leveraging On An E-Commerce/Marketplace Distribution
And Monetization Strategy

As pointed out in the Alibaba annual report for 2017:

We derive revenue from our four business segments: core commerce, cloud computing, digital media
and entertainment, and innovation initiatives and others. We derive most of our revenue from our core
commerce segment, which accounted for 85% of our total revenue in fiscal year 2017, while cloud
computing, digital media and entertainment, and innovation initiatives and others contributed 4%, 9%
and 2%, respectively. We derive a substantial majority of our core commerce revenue from online
marketing services.

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Alibaba, like Amazon, became an “everything store” in China. It leveraged its success to build also
other media platforms (Youku Todou and UCWeb). The e-commerce, marketplace business model has
become quite common since the dawn of the web. From that business model tech giants like Amazon,
eBay, and Alibaba have raised.

Alibaba vision, mission, and core principles

Alibaba Business Strategy starts from its core values defined in its annual report as:

● Customer First: “The interests of our community of consumers, merchants, and enterprises
must be our first”
● Teamwork: “We believe teamwork enables ordinary people to achieve extraordinary things.”
● Embrace Change ”in this fast-changing world, we must be flexible, innovative, and ready to
adapt to new business conditions in order to maintain sustainability and vitality in our business.”
● Integrity “We expect our people to uphold the highest standards of honesty and to deliver on
their commitments.”
● Passion “We expect our people to approach everything with fire in their belly and never give
up on doing what they believe is right.”
● Commitment “Employees who demonstrate perseverance and excellence are richly rewarded.
Nothing should be taken for granted as we encourage our people to “work happily and live
seriously.”

Alibaba’s mission is “to make it easy to do business anywhere,” and its vision is “to build the future
infrastructure of commerce… a company that would last at least 102 years.” For that vision to be
executed it has three major stakeholders: users, consumers, and merchants. The focus on the “at least
102 years” might seem fluffy words, yet those are important as this kind of goal helps you keep a long-
term vision while executing short-term plans. It isn’t unusual for founders to set such visions, as they
help keep the company on track in the long-run. And this is where a business strategy starts. All the
business models designed by Alibaba will follow its vision, mission, and values they aim to create in
the long-run.

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Alibaba ecosystem and value proposition
These elements gave rise to an ecosystem made “of consumers, merchants, brands, retailers, other
businesses, third-party service providers, and strategic alliance partners.” As Alibaba points out in its
annual report “our ecosystem has strong self-reinforcing network effects benefitting its various
participants, who are in turn invested in our ecosystem’s growth and success.” Network effects are a
critical ingredient for marketplace success. To give you an idea, the more buyers join the platform, the
more Alibaba recommendation engines will be able to suggest relevant items to buy for other customers,
and at the same time the more merchants will join in, given the larger and larger business opportunities.
Keeping these network effects going is a vital element of long-term success but also among the greatest
challenges of any marketplace that wants to be relevant.
Even though Alibaba’s essence is in online commerce, the company has several business models
running and a business strategy that at its core is evolving quickly.

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 Source: Alibaba Annual Report

Thus, the core commerce has made it possible for Alibaba to build a whole new set of “companies
within a company.” From digital entertainment and media, logistics services, payment, and financial
services, and cloud services with Alibaba Cloud. Thus, from a successful existing online business
model, Alibaba has expanded in many other areas. And its future business strategy focuses on
developing, nurturing, and growing its ecosystem. More precisely, its strategic long-term goal is to
“serve two billion consumers around the world and support ten million businesses to operate profitably
on its platforms”

To achieve that Alibaba is focusing on three key activities:

● Globalization.
● Rural expansion.
● And big data and cloud computing.

For its core commerce activities, Alibaba has designed a value proposition that moves around a few
pillars:

● Broad selection: over 1.5 billion listings as of March 31, 2018.

● Convenience: seamless experience anytime, anywhere from online and offline.
● Engaging, personalized experience: personalized shopping recommendations and
opportunities for social engagement.
● Value for money: competitive prices offered via a marketplace business model.
● Merchant quality: review and rating system to keep merchants quality high.
● Authentic products: merchant quality ratings, clear refunds, and return policies, and the
Alipay escrow system.

From that value proposition, Alibaba has been able to grow its customer base and offer wider and
broader products, until it expanded in the service and cloud business.

Amazon Business Strategy

Business Model Essence: E-Commerce/Marketplace Distribution And Monetization Model
Leveraging On Proprietary Infrastructure To Offer Third-Party Services

Started in 1994 as a bookstore, Amazon soon expanded and became the everything store. While the
company's core business model is based on its online store. Amazon Launched its physical stores, which
generated already over five billion dollars in revenue in 2017. Amazon Prime (a subscription service)
also plays a crucial role in Amazon's overall business model, as it makes customers spend more and be
more loyal to the platform. Besides, the company also has its cloud infrastructure called AWS, which
is a world leader and a business with high margins. Amazon also has an advertising business worth a
few billion dollars. Thus, the Amazon business model mix looks like many companies in one. Amazon
measures its success via a customer experience obsession, lowering prices, stable tech infrastructure,
and free cash flow generation.

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Therefore, even though in the minds of most people Amazon is the “everything store” in reality, its
revenue generation shows us that it has become a way more complex organization, that also has a good
chunk of advertising revenue and third-party services. For instance, Amazon is also a key player with
its AWS, in the cloud space. And as well a key player in the digital advertising space, together with
Google, and Facebook:

Amazon has been widely investing in its technological infrastructure since the 2000s, which eventually
turned like a key component of its business model.

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Amazon vision, mission, and core values
Jeff Bezos is obsessed by being in “day one,” which, as he puts it, “day 2 is stasis. Followed by
irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always
Day 1.“

It all starts from there, and to achieve that Jeff Bezos has highlighted a few core values that makeup
Amazon‘s culture:

● Customer obsession.
● Resist proxies.
● Embrace external trends.
● High-velocity decision making.

As pointed out by Amazon, “when Amazon.com launched in 1995, it was with the mission “to be
Earth’s most customer-centric company, where customers can find and discover anything they might
want to buy online, and endeavors to offer its customers the lowest possible prices.” This goal continues
today, but Amazon’s customers are worldwide now and have grown to include millions of Consumers,
Sellers, Content Creators, and Developers & Enterprises. Each of these groups has different needs, and
we always work to meet those needs, innovating new solutions to make things easier, faster, better, and
more cost-effective.” In this case, Amazon‘s mission also sounds like a vision statement. Whatever you
want to call it, this input is what makes a company look for long-term goals that keep them on track. Of
course, that doesn’t mean a well-crafted vision and mission statement is all that matters for business
success. Yet, it is what keeps you going when things seem to go awry. Amazon moved from an online
bookstore to the A-to-Z store; it kept its mission almost intact while scaling up.

Start from a proof of concept, then scale up

It is interesting to notice how businesses evolve based on their commercial ability to scale up. When
Amazon started up as a bookstore, it made sense for several reasons, that spanned from logistics to
pricing modes and industry specifics. Yet, when Amazon finally proved that the whole web thing could
be commercially viable, it didn’t wait, it grew rapidly. From music to anything else it didn’t happen
overnight, but it did happen quickly. Thus, this is how the Amazon mission shifted from “any book in
the world” to “anything from A-Z.” This isn’t a size-fits-all strategy. Amazon chose rapid growth,
similar to a blitzscaling process as aggressive growth was a way to preserve itself. Hadn’t Amazon
grown so quickly, it could have been killed. The opposite approach to this kind of strategy is a
bootstrapped business, which is profitable right away and self-sustainable.

Decentralized and distributed value creation: the era of platforms and ecosystems
Before we move forward, I want to highlight a few key elements to have a deeper understanding of both
Amazon and Alibaba business models and their strategy.
Before digitalization would show its use and commercial viability, most of the value creation processes
were internalized. That meant companies had to employ massive resources to generate value along that
chain. That changed when digitalization allowed the value creation process to be distributed, and we
moved from centralized to grassroots content creation. This is even clearer in the case of platforms, and
marketplaces like Amazon and Alibaba. For instance, where in the past the review process and quality
insurance would be done centrally by making sure that the supply complied with the company’s quality
guidelines. By introducing distributed review systems, where the end-users checked against the quality
compliance, allowed companies like Alibaba and Amazon to generate network effects, where the more

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users enriched the platforms with those reviews the more the platform could become valuable. For that
matter though, the main platform role will be to fight spam and attempt to trick the system. Other than
that (fighting spam is a challenging task) all the rest is managed at the decentralized level, and the value
creation happens when more and more users review products and services on those platforms. We’re
referring here to the review system, but it applies to almost any aspect of a platform. Amazon for years
allowed third-party to feature their stores on Amazon‘s platform, while they kept the inventory. This
meant an outsourced and distributed inventory system, spread across the supply side. Therefore, the
supply side not only made the platform more valuable by creating compelling offerings. But it also
made it more valuable from the operational standpoint, by allowing a better inventory system, which
could be turned quickly. Therefore, the critical aspect to understand in the digital era is the decentralized
value creation, which makes the value creation process less expensive for an organization, more
valuable to its end users, and more scalable as it benefits from network effects.

How to decentralize the value creation? Many platform-like business models have leveraged on a few
aspects:

● User-generated content (Quora, Facebook, Instagram).

● Distributed inventory systems (Amazon, Alibaba).
● Peer-to-peer networks (Airbnb, Uber).

This implies a paradigm shift. When you start thinking in terms of platforms, no longer you’ll need a
plethora of people taking care of each aspect of it. Rather you’ll need to understand how the value
creation can be outsourced to a community of people and make sure the platform is on top of its game
in a few aspects. For instance, Amazon and Alibaba have to make sure their review system isn’t gamed.
Airbnb has to make sure to be able to guarantee safety in the interactions from host to guests and vice-
versa. Quora has to make sure to keep its question machine to keep generating relevant questions for
users to answer (the supply-side). If you grasp this element of a platform, you’re on a good track to
understanding how to build a successful platform or marketplace.

Apple Business Strategy

Business Model Label: Product-Based Company Leveraging On Locked-In Ecosystems With A
Reversed Razor And Blade Business Strategy

Apple sells its products and resells third-party products in most of its major markets directly to
consumers and small and mid-sized businesses through its retail and online stores and its direct sales
force. The Company also employs a variety of indirect distribution channels, such as third-party cellular
network carriers, wholesalers, retailers, and value-added resellers. During 2017, the Company’s net
sales through its direct and indirect distribution channels accounted for 28% and 72%, respectively, of
total net sales. Many people look at the iPhone, or the previous products Apple has launched
successfully in the last decade and assume that their success is due to those products. In reality, Apple
has followed throughout the years a strategy that focused on five key elements:

● Strong branding.
● Beautifully crafted products.
● Technological innovation.
● Strong distribution.
● Locked-in ecosystems.

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In short, Apple can sell the iPhone at a premium price because it employs a reversed razor and blade
strategy. This strategy implies free access to Apple’s Ecosystem (ex. iTunes, and Apple Store). That
makes the whole experience through Apple’s devices extremely valuable. Thanks to that experience,
the perception of a high-end (luxury-like) product, together with a reliable distribution, justifies Apple’s
premium prices.

By the end of 2018 and the beginning of 2019, Apple experienced a slower cycle of sales for its main
product: the iPhone. The company also announced it would stop reporting the number of units sold as
a key metric in its financial statements. This is a significant change, due to this slow iPhone sale in the
last quarter of 2018, publications and people around the world have started to declare the fall of Apple.
True, Apple is highly reliant on its iPhone. However, the whole smartphone market might be stagnating
in the coming years. Therefore, Apple’s future success can’t be measured with the same lenses of the
last decade. The real question is: what product Apple will be able to launch successfully? And keep in
mind, it’s not just about the product. Apple’s formula summarized above can be replicated over and
over again. But it isn’t a simple formula. And as locked-in ecosystems, in which Apple controls as much
as possible the experience of its users has proved quite successful in the last decade. That might not be
so in the next, given the rise of more decentralized infrastructure.

To a service-based model:

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This isn’t surprising, as a service business has a few compelling advantages:

● High margins.
● A relatively stable revenue stream.
● Scalability.

As Apple has relied on home runs with its products, from the new Mac to the iPod, iPhone, and iPhones,
that kind of success isn’t easy to replicate, and it makes the company rely on a continuous stream of
fresh sales to keep the business growing. A service business would balance things out. It is important
to remark this isn’t something new to Apple:

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When Apple introduced the iPhone, it isn’t like it was an overnight success. It was successful, but it
had to create a whole ecosystem to make the iPhone a continuous source of growth for the company!
When it comes to business strategy, as pointed out in Apple’s annual report for 2018:

The Company is committed to bringing the best user experience to its customers through its innovative
hardware, software, and services. The Company’s business strategy leverages its unique ability to
design and develop its own operating systems, hardware, application software and services to provide
its customers products and solutions with innovative design, superior ease-of-use and seamless
integration.

Understanding this part is critical. As I explained above, at the time of this writing many think of Apple
as the “iPhone company.” Yet Apple is way more than that, and its business strategy is a mixture of
creating ecosystems by leveraging on these pillars:

● Operating systems.
● Hardware.
● Applications software.
● Innovative design.
● Ease-of-use.
● Seamless Integration.

Those elements together make Apple‘s products successful. As Apple further explained:

As part of its strategy, the Company continues to expand its platform for the discovery and delivery of
digital content and applications through its Digital Content and Services, which allows customers to
discover and download or stream digital content, iOS, Mac, Apple Watch and Apple TV applications,

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and books through either a Mac or Windows personal computer or through iPhone, iPad and iPod
touch® devices (“iOS devices”), Apple TV, Apple Watch and HomePod.

Once again, it isn’t anymore about creating a product, but about generating self-serve ecosystems. How
do you support those ecosystems? It depends on your target. A media company will primarily need an
ecosystem made of content creators (take Quora or Facebook or YouTube). In many cases, a digital
media company over time has to be able to nurture several communities to create a thriving ecosystem.
For instance, large tech companies or startups, often rely on several communities:

● Programmers and developers (Google, Apple).

● Content creators and publishers (Google, Quora, YouTube).
● Artists and creative talents (Apple, YouTube).

In Apple‘s case though, the first ecosystem is a community of developers building third-party software
products that complement the company’s offering:

The Company also supports a community for the development of third-party software and hardware
products and digital content that complement the Company’s offerings.

When you combine that, with a high-touch strategy (where skilled and knowledgeable salespeople
interact with customers) you create a flywheel, where customers are retained for longer, the brand grows
as a result of this high-touch activity which creates a better post-sale experience and triggers word of
mouth and referrals from existing customers:
The Company believes a high-quality buying experience with knowledgeable salespersons who can
convey the value of the Company’s products and services greatly enhances its ability to attract and
retain customers. Therefore, the Company’s strategy also includes building and expanding its own
retail and online stores and its third-party distribution network to effectively reach more customers and
provide them with a high-quality sales and post-sales support experience. The Company believes
ongoing investment in research and development (“R&D”), marketing and advertising is critical to the
development and sale of innovative products, services and technologies.

Airbnb Business Strategy

Business Model Essence: Peer-To-Peer House-Sharing Network With Fee-Based Monetization
Strategy

As a peer to peer network, Airbnb allows individuals to rent from private owners for a fee. Airbnb
charges guests a service fee between 5% and 15% of the reservation subtotal; While the commission
from hosts is generally 3%. Airbnb also charges hosts who offer experiences a 20% service fee on the
total price. The digitalization that happened in the last two decades has facilitated the creation of peer-
to-peer platforms in which business models disrupted the hospitality model that was created in the
previous century by hotel chains like Marriott, Holiday Inn, and Hilton.

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Airbnb is quickly branching out toward offering more experiences. We can call Airbnb the “marketplace
of experiences.” In short, just like Amazon started from books, Airbnb has started from house-sharing.
But that is the starting point, which gives the innovative company enough traction to validate their
whole business model and expand to other areas. The principal aim of Airbnb is to control the whole
experience for its users. This means creating an end-to-end travel experience that embraces the entire
process. Thus, it’s not surprising if we’ll see Airbnb expanding its marketplace to more and more areas.
This is also shown by the fact that Airbnb might soon offer bundled travel packages. Just as we’ve seen
in the case of Alibaba and Amazon, Airbnb follows a marketplace logic, where it needs to make the
interactions between its key users (hosts and guests) as smooth as possible, with an emphasis on safety.
As a platform, Airbnb used initially a strategy of improving the quality of its supply by employing
freelance photographers that could take pictures of hosts' homes. This, in turn, made those homes more
interesting for guests, as they could appreciate more those homes. As many people in real estate might
know, the quality of the pictures is critical. Although this might sound trivial, this is what improved the
Airbnb supply side. Indeed with better and professionally taken images, Airbnb improved its reach via
search engines. And it enhanced the experience of its potential customers.

Baidu Business Strategy

Business Model Essence: Online Marketing Free Services Advertising-Supported Revenue Model

Baidu makes money primarily via online marketing services (advertising). In fact, in 2017 Baidu made
about $11.24 in online marketing services and a remaining almost $1.8 billion through other sources.
According to Statista, Baidu has an overall search market share of 73.8% of the Chinese market. Other
sources of revenues comprise membership services of iQIYI (an innovative market-leading online
entertainment service provider in China) and financial services.

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At first sight, Baidu might seem the mirror image of Google, but in China. However, this is a superficial
view. While Baidu has followed in China a similar path of Google, and it did take advantage of the fact
that Google wasn’t available there, to build its dominant position.
Baidu also has a more efficient cost structure than Google. It had also introduced innovations in its
search products (like voice search devices for kids) at a time when Google wasn't there yet.

Baidu mission: two-pillar business strategy, and value propositions acting as a glue for its key
users/customers
In the past years, Baidu has followed an expansion business strategy focused on acquiring assets and
companies that complemented its core business model. As the leading Chinese search provider, in 2017
Baidu updated its mission to “Baidu aims to make a complex world simpler through technology.”

This mission is achieved via a two-pillar strategy:

● Strengthening the mobile foundation (similar to Google’s mobile-first).

● And leading in artificial intelligence.

Baidu’s key partners comprise users, customers, Baidu union members, and content providers. For each
of those critical segments, Baidu has drafted a fundamental value proposition. Thus, to generate a value
chain that works for these stakeholders, Baiduhas to balance it with a diversified value proposition:

● Users: enjoying the Baidu search experience wants a search engine that gives them relevant
results.
● Customers: with 775,000 active online marketing customers in 2017, consisting of SMEs,
large domestic businesses, and multinational companies, distributed across retail and e-
commerce, network service, medical and healthcare, franchise investment, financial services,
education, online games, transportation, construction, and decoration, and business services.
Those businesses look for a trackable, and sustainable ROI for their paid advertising campaigns.
By bidding on keywords, they can target specific audiences.

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 ● Baidu Union Member: share revenues with Baidy by displaying banner ads on their sites in
relevant spaces filled by the Baidu search algorithm (think of it as Google's AdSense Network).
Those publishers and sites can generate additional revenues and monetize their content without
relying on complex infrastructure, which instead is employed by Baidu.
● Content Providers: video copyright holders, apps owners who list their apps on the Baidu app
store, or users who contribute their valuable and copyrighted content to Baidu products, and
publishers. Those users get visibility or money in exchange for this content. Baidu has to make
sure to allow those content providers to get in exchange for their work and creativity visibility
and revenues.

Understanding how the value proposition for each player comes together is critical to understand the
business decisions a company like Baidu makes over time. For instance, like Baidu (like Google) moves
more and more toward AI, the need to balance the value proposition for Baidu Union Members might
fickle.

Booking Business Strategy

Business Model Essence: House-Sharing Platform Leveraging On A Two-Sided Marketplace With A
Commission-Based Revenue Model

Booking Holdings is the company that controls six main brands that comprise Booking.com,
priceline.com, KAYAK, agoda.com, Rentalcars.com, and OpenTable.
Over 76% of the company revenues in 2017 came primarily via travel reservations commissions and
travel insurance fees. Almost 17% came from merchant fees, and the remaining revenues came from
advertising earned via KAYAK. As a distribution strategy, the company spent over $4.5 billion in
performance-based and brand advertising.

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Booking mission, value proposition, and key players
Booking’s mission is to “help people experience the world.” At the time of this writing Booking does
that via a few primary brands:

● Booking.com.
● priceline.com.
● KAYAK.
● agoda.com.
● Rentalcars.com.
● OpenTable.

The mission of helping people experience the world executed via three primary value propositions
delivered to consumers, travelers, and business partners:

● Consumers are provided what Booking calls “the best choices and prices at any time, in any
place, on any device.”
● People and travelers can easily find, book, and experience their travel desires.
● Business partners (like Hotels featured on Booking.com) are provided with platforms, tools,
and insights in exchange.

At the time of this writing Booking medium-term term strategy is focused on:

● Leveraging technology to provide the best experience.

● Growing partnerships with travel service providers and restaurants.
● Investing in profitable and sustainable growth.

DuckDuckGo Business Strategy

Business Model Essence: Privacy-based Search Engine Built On Google’s Weakness With An affiliate-
based Revenue Model

DuckDuckGo makes money in two simple ways: Advertising and Affiliate Marketing. Advertising is
shown based on the keywords typed into the search box. Affiliate revenues come from Amazon and
eBay affiliate programs. When users buy after getting on those sites through DuckDuckGo the company
collects a small commission.

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While this model might not sound that exciting. DuckDuckGo managed to grow quickly by leveraging
Google's primary weakness: users’ privacy.

Where Google’s primary asset is made of users’ data. DuckDuckGo throws that data away on the fly:

It is important to remark that DuckDuckGo is still figuring out a business model that can make it
sustainable in the long-term. Indeed, the company got a venture round of $10 million back in August
2018. DuckDuckGo will be tweaking its business model in the coming years, to reach a “business
model/market fit.”

Google (Alphabet) Business Strategy

Business Model Essence: Free Search Engine Distributed Across Hardware, Browsers, And Members’
Websites With An Hidden Revenue Generation Model

As of 2017, over ninety billion dollars, which consisted of 86% of Google’s revenues came from
advertising networks. The remaining fraction (about 13%) came from Apps, Google Cloud, and
Hardware. While a bit more than 1% came from bets like Access, Calico, CapitalG, GV, Nest, Verily,
Waymo, and X. The Google business model is changing over the years. Even though advertising is still
its cash cow, Google has been diversifying its revenues in other areas. While in 2015 90% of Google
revenues came from advertising, in 2017, advertising revenues represented 86%. Other revenues grew
from about 10% in 2015 to almost 13% in 2017.

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Why did Google get there? And where is Google going next? To understand that you need to understand
the “moonshot thinking.”

Understanding Google’s moonshot thinking and a breakthrough approach to business

As highlighted in the Alphabet annual report for 2018:

Many companies get comfortable doing what they have always done, making only incremental changes.
This incrementalism leads to irrelevance over time, especially in technology, where change tends to be
revolutionary, not evolutionary. People thought we were crazy when we acquired YouTube and Android
and when we launched Chrome, but those efforts have matured into major platforms for digital video
and mobile devices and a safer, popular browser. We continue to look toward the future and continue
to invest for the long-term. As we said in the original founders’ letter, we will not shy away from high-
risk, high-reward projects that we believe in because they are the key to our long-term success.

Understanding the moonshot approach to business is critical to understand where Google (now
Alphabet) got where it is today, and where it’s headed next. Since the first shareholders’ letter from
Google’s founders, Brin, and Page, they highlighted that “Google is not a conventional company. We
do not intend to become one.”

Understanding where Google is going next, you need to look at the AI Economy, in which the tech
giant is trying to lead the pack. Whether or not it will be successful will highly depend on its ability to
keep creating successful ecosystems, just like Google has done with Google Maps (you might not
realize but Google Maps powers up quite a large number of applications) and Android.

At the time of this writing, Google is widely investing in other areas, such as:

● Voice search.
● AI and machine learning applications.

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 ● Self-driving cars.
● IoT.
● And other bets.

If that is not sufficient Google has made several moves in different spaces, to keep its dominance on
mobile, while moving toward voice search, like the investment in KaiOS, which business model is
interesting as it finally allows an ecosystem to be built on top of cheap mobile devices in developing
countries:

KaiOS is a mobile operating system built on the ashes of the discontinued Mozilla OS. Indeed, KaiOS
has developed a robust standalone mobile operating system that turns feature phones (so-called “dumb
phones”) into smartphones-like phones. As feature phones powered by KaiOS have access to mobile
apps, connectivity, and voice search. KaiOS feature phone business model wants to bring connectivity
and the digital revolution to those developing countries (like India and Africa) that have missed out on
the smartphone wave due to too high costs of those devices. Besides, KaiOS might be well suited for
the IoT revolution! That is why Google keeps making “smaller bets in areas that might seem very
speculative or even strange when compared to its current businesses.” Those other bets made “just”
$595 million to Google in 2018. This represented 0.4% of Google‘s overall revenues, compared to the
over $136 billion coming from the other segments. Google‘s North Star is its mission of “organizing
the world’s information and making it universally accessible and useful.”

Key takeaway
I hope that in this section you learned the critical aspects related to business strategy, with an emphasis
on the entrepreneurial world. If business strategy would only be an academic discipline disjoined from
reality, that would still be an interesting domain, yet purely speculative. However, as a business strategy
can be used as a useful tool to leverage on to build companies, hopefully, this guide will help you out
in navigating through the seemingly noisy and confusing business world, dominated by technology. As
a last but critical caveat, there isn’t a single way toward building a successful business. And oftentimes
the way you choose to build a business is really up to you, how you want to impact a community of
people, and your vision for the future!

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When did my love for business modeling start?
When I was a kid I found myself time and time again to start modeling local shops around me. I counted
seats, guessed average tickets, tried to guess the costs of running a business. In part, I was trying to
understand whether the business was sustainable or not. On the other hand, I also felt one day I’d be an
entrepreneur, so if I understood enough businesses I could then decide what made more sense to me.
Yet, in the last years, I’ve kept dissecting business models of any type, and companies of any size. At
the same time, I’ve been talking, interviewing, and discussing business models and business model
innovation with dozens of entrepreneurs and practitioners.

I’ve been doing that for several reasons:

● To gain a better understanding of businesses around me. As I had the option to gain a Ph.D. on
the topic or to create my Ph.D. I went for the latter, and in the process, I thought to document
it all on FourWeekMBA. Over time I wanted to create the business school I always dreamed
of.
● Business models enabled me to gain insights into how companies worked at a holistic level so
that I could become a better digital entrepreneur.
● Business modeling also helped me test the assumptions around the business I was trying to
build, thus reducing the time or potential financial resources spent on a project which was
doomed to failure.

In short, I found myself using business modeling for several reasons, and those I believe are all
legitimate. At the same time, while researching the topic with the mindset of an entrepreneur but the
depth of reach of a Ph.D.

I noticed how the business model and business model innovation had become widely adopted concepts.
And also (and probably for that reason) widely misunderstood. Business model innovation is about
increasing the success of an organization with existing products and technologies by creating a
compelling value proposition able to allow an organization to scale up customers, with a better operating
model.

At its core business model innovation is a subtle change, that as it becomes hard to dissect from the
outside world (in many cases business model innovation is detected only in hindsight), it is also hard to
copy.

Thus, in a world where technology gets commoditized, business model innovation can make a huge
difference. Before we move forward toward deciphering and dissecting business model innovation, let’s
bust three myths, existing in the entrepreneurship world, especially in the era of digital business models.

What is a business model and why is it important?

A business model is a critical element for any startup success as it is what unlocks value in the long-
term. In a way, developing a business model isn't only about monetization strategies. Indeed, that is
way more holistic. To develop a business model companies need to create value for several
stakeholders. Thus, a business model is about what makes users go back to your app, service, or product.
It is about how businesses can get value from your solution. It is about how suppliers grow their business

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through it. A business model is all those things together. In short, when those pieces come together, that
is when you can say to have a business model.

A quick history of business models

"business model" and "business models" in millions of books according to Google Ngram

While the Internet worked as a catalyzer for business model innovation, the term itself was born way
before that. However, it stayed asleep for a while, until the Internet proved commercially viable. The
rise of the Internet and the dot-com fell awakened the need for innovative business models:

Source: internethistorypodcast.com

Indeed, while many companies were born during the dot-com era. Those companies used the Internet
as a new distribution channel but they still played with an old business playbook. When the dot-com

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bubble fell. That left the room for a few companies which not only would prove commercially viable.
They would also become among the tech giants that dominated the web. Companies like Amazon,
Google, and eBay built, tweaked, and consolidated their business playbook during that era.

A business model is not a business plan

Among the top results, Google suggests “How to write a business model” when typing “how to …
business model. When you click on the result that Google suggested, see what happens.

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When you click on the Google suggested result for “How to write a business model,” you get “how to
write a business plan.”

A common misunderstanding is to think of business modeling as a one-page business plan. However, a

business plan is a document with a specific aim. It contains a bunch of assumptions about your business.
It also contains financial projections about the business for the next 3-5 years. However, those
assumptions can be hardly tested. The business plan thus remains a document that lives in the imaginary
world. Drafted beautifully to impress friends and potential investors; hardly of any use for
experimentation. Instead, as we will see, business modeling is primarily about experimentation.

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A business model is not a revenue generation strategy

An example of how Airbnb “confused” its business model for its monetization strategy (Slideshare)

How WeWork described its business model in the report before the IPO. You might notice that what
they’re talking about is their revenue generation strategy. (WeWork Financials)

Another misconception around business models is to confuse them with the monetization strategy or
the revenue model of a company. While this is an essential piece of the puzzle, it is just one of the
components of a successful business model. In this blog, we've discussed at great length how companies
make money as a way to start the discussion of a business model. However, a business model implies
the understanding of operations, customer acquisition, retention, supply chain management, besides
monetization. According to the business model you designed over the years for your organization there
will be a piece that plays a more critical role compared to others. For instance, a vital component of the
Coca-Cola business model is its distribution strategy. For other companies like McDonald's, the key to
its business model success is the heavily franchised restaurants that helped the company scale up all
over the world. Each company will develop a unique model among the many types of business models
which is what makes your company robust in the long-run!

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The importance of business model design

Strategic analysis is a process to understand the organization's environment and competitive landscape
to formulate informed business decisions, to plan for the organizational structure and long-term
direction. Strategic planning is also useful to experiment with business model design and assess the fit
with the long-term vision of the business. The primary aim of a business model is to create a sustainable
chain, able to unlock value for several players in a market, industry, or niche. Therefore, this value chain
will start from a value proposition, a promise you make to the key players and partners in that market,
industry, or niche depending on where you start. For instance, when PayPal started it didn't look to
dominate the whole market. It started from a niche. As Peter Thiel put it in his book, Zero to One:

The most successful companies make the core progression—to first dominate a specific niche and then
scale to adjacent markets—a part of their founding narrative.

Indeed, PayPal began identifying its most valuable partner, what at the time they called "power user."
That was a choice driven by its business model design. Therefore, instead of focusing on generically
offering a service for everyone, PayPal focused on acquiring and attracting as many power users as
possible. Those power users were mostly on another platform that had already scaled up: eBay. Thus,
PayPal focused all its effort on acquiring those power users from eBay, fast! Only after PayPal had
drafted, tested, and validated a clear value proposition for a small, yet a critical group of power users,
it could move on to take larger and larger segments of that market.

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Tim Brown, Executive Chair of IDEO, defined design thinking as "a human-centered approach to
innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of
technology, and the requirements for business success." Therefore, desirability, feasibility, and viability
are balanced to solve critical problems.

Business modeling is about experimentation

Where scientists have labs where they can manufacture and run experiments. Entrepreneurs have the
real world as a way to measure their assumptions. Designing and executing business models for an
entrepreneur is like designing and running experiments for scientists. However, where a scientist might
be looking for lasting truth, an entrepreneur searches for a business model that will work in the
marketplace at that particular point in time. Indeed, one of the common beliefs is that business models
can be sketched on a piece of paper and they will work in the real world. That (almost) never happens.

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Before a business model does work in the real world that will require a lot of strategic and deliberate
thinking, experimentation, and tinkering. Thus, a successful business model is usually the fruit of this
process. That implies that often an entrepreneur has to design multiple variations of the same business
model and test those in the marketplace. For instance, if you've built a company that offers software but
you positioned yourself with a freemium model. You might realize that the model won't work in your
case, so you will need to move the revenue generation back to a premium model, where your target
customers are willing to pay more and you move the needle from B2C to B2B. Thus, cutting yourself
space within a specific niche. That will, of course, limit the number of customers you might be able to
reach; at the same time, it will enable you to find product/market fit.

Technological innovation vs. business model innovation

Business model innovation is about increasing the success of an organization with existing products
and technologies by crafting a compelling value proposition able to propel a new business model to
scale up customers and create a lasting competitive advantage. And it all starts by mastering the key
customers. The misconception starts from the fact that nowadays, technological advancement is pushing
toward new ways of doing business. The Internet is still enabling new, untested models to pick up. For
instance, business models of companies like Netflix would not be possible if the Internet didn’t allow
new ways of content delivery, and so also of how those same companies make money. However,
technological innovation is wholly different from business innovation. That’s because technological
innovation often happens in labs or research centers (take the internet) rather than just companies, or in
a business context. In short, technological innovation requires a massive amount of resources upfront
and researchers, which might not follow business objectives, but rather experiment freely with ideas
that take time to work out. In addition, even when a specific technology becomes commercially viable
that might also be soon commoditized. Thus, technology itself hardly becomes a competitive advantage.
Technology coupled with new ways of serving customers, a powerful distribution strategy, and creative
monetization strategies might create lasting competitive advantages. That is when the business model
innovation kicks in.

Why business model innovation matters so much

One of the people that I like to follow the most in the business world, venture capitalist, Fred Wilson,
in a post, highlighted something that many are still missing today:

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I believe business model innovation is more disruptive than technical innovation.

As Fred Wilson further explained: The move from desktop computing to the web. We saw massive
disruption as we went from a licensed software business model to an advertising-supported business
model, which has evolved into an advertising/subscription freemium business model. When new,
revolutionary technology finally is widely adopted, that is when a massive phase of business model
innovation happens. For instance, we’re still looking at how the Internet-enabled digital economy is
still an ongoing explosion. We might be looking at a similar change and blossoming of new business
models with the advent of the Blockchain and crypto-based business models. That connects to another
key point.

Competitive moats are generated around business model innovation

What should you be doing in running your business? Just what you always do: Widen the moat, build
enduring competitive advantage, delight your customers, and relentlessly fight costs. With the exception
of insurance pricing and coverages, almost all operating decisions that made sense a month ago make
sense today In a memo dated September 26th, 2001 Warren Buffet highlighted the importance of
building moats. For financiers, a moat is a lasting competitive advantage. There was a time where you
could build those moats by following Porter's five forces.

However, the digital era, dominated by platform business models, taught us that competitive advantages
sit outside the company's boundaries. And the ability of digital businesses to take advantage of those
external resources, also wrecked those barriers, making competition way more fluid, unpredictable, and
hard to build with the old business playbook. Therefore, companies like Amazon have learned to take
advantage of network effects, and rather than follow a linear logic, designed business models with built-
in flywheels focused on customer obsession:

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The point here though is not that you have to build a tech giant like Amazon. Instead, you need to realize
that the Internet and the digital era enabled new ways of doing business. Thus, they are not just new
distribution platforms, but they require a new business playbook altogether. This business playbook
revolves around business model innovation.

Business model innovation as a traction model

During the dot-com bubble, Amazon was a company that aggressively invested in growth. While the
company advocated for free cash flows; before the year 2000s, Amazon was quickly burning cash. Until
it realized it needed to change its business playbook. Companies that didn't make it to the fall of the
dot-com, had an aggressive playbook, focused on reckless growth and grandiose business plans. Instead,
Amazon started to focus its efforts on building a platform that would have helped third-party sellers to
host their own products and services. And at the same time, it started to follow a leaner playbook. With
that in mind, Amazon found its business-model market fit. When that happens, traction becomes wired
to the company's DNA for a while.

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What are the primary components of a business model?
Although there is not a single way to define a business model, there is a standard called "business model
canvas" which is a good way to start to understand what are the pieces and moving parts of a company
value creation chain. Then we'll look at the FourWeekMBA method of classifying a business model.

The business model canvas perspective

As highlighted in the business model canvas there are seven key ingredients for any business model to
succeed:

● Key partners.
● Key activities.
● Value proposition.
● Customer relationship.
● Customer segment.
● Key resource.
● Distribution channel.
● Cost structure.
● Revenue stream.

However, in a world where information technology has become predominant, being agile becomes
critical. In that context, an evolution of the business model canvas, the lean startup canvas has become
more accurate to design a business model for a startup. The key difference is how a startup "behaves"
compared to a corporation:

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The lean startup canvas started from the lean startup movement launched by Steve Blank in 2013. In
short, while large companies relied and still rely primarily on elaborate planning, with business plans
hundreds of pages long, full of assumptions. Startups primarily rely on experimentations. Where large
corporations invest large resources upfront to design or build up a product or service; Startups use the
process of iterative design and agile development, where users help the startup get from MVP to
product/market fit.

Whether you decide to use tools like the business model canvas, the lean startup canvas, or develop
your own methodology, it is critical to gain a holistic understanding of your business. Thinking in terms
of business modeling is the key to reach that kind of understanding. In other cases, a framework like
the Blitzscaling business model innovation canvas might be more suited to assess whether your business
or the company's business model you've designed has all the ingredients to scale up, quickly:

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In that scenario, you might want to assess whether your business model has been engineered to
encompass four key growth factors (market size, distribution, gross margins, and network effects) and
avoid major growth limiters (lack of product/market fit and operational scalability).

The FourWeekMBA perspective on business model components

The key components of any business model according to the FourWeekMBA analysis are:

● A compelling value proposition: How do you want your people to think about your brand?
● A unique brand positioning: What do you offer to your people that make them want more?
● A 10x goal setting: Can you offer a 10X better product or service? (compared to existing
solutions)
● Customer segments: Who is your customer? (to notice here we're not talking anymore about
people but customers, those willing to pay for your product or service)
● Distribution channels: How do you get your product or service to your customers?
● Profit formula: Is the business financially sustainable?

This business model framework by FourWeekMBA has four aims:

● Simplicity: Heuristics-based rather than complex models

● Noise reduction: Choosing a few key data points, rather than looking at a massive amount of
data that only adds noise and paralyze decision-making processes
● Branding and distribution: Looking at a business model as a systematic way to build a strong
distribution network and a strong brand. The two things walk hand in hand
● And profitability: The financial viability of a business model is a key element for its success

In short, according to this framework, there are two dimensions of a business:

● The people dimension

● The financial dimension

These two dimensions walk hand in hand.

Yet the people side is also what makes the business thick from the economic standpoint. The people
side comprises the following elements:

● A compelling value proposition: How do you want your people to think about your brand?
● A unique brand positioning: What do you offer to your people that make them want more?
● A 10x goal setting: Can you offer a 10X better product or service? (compared to existing
solutions)

This people dimension will help you build a solid brand. A solid brand builds up a tribe, a group of
people that can follow you anywhere. Once you have a solid brand, you can focus on the second
dimension: the financial dimension.

The three elements of the financial dimensions are:

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 ● Customer segments: Who is your customer? (to notice here we're not talking anymore about
people but customers, those willing to pay for your product or service)
● Distribution channels: How do you get your product or service to your customers?
● Profit formula: Is the business financially sustainable?

How many types of business models exist?

We can classify business models in several ways. For instance, based on how companies and startups
monetize their business, how they deal with their suppliers, customers, and the value proposition those
companies can offer to several stakeholders. Some business models have always existed, some others
are new, others yet innovate by bringing old business models to a new industry (take the Netflix business
model case study as an example). In this guide, we'll see several business models based on successful
companies, tech startups, and also more traditional organizations. The aim is to give you an overview
of all the different moving parts that comprise a business model. In some cases - take Microsoft or
Amazon - there isn't a single way to describe a business model, as some companies have been able to
diversify so much their operations to be able to generate value propositions across several stakeholders
across many industries. For instance, Microsoft isn't just the company selling Microsoft Office products.
True, that is still an essential part of the business, as of 2017. Yet, Microsoft has many other segments,
that are independent of others, and some others that are complementary:

From a quick look at Microsoft revenues breakdown from 2015-2017, you can appreciate the changes
the company has gone through and the complexity of its business model. Indeed, while Microsoft Office
is still the core of the business, other products, such as Xbox, might seem at first sight completely
separate segments. However, when you understand that Microsoft's involvement in the gaming industry
has proved as a perfect ground for AI systems; you can appreciate how the Xbox becomes the perfect
"playground" for innovation in the other company's segments! Take also LinkedIn, a social media
network for professionals. If you look at it merely as a social network, you don't realize the importance
of LinkedIn on Microsoft's overall business model. In fact, LinkedIn, which is powered by a knowledge
graph might be playing a critical role in Microsoft's search engine, Bing. Or take how Amazon back in
2000 was trying to figure out a way to allow other stores to build their e-commerce on top of Amazon,
yet it was impossible to do that with its infrastructure at the time. That is why Amazon started to develop
that infrastructure, which has now become Amazon AWS:

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In 2017, Amazon AWS represented the fastest-growing segment of the company, and it generated over
$17 billion in revenues! Why am I telling you that? As highlighted so far, a business model can be
designed. Yet, most of it is about tinkering and experimentation. Thus, the business model design is a
tool to accelerate the process of building up a sustainable machine that captures value in the long-run.
The key though is to leave that machine unleashed. How do you understand the way the business model
moving parts come together? What is the glue that keeps them together?

Vision vs. Mission: why understanding the difference between them is

important
There is one key ingredient of any company's business model that seldom changes, that is the company's
vision. While the company's mission statement might change over time, the vision sticks. The main
difference between mission and vision is about the present and future. The mission is the way the
company wants to achieve its objectives now and its purpose in the present.

Take the Google mission statement:

In other words, the vision is the map that influences the company directions and decisions for the future.
The mission is about how the company wants to achieve its objectives, thus getting closer to its future
vision, in the moving present. That is a tool aligning the key players of an organization (employees,
suppliers, customers, and more), while it allows the forming of a culture within the organization. The
mission statement instead might have two functions, one is internal, and one is external. Internally, the
vision aligns with people around the same map. Externally, the vision allows outside observers to
understand why an organization might be looking toward a certain direction. Therefore, the vision is
"organizational DNA." Once the vision is clear, you might not even need a mission statement to
succeed. Even though the mission statement is a critical propeller that helps companies focus on short-
term success. Going back to Google's mission statement "to organize the world's information and make
it universally accessible and useful," that allows Google to focus its efforts to achieve its future vision.

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For instance, when Google announced its transition from mobile to AI-first that hasn't changed its
mission. That only represented the means to achieve its mission.

50+ business model examples in a nutshell

In this guide, we'll look at 50 business models, spanning across several industries, monetization
strategies, and ways to unlock value in the long run!

A mix of chain and franchise business model

When 1983, Howard Schultz was walking through the streets of Milan and Verona he became
"enamored" by the coffee experience people had in the Italian bars. He decided to bring that experience
back home. That's how Starbucks was born. While McDonald's makes money by primarily and heavily
franchising its restaurants, Starbucks is a mix of operated vs. licensed stores. If we look at the revenue
generation, company-operated stores make up 79% of the company's revenues in 2017.

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Ad-supported (subsidized) business model

Spotify is a two-sided marketplace where artists and music fans engage. Spotify has a free ad-supported
service and a paid membership. Founded in 2008 with the belief that music should be universally
accessible, it generated over €6.7 billion in 2019, almost 90% based on premium memberships, and
around 10% is ad-supported. Keeping a free product offering, especially when it comes to a consumer
brand, like Spotify, can be quite expensive. It is true that Spotify uses a sort of self-serving model where
its free accounts are channeled to activate premium plans (the Family Plan has been the most popular
in the last years). On the other end, Spotify makes sure to support its free side of the business by running
ads. Those ads subsidize in part the free service for over 163 million accounts as of March 2020.
Therefore, instead of letting premium members support the free plans. The ad-supported side
(representing 10% of its revenues as of 2019) becomes self-standing and viable. In short, while the
free/ad-supported side of the business is relevant to Spotify to convert those accounts in premium. At
the same time, it works pretty well as a self-sustaining product tied into a digital business model.
However, as the ad-supported model scales, it also poses some threats to the scalability of the business
model, as the licensing costs for the streamed content might grow quickly (Spotify will pay more
royalties as more free users stream content on the platform). That is also part of the transition of what I
like to call from platform to brand.

Affiliate business model

Let's say you have a website with a large amount of traffic each month. Yet you don't sell any product
or service, which is yours. How do you make money? Well, thanks to affiliate marketing you don't need
either a product or a service, you have many from other companies. Thus, you'll make money by merely
featuring other products or services and getting a commission for that. Affiliate marketing done right
can be a powerful source of income. Take, Pat Flynn from Smart Passive Income, which has been
generating millions of dollars with affiliate marketing:

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Aggregator business model

An aggregator business model can be classified as a sort of platform business model, however, with its
specific features. For instance, the aggregator might act as a middleman. Still, it monetizes the eyeballs
on the platform (advertisers subsidize the aggregator) while keeping a tight control on the whole
experience of users. In this business model, the aggregator becomes the middleman by removing all the
other middlemen from the market. To understand more about this model and how it differentiates from
platform business models, read the guide on the aggregator business model.

Agency-based business model

neilpatel.com is one of the most successful sites in digital marketing. Neil Patel has also used his name
as a brand, which has become recognized in the digital marketing space. However, rather than selling
tools or info-products, Neil Patel is monetizing its traffic by generating leads for his digital agency. As
he pointed out:

My model isn’t as scalable and it requires more headcount, but it can generate much more money. Just
look at ad agencies like WPP and Dentsu. They generate billions in revenue!

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In short, Neil Patel Digital is the SEO and digital marketing agency that allows Neil Patel to monetize
its traffic primarily by offering free content and free marketing tools. This is a mixture of a freemium
business model, combined with an agency-based business model. Yet, the idea behind the agency-based
business model is simple: you generate enough qualified leads, set up a lean team to manage those
projects, and grow the agency based on on-coming projects! According to Neil Patel - at least in the
digital marketing space - there is still space to grow a multi-billion turnover agency.

Asymmetric business models

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In an asymmetric business model, the organization doesn't monetize the user directly, but it leverages
the data users provide coupled with technology, thus having a key customer pay to sustain the core
asset. For example, Google makes money by leveraging users' data, combined with its algorithms sold
to advertisers for visibility. Some examples of hidden revenue generation are Google and Facebook.
The two most popular websites on planet earth have a similar monetization strategy. They offer free
apps and platforms for a broad audience (billion people worldwide) while monetizing the data of the
same users. Each time you click through a link on Google that has the "ad" notation next to it. De facto
you're allowing Google to monetize on a keyword, while you're making a business monetize on that
keyword if you buy the service they provide. A similar logic applies to Facebook. The news feed is the
place where Facebook monetizes most of its ads. Both models both use a hidden revenue generation
model as those services work so well that most users barely realize their data is getting sold for
advertising.

Attention merchant business model

An attention merchant might be defined as a company that primarily makes money by harvesting human
attention. While this definition is tough in practice (most companies make money by grabbing their
target attention) the attention merchant primarily asset is human attention. That is also why companies
operating with an advertising business model are defined, attention merchants. While in the tech
industry companies like Facebook and Google have become hugely profitable by using an advertising
model. For the sake of this article, I'm mentioning Snapchat Business Model as it probably represents
the wildest evolution of where attention merchants can get. Just like Google allows businesses to bet on
keywords. Businesses on Snapchat can create their Geofilters based on location and track the results of
those Ggeofilters. While Google and Facebook proved to have a solid business model, attention
merchants usually also face many challenges. In fact, as those companies scale up, they also end up
grabbing the attention of billions of people worldwide. When that happens, those tools become a threat
to the political system which tries to kick back by regulating or fining them. Another aspect of attention
merchants is about keeping the users hooked. When those apps start losing users' attention - if they don't
have a solid business model - a single Tweet from a Kardashian can make the company burn over a
billion dollars in market cap!

Barbell business model

A Barbell strategy consists of making sure that 90% of your capital is safe, and use the remaining 10%,
or on risky investments. Applied to business strategy, this means having a binary approach. On the one
hand, extremely conservative. On the other, extremely aggressive, thus creating a potent mix. Author
Nassim Nicholas Taleb explains this approach in his Incerto Series. It's an approach where you invest
most of your wealth in extremely conservative financial instruments to preserve the capital. And on the
other end, the remaining part of the capital is invested in extremely aggressive strategies with massive
potential upsides, yet controlled downsides. In short, you make yourself prone to take advantage of
positive Black Swans (rare events that can benefit you). I want to take this further to apply that to

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business modeling. Here the company uses a barbell approach to product and distribution. You have a
core product and business where most resources are spent and the whole organization structured around.
On the other end, you place bets on new products that might renew your business model and make the
old irrelevant. An example of that is how companies like Google, keep investing most resources in their
core business model while also placing other bets, prone to create not only a whole new business model
but whole new industries.

Bidding multi-brand platform model

Grubhub is an online and mobile platform for restaurant pick-up and delivery orders. In 2018 the
company connected 95,000 takeout restaurants in over 1,700 U.S. cities and London. The Grubhub
portfolio of brands like Seamless, LevelUp, Eat24, AllMenus, MenuPages, andTapingo. The company
makes money primarily by charging restaurants a pre-order commission and it generates revenues when
diners place an order on its platform. Also, it charges restaurants that use Grubhub delivery services
and when diners pay for those services.

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Grubhub is an extremely interesting case as the Company primarily charges restaurant partners a per-
order commission (mostly percentage-based). The restaurants can choose (in most cases) their level of
commission rate, at or above the base rate. When a restaurant pays a higher rate, that positively affects
its prominence and exposure to diners on the Platform. This approach combined with Grubhub's brands
enables restaurants to easily build up their delivery operations even if they lack that. Thus, increasing
the overall market value, as more restaurants can supply their food and people get more variety.

Blitzscaler-mode business model

In Q1 2020, Amazon's net sales increased by 26.3%. Yet its operating income decreased by 9.7%
primarily due to a higher cost of sales (30% increase), incurred by Amazon due to the COVID, due to
increased shipping and fulfillment costs and marketing expenses. Amazon's continuous, massive,
investment in growth to dominate multiple markets is a perfect example of a business model with built-
in growth. This is the combination of several elements (platform's network effects + branding power +
scalable financial model). That applies to the consumer e-commerce side of Amazon (excluding
Amazon AWS) where the company, while generating low-profit margins for years, also generated
substantial cash flows which is invested back into massive growth. A sort of continuous blitzscaler-
mode, that while risky for most companies, it has become a normal mode for Amazon. Thus, Amazon
has been able to ingrain blitzscaling within its business model.

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Blockchain-based business models

When on January 10th, 2009, a guy named Satoshi Nakamoto (it probably was only a pseudonym) sent
an email to a man from Santa Barbara, Hal Finney, he announced a new currency, called Bitcoin, based
on a new technology called Blockchain. Merely put, the Blockchain is a distributed ledger that relies
on cryptography to handle transactions, interactions, or anything that implies an exchange between
people, which is decentralized and anonymous. That was a revolution. Since Bitcoin has become a
global phenomenon, the technology that allows it to function, the Blockchain, has been evolving. To be
sure, the Bitcoin Blockchain isn't the only protocol. Large numbers of Blockchain protocols have been
created since the Bitcoin launch. This means that the combination of existing business and new
Blockchain protocols will give rise to a countless number of innovative business models. Those few
that will pass the test of time might probably give rise to the next Blockchain Giants. A compelling case
of innovation based on a Blockchain-based business model is Steemit:

That is a decentralized social network, which rewarding system is based on a Blockchain protocol,
called Steem. Like Steemit, many others are trying to innovate in several fields. Thus, we might expect
an explosion of Blockchain-based business models.

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Bundler model

Bundling is a business process where a series of blocks in a value chain are grouped to lock in consumers
as the bundler takes advantage of its distribution network to limit competition and gain market shares
in adjacent markets. This is a distribution-driven strategy where incumbents take advantage of their
leading position. In bundling, a strong distribution power combines several products in a single offer to
extract more from the market. For decades Microsoft has been able to bundle several products under
the same umbrella (Office has been coupled from time to time to several other products) so the company
extracts more from the market if it were selling a single product.

Cash conversion cycle or cash machine model

Have ever wondered how some businesses survive, nonetheless the thin margin they have? One great
example is Amazon. A company that makes a low-profit margin yet it has been very disruptive. In
reality, Amazon can get its partners to finance the business by playing on the short-term liquidity of the
business.

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Discount business model focusing on high quality

Leveraging on the price to gain a competitive advantage isn't new. However, price wars are not the best
way to create a sustainable business model. Instead, the supermarket chain - ALDI - has done just the
opposite. One of the critical ingredients of the ALDI business model is to keep its prices low while
maintaining its quality as high as possible. How? With several strategies. For instance, ALDI limits its
stores to 1,300 items, which generates minimum wastes. Also, ALDI also features its brands, which
makes it inexpensive to sell them, as there will be lower sales and marketing costs associated. 90% of
ALDI brands have an exclusive agreement with the market chain!

Distribution based business model

A distribution-based business model is one in which a company's survival depends on its ability to have
one or a few key distribution channels to connect to its final user or customer. It is important to notice
that almost any business can be classified as a distribution based business model, as there is no company
that can survive without distribution. However, in general, companies that tap into consumer markets
need to be extremely good in creating distribution channels that are able to unlock long-term value.
There are a few critical aspects:

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 ● The distribution channel has to be sustainable: this means that if you spend more money to
maintain it that what it generates it might not work. It is fine in the short-term to lose money on
building up a distribution strategy. Yet in the medium term, it needs to be sustainable.
● It needs to be diversified: relying on a single distribution channel might be too risky, especially
if you don't control it. Therefore, it is critical to focus on the main channel, yet the company
needs to expand and tap into other channels.
● It needs to scale: a distribution strategy is as good as its ability to stick also when the business
scales up. Thus, the critical question is "would this strategy work if I go from €1 million to €10
million in revenues?" Many won't and it's fine. Yet as an entrepreneur, your goals should be to
find a distribution strategy that scales.

Also, tech giants like Google spent billions to guarantee proper distribution. For instance, Google
spends a good chunk of its revenues on distribution via acquiring traffic from several sources:

TAC stands for traffic acquisition costs, and that is the rate to which Google has to spend resources on
the percentage of its revenues to acquire traffic. Indeed, the TAC Rate shows Google’s percentage of
revenues spent toward acquiring traffic toward its pages, and it points out the traffic Google acquires
from its network members. In 2017 Google recorded a TAC rate on Network Members of 71.9% while
the Google Properties TAX Rate was 11.6%. When you see companies with a large turnover, you need
to always ask, "what's their distribution strategy?" or "how did they get there?" You'll find out that they
spent massive resources to tap into channels that proved successful to scale up their business!

Direct-to-consumers business model

A direct-to-consumer business model is primarily based on direct access from a brand or company to
its final customers. Indeed, the more a company is able to tap into its customers without the need of an
intermediary, the more this model will work in favor of the brand, which is able to control the perception
of its customers via massive marketing campaigns. Indeed, this kind of model implies a massive activity
of branding and marketing to make sure consumers have your product on top of their minds. A
successful example of a direct-to-consumer business model is Unilever:

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Unilever is the second-largest advertiser in the world in 2017, based on media spend. Alongside more
conventional advertising, Unilever creates and delivers tailored content through several digital
channels. When building up a direct-to-consumer business model it is critical to emphasize marketing
rather than sales processes. Indeed, consumer products have a low pricing point. Thus, to make sure to
generate enough revenues for the company, marketing activities will be the key ingredient.

Direct sales business model

Nowadays, with the advent of AI, machine learning, and a new form of advanced technologies, it might
seem demode to talk about direct sales. In fact, for many, this is a thing of the past. However, the
opposite is true. In an era where everything is getting automated the personal touch is becoming critical.
Of course, once technology produces machines to the point of seeming human (see the Google Duplex
experiment) that might be a different story. Yet as of now, companies like ConvertKit use direct sales
as a powerful weapon to grow their business, fast! Below you can see a simple Trello board put up by
Nathan Berry, founder of ConvertKit when he decided to create a mail marketing tool from scratch just
to see it grow to over a million dollar in monthly recurring revenue in only six years:

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Thus, direct sales can be a powerful way to develop a business if done correctly. One of the secrets to
a successful direct sales strategy is the qualification of your target audience. If you try to sell your
service or product to anyone, this is more spamming. The more you qualify your audience, the more
you create value.

E-commerce marketplace business model

With almost $23 billion in revenues and nearly $7 billion in profits. While in North America and the
western world in general, Amazon is the synonym of "e-commerce." When it comes to the Chinese
industry, Alibaba is the market leader! In 2016 the company recorded over 423 million active buyers.
Alibaba, just like Amazon has a diversified business model, with many moving parts. However, as of
2017 most of its revenues still came from core commerce. As building up a website and e-commerce

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has become inexpensive, and it buries no particular cost for the traditional brick-and-mortar business,
more and more small businesses join in and make the marketplace their primary source of revenues
following Amazon leadership at the global scale. In fact, in many cases brick-and-mortar stores opt to
become Amazon sellers:

In fact, by becoming a seller on Amazon, you allow your products to be directly picked, packed and
shipped. Amazon takes a cut of the revenue, and the seller retains the rest. As Amazon puts it:

We offer programs that enable sellers to grow their businesses, sell their products on our websites and
their own branded websites, and fulfill orders through us. We are not the seller of record in these
transactions. We earn fixed fees, a percentage of sales, per-unit activity fees, interest, or some
combination thereof, for our seller programs.

As of 2016 Amazon still made almost 70% of its revenues from retail products.

Educational niche business model

Built by one of the smartest persons on earth (Stephen Wolfram), Wolfram Alpha is a computational
engine, able to provide complex mathematical questions and way more advanced (at least until a few
years ago) compared to any other search engine. Wolfram Alpha has built its business based on
education. The primary targets remain students or teachers, which with a subscription can get unlimited
access to Wolfram Alpha features. Wolfram Alpha makes its computational engine free and open to

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anyone. Yet to get advanced features (such as full mathematical procedures) you will need to subscribe
to the paid version. In short, that is a mixture of a freemium and subscription-based model that targets
the educational industry.

Family-owned integrated business model

The family-owned integrated model starts from the assumption that even if you've built a multi-billion
dollar company you can control it in its entirety, while you also keep an agile decision-making process
based on an ownership structure that keeps the control of the organization in the hands of the family.

An example of that is the Prada business model:

Prada generated over three billion euros in revenues in 2017, and it managed to integrate its overall
chain, from the creative process to the distribution to consumers via its directly operated stores:

Source: Prada annual report for 2017

They've also managed to keep the ownership of the firm in the hands of its two founders and partners
in life, Miuccia Prada and Patrizio Bertelli:

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 Source: Prada annual report for 2017

With 100% of Prada Holding, the couple controls 80% of Prada! Their word is law within the
organization. Although Prada as a multinational has complex management systems, Miuccia Prada and
Patrizio Bertelli are the key decision-makers on strategic initiatives.

Feeding model

HyreCar is a peer-to-peer marketplace where owners of cars can rent their idle vehicles to drivers that
want to make an additional income via ride-sharing services like Uber, and Lyft. As a two-sided
marketplace, HyreCar makes money by charging drivers for direct insurance and a 10% fee on the
weekly rental expense. And by taking a 15% fee from owners' weekly rental income. As platforms
arise, they create ecosystems, becoming unexplored markets. Those markets can be surfed by feeding
your business model on top of that. A good example is how HyreCar feeds its business model on top of
Lyft and Uber networks of drivers. People that want to make some extra bucks can rent temporarily a

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car and connect to Lyft and Uber to generate some extra income. In a sort of "tit for tat" relationship
HyreCar "cooperates" and surfs the drivers' network of Uber and Lyft, to create more liquidity, by
making more cars available on the road for drivers, thus improving the supply, and therefore generating
more demand.

Freemium model (freemium as a growth tool)

The freemium is usually a growth and branding strategy rather than a business model. A free service is
provided to a majority of users, while a small percentage of those users convert into paying customers
through either marketing or sales funnel. The free users not converting into customers help spread the
brand. Free can be a powerful weapon for growth. Many in the tech industry and more specifically in
the SaaS business model use the Freemium to grow their business. The freemium is a mix of free and
paid service. The company offers a basic version of the product that works just like the premium product
but it either has limited usage, or it has limited features. Thus, the free version is used for lead generation
(capture contacts of people) and invite them to upgrade to the paid version or have the users with a free
account to advertise their product. Take SumoMe, a tool that allows you to grow the audience of a blog
through newsletter forms, pop-ups, A/B tests, and heat maps:

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If you get the freemium version of the tool, you still have a lot of features for free. SumoMe will invite
you to upgrade over time, and it will show a small link "powered by SumoMe."

Source: jackpdean.com

In short, the free product can be leveraged in several ways. First, for lead generation. Second, as a way
to trigger upsells for non-paying customers. Third, as a virality tool, with CTAs and links placed in
strategic places to have free publicity from non-paying users. If appropriately implemented the
freemium model can be a great way to grow a brand and a business fast. While freemium can be
considered in certain circumstances a key element of a business model, as it influences all its aspects.
In many other cases, a freemium model is a growth tool that has an incredible potential in spreading the
brand of the company offering it. Companies like MailChimp and Slack, have strengthened their brands
and marketing funnels by leveraging on the freemium model.

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Freeterprise model

A freeterprise is a combination of free and enterprise where free professional accounts are driven into
the funnel through the free product. As the opportunity is identified the company assigns the free
account to a salesperson within the organization (inside sales or fields sales) to convert that into a

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B2B/enterprise account. As consumer brands showed the freemium model could be both a great go-to-
market strategy and generate a continuous flow of qualified leads (however, only after the whole
organization would be organized around identifying those opportunities), other B2B/Enterprise
companies (those primarily selling to other companies or larger corporations) also mastered the
freemium model but on a B2B scale. That is why I like to call that "Freeterprise." Companies like Slack
and Zoom are great examples of how you can build a valuable business with a Freeterprise model.

Zoom is a video communication platform, which mission is to "make video communications

frictionless." Leveraging on the viral growth from its freemium model, Zoom then uses its direct sales
force to identify the opportunity and channel those in B2B and enterprise accounts. This sort of looks
like magic, as you can start from a single free professional account, and pull a whole organization into
that, to transform it into an enterprise As I explained in the Zoom business model though, the whole
organization needs to be structured around the freeterprise model, where on the one end the company
seamlessly uses the free product as entry point within companies. And on the other end, salespeople
with the ability to build a strong relationship with the account can get the whole company on board,
thus transforming a free professional account into a potential enterprise customer. Of course, this leads
the organization to skew its resources toward building an army of qualified salespeople to handle the
volume of leads generated by the free offering (in 2019 Zoom spent 54% of its revenues primarily on
salespeople headcounts).

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Gatekeeper model

In the gatekeeper model, the small business masters how the gatekeeper works and aligns with its
business model to reach potential customers. For instance, where you launch e-commerce on Amazon,
a blog by leveraging on Google, or a channel on YouTube, in all these circumstances you're aligning
your distribution model with that of the gatekeeper to reach potential customers. The gatekeeper
becomes the unlocker to final customers.

Heavy-franchised business model

McDonald's follows what could be defined as a "heavy franchised business model." 92% of its
restaurants are franchised. With a long-term objective to reach 95% of franchised restaurants. The
franchising business model is quite effective for the expansion of the organization. A franchisor licenses
its know-how (which might comprise procedures, training materials, brand, and more) for a franchisee,
which has the right to sell the franchisor products and services in exchange for a royalty. In some cases,
the franchisor also gets a percentage of the revenues.

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Humanist enterprise business model
The most prominent advocate for the humanist enterprise business model is Brunello Cucinelli. Indeed,
Brunello Cucinelli business model is based on three key pillars:

● Italian Craftsmanship,
● Sustainable Growth,
● and Exclusive Positioning and Distribution.

The company generated over €503 million in 2017:

The humanist enterprise is based on the premise that "profit is made without harm or offense to anyone,
and part of it is set aside for any initiative that can really improve the condition of human life: services,
schools, places of worship and cultural heritage."

Enterprise business model built on complex sales

In an enterprise business model, a company focuses on large clients, usually Fortune 500 clients that
have a massive budget of millions or billions of dollars. This kind of business is primarily based on
complex sales.

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As Peter Thiel explains in his book Zero to One, when it comes to a company's distribution it is critical
to understand where you stand. Indeed, in an enterprise business model, it's all based on closing large
deals. Therefore, it is crucial to have senior salespeople with competence in managing those large deals
to guarantee the success of the company. In this respect, drawing a clear line between Marketing and
Sales is the key point when trying to build up an enterprise business. That's because you need to identify
the right target with a laser focus. Most of the time a large enterprise business might have only a few
dozens of potential clients. Once identified those potential clients you need to put the proper resources
to close those deals.

Lock-in business model

Apple is a product-based company fueled by platform business models (like Apple Store), in which
sales still primarily come from the iPhone. However, the company has also transitioned toward a service
company (with Apple Store, iTunes now called Apple Music) and as a wearable product company,
which is the fastest-growing segment. Apple is famous in the business world (beyond launching
beautifully crafted tech products) for its philosophy in keeping its ecosystem as enclosed as possible.
Apple devices will talk to each other in a seamless way, to create a great experience. While the smooth
experience for users through Apple's devices makes its products compelling for millions of people, the
lack of integration with products outside its ecosystem can also be frustrating. A locked-in experience
can be great to have as much control over users' experience and to incentivize customers to purchase
more products from the company. It can also be a disadvantage in the long-run as those competitors
leveraging on an open approach can grow more quickly. As long as the company can keep investing
back in developing great products, integrating them with each other to create a seamless experience,
and maintaining a strong distribution pipeline, that model might work.

Instant news business model

Twitter has based its fortune on short messages (until 2017 140 characters, then extended to 280) which
allows anyone to share the news but also updates that become news. One of the most powerful aspects
of Twitter is its immediateness, which although it might have also caused troubles in the media industry,

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also allowed news to be disintermediated. Twitter is an attention merchant, which primarily makes
money via advertising, like Facebook and Google.

Management consulting business model

As one of the most successful consulting companies in the world, Accenture makes money by selling
consulting services in several industries (from financial services to communication and technology). A
consulting business model is often based on hiring talented people and having them work on multiple
client's projects. The client pays a fee that can be assessed per hour or per day, according to the
requirements of the service. Accenture was able to build a multi-billion dollar based on consulting
services across the globe.

Market-maker model

Some platforms create liquidity by removing hundreds of intermediaries that used to lock-in the market.
When that happens the market gets bigger and more liquid over time. That enables the platform to work
as the market maker, or the maker of the price, by making it liquid.

Dynamic pricing is the practice of having multiple price points based on several factors, such as
customer segments, peak times of service, and time-based consumption that allow the company to apply
dynamic pricing to expand its revenue generation. One of the major values from a platform like Uber
is the fact that it is able to create liquidity on the platform by batching by time to time divers and riders,
also with dynamic pricing.

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Multi-brand business model
Back in the late 1990s, a war started in the fashion luxury industry to take over Gucci. That war saw an
arm wrestling between Kering Group - a company founded as a lumber trading organization back in the
1960s - and LVMH Group - a company, started a few decades before primarily as a construction
company just to become one of the most known luxury brands in the world. The war was about who
would become the largest luxury group - fought by the two wealthiest men in France - but also about
who would be the most diversified luxury empire. Eventually, Gucci ended up within Kering Group,
sold by LVMH at a high price. At the same time, LVMH took over Fendi. Today, both Kering Group
and LVMH have a massive portfolio of brands.

Kering Group portfolio of brands made over €15 billion in 2017

LVMH built a portfolio of brands and houses that made over €42 billion in sales in 2017. Both groups
today follow a multi-brand strategy based on creating economies of scale at a central level; while
keeping the Maison and Houses part of the portfolio operated and run independently. This multi-brand
approach leverages both centralization for certain aspects of the business (collaboration among the
brands, economies of scale, better supply chain, shared branding initiatives) and decentralization for
others (allow agile decision making, preserve the unicity of each brand to keep its creativity output
high). That approach to business modeling can be quite effective if you're trying to build up an empire!
It requires massive resources to develop an acquisition campaign over the years. Indeed, both of those
groups came from different industries and used the liquidity generated by their core activities to enter
the luxury market.

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Multi-business model

Amazon runs a platform business model as a core model with several business units within. Some units,
like Prime and the Advertising business, are highly tied to the e-commerce platform. For instance, Prime
helps Amazon reward repeat customers, thus enhancing its platform business. Other units, like AWS,
helped improve Amazon's tech infrastructure. When you look at Amazon it's tempting to talk about its
"business model." Yet Amazon is a set of combined business models that span across:

● Consumer e-commerce platform.

● First-party seller platform (Amazon owns a set of brands like AmazonBasics).
● Third-party seller platform and services (Amazon hosts third-party sellers).
● Amazon Prime.
● Amazon Advertising.
● Amazon AWC B2B/Enterprise Cloud platform.

The core of Amazon has always been the e-commerce platform, however over the years, as a side effect
of developing adjacent parts of the business, to sustain its core. Amazon built successful programs
(Prime and AWS are examples) that turned into self-standing businesses. This is the fruit of a continuous
mode of aggressive growth and business innovation that made Amazon expand, and reinvent its
business model (AWS has a whole new logic than the core e-commerce business and could potentially
be a spin-off of Amazon).

Multi-sided platform business model

If I saw, professional social network, at least at the time of this writing, for sure you'll think about
LinkedIn. In fact, with over five hundred million users worldwide LinkedIn is a platform that offers
value for several stakeholders. LinkedIn is a source of value for a B2B that is trying to grow; it is a
powerhouse for any business developer and a source of value for HR managers and candidates looking
to grow their skills. In short, on a peer to peer marketplace, a company acts as an "invisible" middleman
that makes transactions and interactions among sellers and buyers as smooth as possible. On a multi-
sided platform, the company operates services to both sides. For instance, LinkedIn sells subscription
services to HR managers to find candidates to fill vacancies. At the same time, LinkedIn provides

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another subscription service to people looking for job opportunities. As the value of the platform
depends upon the ability of LinkedIn to offer skilled candidates to the HR manager, that is why LinkedIn
also has an online teaching platform that offers together with a subscription, professional courses to
people looking for a job.

Multimodal business model

Lyft is a transportation-as-a-service marketplace allowing riders to find a driver for a ride. Lyft has also
expanded with a multimodal platform that gives more options like bike-sharing or electric scooters.
Lyft primarily makes money by collecting fees from drivers that complete rides on the platform. Lyft
is a transportation-as-a-service on-demand marketplace that allows riders to quickly find a driver and
get from one place to another. However, Lyft has also expanded with a multimodal platform that gives
more options like bike-sharing or electric scooters. Lyft leverages three key problems related to the
cost of ownership:

● Underutilization: vehicles are not used most of the time.

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 ● Inefficiency: the large ownership of vehicles also made cities build large parking spaces that
occupy a good chunk of cities’ urban landscapes.
● Inequality: car ownership while distributed is still a large issue for many people that can’t
afford to buy a car.

From there it offers different options to customers that can switch from car to bike-sharing, or electric
scooters, depending on their short-term transportation needs.

Multi-product (Octopus) business model

OYO business model is a mixture of platform and brand, where the company started primarily as an
aggregator of homes across India, and it quickly moved to other verticals, from leisure to co-working
and corporate travel. In a sort of octopus business strategy of expansion to cover the whole spectrum of
short-term real estate. In its expansion strategy, OYO started from India, yet it quickly moved to
different verticals. From there it built up a portfolio of products, each launched in parallel to its
expansion strategy, to cover larger geographical areas, but also different segments of the market. From
the low-end of the travel market to the higher-end with its Townhouse, a sort of modern boutique hotel.
To further expand in co-working and corporate traveling. This sort of business model is skewed toward
a quick go-to-market strategy that moves in all directions to expand and cover as much as possible of
the end-to-end experience for travelers.

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On-demand subscription-based business model

We now give for granted that we must watch our favorite shows and series on-demand. Yet, for decades
the traditional media business model has relied on fixed schedules. You either watched the Late Show
at the time it was going on air, or you were supposed to wait for the next replica of that episode. At
times a business model only becomes possible when technology evolves. In some cases, it also requires
some creativity when technology doesn't help. For instance, in 1997 Reed Hastings, CEO, and founder
of Netflix started a business based on the rental of DVDs. This business today contributes to a small pie
of Netflix revenues, yet at the time it was the core of the business, and it has been so for years. "On-
demand" at the time as possible with the pay per rental business model. Until Netflix transitioned to
the on-demand subscription-based business model; an old business model used by magazines for
decades was successful and "innovative" in the TV industry, where the content was mainly distributed
at fixed schedules.

One-for-one business model

Have you ever heard of TOMS Shoes? As you can understand from the name, this is a company making
shoes. What's new about it? The founder of TOMS Shoes has come up with a model, in which, for a
pair of shoes sold, another pair is given to kids around the world that cannot afford them. This kind of
model might be seen as a sort of hybrid that combines profit with non-for-profit models. In reality,
TOMS Shoes has proved to be profitable and sustainable over time.
Indeed, the non-profit side of the business model works as an excellent propeller for the business.
Anyone wants to take part in the growth of a company that not only sells shoes but takes care of kids
around the world. Thus, it isn't anymore just a pair of shoes; it is a story you want to be part of.

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Peer-to-peer business model

Airbnb is a platform business model making money by charging guests a service fee between 5% and
15% of the reservation, while the commission from hosts is generally 3%. The platform also charges
hosts who offer experiences with a 20% service fee on the total paid amount.

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A peer-to-peer business model is built on the premise of creating value for both demand and offer, while
the company that acts as a middleman monetizes through commissions. Companies like Airbnb have
implemented the modern version of the peer-to-peer business model. As technology has quickly
advanced, in Airbnb's case, it won just because it allowed the transactions between hosts and the hosted
smooth. The platform works seamlessly, and Airbnb only intervenes to create trust and mitigate risk for
the party involved.

Platform-agnostic model

Grammarly leverages on a freemium service, where free users are prompted to switch to a paid
subscription. Grammarly makes money by selling premium plans starting at $11.66 to $29.95 per
month. The company also makes money by selling human proofreading services to its paid users.
Grammarly’s CEO explained to TechCrunch as one of the key advantages of Grammarly is its
“platform-agnostic approach.” In short, Grammarly focuses on being anywhere the user needs to be.
This approach makes Grammarly value proposition compelling in a tech world, dominated by the tech
giants that are trying to cover the end-to-end experience of users, thus locking them in their walled
gardens. Grammarly instead is trying to be anywhere, independently from the platform, thus making
the user free to choose the platform.

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Privacy as an innovative business model

While humans have always looked for private moments in their lives, Privacy has gained a new and
renewed meaning in modern times:

With the rise of the web and the rise of companies that make money by harvesting users' data, privacy
has become a concern. As many businesses start from people's concerns, privacy has become an
industry. Part of it has been fueled by Google practice to gather users' data. As more people become
aware of the Google business model, they look for alternatives that respect privacy. If you type
"privacy" on the Google search box, among the most frequently related searches, you'll find "privacy
Google:"

If you click on "privacy google" you will get on the right-hand side a knowledge panel which highlights
"privacy concerns regarding Google:"

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In short, Google itself is revealing the existence of an industry that revolves around privacy online. In
this scenario, a search engine like DuckDuckGo, which has built its success on throwing the users' data
on the fly to allow private navigation, is growing quite fast. That's because DuckDuckGo makes money
primarily via affiliations and by selling local keywords. Thus, privacy becomes a propeller for
DuckDuckGo business growth.

Razor and blade revenue model

Have you ever wondered why a blade costs more than a razor? This is the razor and blade revenue
model in action. When a company makes its customers loyal to a product. Then those same companies
might leverage that product to sell related "accessories" for a premium price. Companies like Apple,
for instance, use an inverse razor and blade, business model. Apple has created platforms like the App
Store and iTunes, which sell apps and songs, movies, or tv series at a convenient price. While Apple
charges premium prices on its devices (iPhone, iPad, and Mac). The logic is the same, but inverted. As
consumers are locked in the Apple ecosystem, they feel compelled to buy Apple products at a premium
price and with very low price elasticity.

Self-serving model

Dropbox generated over 90% of its revenue via its self-serve channels to convert users into paying
customers through in-product prompts and notifications, time-limited free trials of paid subscription

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plans, email campaigns, and lifecycle marketing. Dropbox generated over $1.1 billion in revenue in
2017, with an average revenue per paying user of $111, $305 million in free cash flow, and 11 million
paying users. A self-serving model is a freemium-based model able to convert quickly and with low-
cost free users in paid accounts. Dropbox business model is a great example of acquiring new users
efficiently and at relatively low costs through three tactics:

● Word-of-mouth referrals.
● Direct in-product referrals.
● And sharing of content.

By following the freemium model when users create a free account those same users often share and
collaborate with other non-registered users. This mechanism for which free users invite other non-users
creates an automatic referral mechanism. Built-in prompts in the products instead make it possible to
convert, with a low-touch and automated funnels users in premium accounts.

Space-as-a-service model

WeWork runs a membership model that gets monetized via a set of packages which include ancillary
value-added products and services to enable companies to scale or shrink their workspace on-demand.
WeWork defined its revenue model space-as-a-service as claimed to be more scalable than a traditional
commercial real estate. While the main carrier of this model (WeWork) had massive backlashes due to
its unsustainable business model. The question of whether this model will be possible in the future still
holds. True, that part of the problem is that of taking long-term leases to transform them into short-term
opportunities by building services on top of them, to arbitrage on the difference.

Subscription-based business model

Think about those two scenarios. You have a series of online courses that you sell as a one-off. You've
sold 100 courses in one month at $100; you'd made $10,000. Next month to have the same level of
revenue generation you'll have to sell the other 100 courses. This means you either find more students
or you produce new courses. Imagine the second scenario. You have a few courses, and you make them
available for a monthly subscription at $75. If you have 100 subscribers, this means that each month
you'll have $7,500 without having to find new students. Given this example, you can understand why
the subscription business model is so powerful. Today companies like Netflix, Amazon (with Prime),
LinkedIn, and many others use subscription-based models to monetize part of their business. However,
a subscription-based business model also needs a lot of resources. Take Netflix. I'll keep paying my

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subscription only if they will give me fresh content on a regular basis. That is why Netflix also produces
series that are quite successful. Yet those series have massive production costs. In other words, to sustain
a subscription-based business model you also need a lot of the resources necessary to create new
content, have awesome support or service that motivates subscribers to keep paying. The curse of the
subscription business model is churn!

Three-sided marketplace model

Uber Eats is a three-sided marketplace connecting a driver, a restaurant owner, and a customer with the
Uber Eats platform at the center. The three-sided marketplace moves around three players: Restaurants
pay commissions on the orders to Uber Eats; Customers pay the small delivery charges, and at times,
cancellation fee; Drivers earn through making reliable deliveries on time. Uber Eats is a great example
of a three-sided marketplace, where the company facilitates interactions between eaters, delivery
partners, and restaurants to develop a solid marketplace. While each of those interactions could happen
independently. Uber Eats platform makes them smooth, as it provides a unique place for those players
to connect and do business.

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User-generated content business model

Among the 50 most popular sites in the US, Quora might be defined as a "social Q&A" site. Just like
Reddit taps into users to generate content. Quora also draws into its writers to produce quality content
that answers its users' questions. There are a few interesting aspects about Quora. First, it uses a mixture
of AI combined with human intelligence. Quora allows users to write content while using advanced
algorithms to make the platform scale up. Second, people writing on Quora do not get paid. In fact, by
introducing a social mechanism of ranking, Quora writers feel recognized for their work. Besides,
earning the prize as Quora top writer might also mean the mention of popular publications. Thus, if I
had to describe the Quora business model in a couple of sentences, that would be "the social that taps
into users - that aspire to become writers - to produce content, and it scales up thanks to a smart platform
built on AI systems." In terms of monetization, Quora has received several rounds of investment and
started to test text-based advertising.

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User-generated AI-amplified model

TikTok is the Chinese creative social media platform primarily driven by short-form video content. It
launches challenges of various types to tap into the creativity of its users and generate engaging (if not
addicting content) accessible via an infinite feed. TikTok primarily makes money through advertising,
thus making it an attention-based business model. For many, TikTok is just the next generation of social
media. However, there is more to it. TikTok is a continuous feed that shows short video formats, where
users engage in all sorts of dances, memes, and more (for now). Yet, what makes TikTok powerful is
the curation performed by its AI. Where in Web 1.0 social media was all about the network. In AI-
driven social apps, it's all about engagement. Users can find a continuous stream of hooking content in
their feeds independently from their network, the AI replaces it. Yet, the AI + the network becomes an
atomic weapon for growth. If the previous advertising machine built on top of information retrieval
(Google) and network (Facebook). Those are the largest digital advertising machines as they managed
to make advertising mostly invisible or at least relevant to users. What if that could be brought to the
next level? Where scaled user-generated platforms built powerful business models (Facebook, Twitter,
Instagram). In the web 2.0 version is the user-generated, AI amplified content that will take over with
new video formats.

Unbundler model
Unbundling is a business process where a series of products or blocks inside a value chain is broken
down to provide better value by removing the parts of the value chain that are less valuable to consumers
and keep those that in a period in time consumers value the most. Unbundling is the process of breaking
the value chain to take over the most valuable part of it, without owning or bearing the total cost of
ownership of maintaining it. In phenomena like showrooming the customer browses the physical shop,
yet it buys from the online retailer, which has more competitive pricing. Therefore, the online retailer
takes all the upside, without having the downside of maintaining a physical store. A classic example is
when people browse in a local store, to then buy on online e-commerce like Amazon, where they can
find more competitive pricing.

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Showrooming is a pattern where consumers browse on a brick-and-mortar store but they finalize the
purchase online. Webrooming is the reverse process. Consumers browse the product online, but they
finalize the purchase in the physical store. The unbundler, initially, is a sort of freeloader that takes the
upside of a value chain without bearing the downside. Yet the overall value chain improves as customers
get the most by combining the experience from the incumbent and the unbundler (ex. the consumer
browses several physical stores, then buys online as it saves money).

Vertically-integrated business model

From its humble beginnings in 1961, when Leonardo Del Vecchio started as a small shop that produced
components and semi-finished products for the optical industry; that shop has reached over $9 billion
in net sales in 2017. With all the major brands from the eyewear industry licensed by Luxottica (Armani,
Bulgari, Chan, l, Prada, and many others) it is the largest and most vertically integrated business in the
world. Leonardo Del Vecchio, one of the wealthiest people in Italy and among the wealthiest
businessmen in the world, has built Luxottica piece by piece. Started as a small shop producing semi-
finished products for the optical industry it eventually acquired the whole supply chain, up to own retail
stores across the globe. It took Leonardo Del Vecchio a few decades to build its vertically integrated
business.
Yet now that is the most successful company in the optical industry. Instead of being acquired by a
large American company, the Italian based Luxottica was the one acquiring brands like Oakey (the
California-based eyewear company).

Key takeaways
● Many believe business modeling is about copying and pasting. Instead, that is about
experimentation.
● Business models can offer valid templates that we can test, yet only when those ingredients are
combined we get a unique model, hard to replicate, that is when a competitive advantage is
created.
● Business models are not business plans. While many startups consult business modeling right
when it’s the time to build their pitch for investors. In reality, the business model strategy serves
entrepreneurs to test their hypotheses, quickly and cheaply. So that when you have enough
built-in mechanisms for sustainability within your business model, you will have enough cash

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 at the bank to keep growing. Or perhaps the market will have proved your model to be
successful, so ready to be taken to the next level.
● In an era, where technology becomes commoditized over time, business model experimentation
can prove more sustainable, as it is harder to reverse engineer (as it comprises many building
blocks that sometimes are hard to understand also to the same company rolling out the
successful business model).
● Business modeling is a continuous journey of discovery. It never ends. As a company scales or
it creates options to scale, the whole business model will transform and the question of whether
it will be sustainable for the next stage of growth and scalability stays open.
● There isn't a right or wrong business model, but rather a model that will work in a certain
context, and that will suddenly stop working in others. Business modeling is also a matter of
life's philosophy. The vision of founders or those who took the business from one stage to the
next affects the long-term vision of the business, thus its direction in the long-run.

Week Three: Master The Customers

This section is about market segmentation, the technologies that allowed marketers to create more and
better-segmented audiences, and how the way of communicating changed from mass marketing to one-
to-one marketing starting the 1920s until today.

The section is divided into three main sections:

● A brief history of advertising.

● Everything you need to know about market segmentation.
● The most powerful online tools for marketers.

Each of those sections will give you an understanding of three main concepts. First, how marketing
evolves with new technologies and how new technologies are used by marketers. Second, you’ll learn
all the aspects of market segmentation. From how, why, and when to create market segments. To the
requirement necessary for creating market segments and the types of market segmentation. Third, you’ll
learn what tools today marketers can leverage to create audiences and small segments with the utmost
details. Marketing has evolved through the technological devices that allowed marketers to convey the
same message to millions of people at the time, like mass media. To technologies that instead allowed
marketers to speak to millions of people with customized messages, like social media and SEM. Let’s

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dive a bit into the story of marketing associated with the technological devices that made it possible for
marketers to develop new ways of reaching an audience. I argue that as new technologies at the
beginning of the 1900s became available for marketers, those allowed to speak to vast audiences. That
also meant crafting a message that could be understood by the masses. It was the rise of pop culture. As
technology has evolved, it allowed marketers to have accurate data about users. Thus, the marketer
could finally craft a personalized message for each user. It is interesting to notice the change in
terminology. From masses to users. From television viewership to the user experience. That is also why
marketing is now back to building communities, tribes, and personal relations. This is the story of how
we went from mass markets to one-to-one conversations.

Radio and Mass-market

As reported in the book The A to Z of Old Time Radio Frank Conrad, an electric engineer who worked
for Westinghouse held more than 200 radio-related patents he started off with his own radio transmitter.
Initially, radio broadcasts consisted just of transmitting the location and equipment used. Yet Mr.
Conrad was soon to be bored by this kind of set up. That is why in 1920 he started a new format called
The Radio Amateur News. During the show, Frank Conrad took his phonograph and began to transmit
it. At the time 400 people listened to that show. When another executive at Westinghouse noticed the
potential for advertising, he understood they should test the same concept with a broader audience and
more structured programming. The chance to test that came with Election Day:

When KDKA became the radio’s first commercial programmer, it started by asking “Will anyone
hearing this broadcast, please communicate with us, as we are anxious to know how far the broadcast
is reaching and how it is being received?”

On that occasion, more than a thousand listeners were reached.

Technology and marketing walk hand in hand. In the 1920s, radio had become the primary medium of
communication. Across the U.S. and Europe, broadcasting stations such as KDKA and British
Broadcasting Company (BBC) began to rise. The power and potential of mass media were still hard to
foresee at the time. Experimentation allowed those first marketers to understand its potential. In fact,
disciplines like growth hacking claim to have brought the scientific methodology into the marketing
world. In reality, good marketing has always been about experimentation. Also, Frank Conrad was an
electrical engineer, and from what we know he might have been the first mass media marketer. Even
though he reached just a few hundred people, he changed the rules of the game. We think of Sergey
Brin and Larry Page or Mark Zuckerberg as a new expression of a tech world dominated by engineers.
Yet as this story shows, broadcasts made it possible for companies to send advertising messages to
large, undifferentiated audiences at once, giving birth to the mass market concept and the first mass
marketing techniques. Then television came, and mass markets became even more prominent.

Television and mass market

The Brooklyn Dodgers are playing the Philadelphia Phillies. It is July 1, 1941. Suddenly, before the
game begins a 10-second advertisement from a watch company – called Bulova – got broadcasted.

This ten-second spot was the first TV commercial US people saw. Imagine the effect of it – if any. From
there a multi-billion industry was born. A bunch of commercials became part of pop culture. TV
dominated the advertising together with other media outlets dominated the advertising industry:

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 Source: eprints.lancs.ac.uk
Until 2017 came:

One of the things for which 2017 might be remembered is the take over of the advertising spending by
digital over TV.

The internet, Google, and its AdWords

Mountain View, California – October 23, 2000, Google makes the following announcement:
Google Inc., developer of the award-winning Google search engine, today announced the immediate
availability of AdWords(TM), a new program that enables any advertiser to purchase individualized

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and affordable keyword advertising that appears instantly on the google.com search results page. The
AdWords program is an extension of Google’s premium sponsorship program announced in August.
The expanded service is available on Google’s homepage or at the AdWords link
atadwords.google.com, where users will find all the necessary design and reporting tools to get an
online advertising campaign started.

The beta debut saw the involvement of 350 businesses and advertising agencies worldwide. However,
Google AdWords would be rolled out broadly in 2002:

In 2003 Google reported over $790 million in turnover! Google’s advertising revenues have grown
exponentially to monopolize the digital advertising market together with Facebook.

In 2017 Google‘s revenues from its properties came primarily from AdWords. Revenues reached almost
eighty billion in 2017! On Jun 27, 2018, Google announced Google Ads:

The new Google Ads brand represents the full range of advertising capabilities we offer today—on
Google.com and across our other properties, partner sites and apps—to help marketers connect with
the billions of people finding answers on Search, watching videos on YouTube, exploring new places
on Google Maps, discovering apps on Google Play, browsing content across the web, and more.

The aim is to provide under the same umbrella access to Google Marketing Platform:

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Social networks, Facebook, and its advertising network
Facebook announced Facebook Ads:

“Facebook Ads represent a completely new way of advertising online,” Zuckerberg told an audience
of more than 250 marketing and advertising executives in New York. “For the last hundred years media
has been pushed out to people, but now marketers are going to be a part of the conversation. And
they’re going to do this by using the social graph in the same way our users do.”

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If you want to know where the advertising money is, just follow the eyeballs
New technologies influence human behaviors for better or worse. Companies or people operating in the
business world use those technological advancements to understand how to alter the responses of people
to specific stimuli. Technologies like Radio and TV allowed companies to speak to a broad audience.
They also created a monologue between corporations and the public. This also incentivized companies
and marketers to use a sort of “universal language” that could be understood by anyone. It was the era
of pop culture. This kind of advertising model made sense because companies knew little about who
they had on the other side. Thus, they either used mass marketing campaigns that were undifferentiated,
or they invented customer groups based on what they thought were their ideal customer. When tech
giants like Google and Facebook entered the advertising industry, it all changed. Advertising was no
longer something “magical.” Those companies founded and run by engineers looked at advertising and
tried to make it accountable, and measurable. So that any business paying for advertising could stop
focusing on metrics used in TV advertising like gross rating points (audience reached by the frequency
of its exposure to the message during a given period); and focus more and more on conversion targets
with PPC (pay-per-click) also known in the business as CPC (cost-per-click). The reason why in the
history of modern advertising I included mainly Google and Facebook is that those two companies
combined took over the advertising industry. In fact, as Statista points out:

Over the past two decades, advertisers have gradually shifted their budgets away from traditional media
(e.g. TV, newspapers and magazines) towards online ads. The rise of the smartphone has only
accelerated this shift, as smartphones have fundamentally changed the way that people consume
content. Ad dollars have always followed eyeballs and thus it doesn’t come as a surprise that mobile
ad spending is currently growing at a breathtaking rate.

As reported by Statista 25% of global ad spend goes to Google or Facebook.

Part of this process has been driven by the change in behaviors of users driven by new technologies. In
fact, as mobile devices are becoming less and less expensive, most of the consumption of content and
information is connected to those devices. That is why ad spending has followed. This short history of
advertising could have well been called the “history of eyeballs.”
In this landscape, we’ll see also how advertising has changed and how it has evolved from mass
marketing, with the so-called shotgun approaches, to hyper-personalized approaches. In other words,
market segmentation moved from undifferentiated to highly personalized. Those changes were driven
by a word that today represents the most important asset any company is willing to fight for: data!

Everything you need to know about market segmentation

As Peter Drucker pointed out in his book Drucker Management,

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There will always, one can assume, be need for some selling. But the aim of marketing is to make selling
superfluous. The aim of marketing is to know and understand the customer so well that the product or
service fits him and sells itself.

In this guide, we’ll see how market segmentation is aiming at just that, allow marketers to know
customers' needs and pain points as well as a sales enablement device and tactic.

What is market segmentation?

Market segmentation is a marketing practice that allows companies to divide their customers into
groups, thus classify them based on specific characteristics.
Market segmentation isn’t new. In fact, it has been used since the 1920s when mass manufacturers
needed to offer a more comprehensive product line that could fit broader groups of people. Market
segmentation at the time (up to the 1980s) was mainly based on demographic, socio-economic, and
lifestyle factors. In fact, those were the main characteristics that could be figured out about a group of
people that companies were targeting. As more and more new data became available market
segmentations took into account also so-called psychographic segments, organized according to
activities, interest, and opinion. From the 1980s going forward, there was a shift in market segmentation
that allowed companies to narrow the segments they were targeting to include more sophisticated
features of those groups. The war of the so-called hyper-segmentation began and in a way, we are still
living it today. With new kinds of market segments that allow one-to-one and personalized experiences,
thanks to the ease of data acquisition through digital devices.

Graph from Google Ngram Viewer shows the mention of the term “market segmentation” in millions
of books throughout the 1900s to 2000s.

What are the bases of market segmentation?

It is important to point out that proper market segmentation is about starting with the customer in mind.
In short, the reason for segmenting a market is based on differentiating the otherwise undifferentiated
offer to fit the customer needs based on their preferences. Thus, market segmentation is justified when
it provides customers with better products or services. Market segmentation is also critical to
understand the distribution channels needed to grow your business. In fact, with tools like the business
model canvas or the lean startup canvas, one of the main aspects is understanding customers based on
their needs and pain points and what kind of unique value proposition you can bring with your product
and service. Therefore, there isn’t a fixed number of segments that can be created. In fact, there can be
many examples of market segments based on the following characteristics:

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Those include market segments based on gender, age group, income, place, occupation, usage, lifestyle,
and more. For the sake of keeping things simple, we’ll discuss the four main types of market segments.
At the same time, we’ll also look at why, when, and how to create a market segment.

Why, when, and how to create a market segment

For an ideal market segment, there are different criteria to take into account. In fact, the more you can
divide up the market into small groups of people the more the marketing effort it will be easy to plan
and execute. It doesn’t always make sense to create segments unless you have available data about those
segments. In fact, as more data becomes available (think of the billions of queries that each day goes
through Google or the social knowledge graph Facebook has at its disposal) so new segments become
possible. Therefore, segments must be measurable. At the same time market segmentation makes sense
when it can generate enough profit from your marketing effort. Imagine the case in which market
segments might be composed of a small group of people with low spending availability. Your marketing
effort would be wasted. Also, you need to make sure to target a group of people with characteristics
that will last in time. For instance, imagine the case in which you set up a market segment, and a
marketing campaign based on that. When the campaign is about to get rolled out. If that segment doesn’t
exist anymore. It becomes a wasted marketing effort.
At the same time, that market segment needs to be reachable through several channels. Think of
customers that can be reached through your website, social media accounts, events, and so forth. Also,
would you be able to persuade that market segment? If that is too hard or not possible, the market
segment itself loses relevance. The last element which is critical is about having enough data to support
the creation of that market segment. Those are the requirements for market segmentation. Let’s see
them more in detail.

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Requirements for market segmentation

Measurable and identifiable

Can we measure those segments so that they can be identified?

Accessible
Can we reach those segments through communication and distribution?

Different
Do those segments respond differently to different marketing mixes? In short, do they have unique
needs?

Substantial
Is this segment large enough to be profitable, thus justify the marketing effort required?

Durable
Are those identified segments stable enough to allow proper marketing campaigns? The aim is to
provide a better product, service or experience to customers. Which will, in turn, lead to an improved
marketing effort rewarded by more sales.

Types of market segmentation

We can identify five main categories and types of market segments:

● Demographic: sex, age, race, generation, occupation, etc.

● Geographic: geographic regions such as the county, state, city, neighborhood.
● Behavioral: knowledge of, attitude towards, usage rate, response.
● Psychographic: activities, interests, and opinions (AIOs) of customers.

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What is demographic segmentation?
Demographic segmentation is about classifying people based on characteristics such as age, gender,
relationship status, education, workplace, and more. This is among the most common market
segmentation techniques. In fact, it was also the first market segmentation used which comprised factors
like age, life cycle stage, gender, income, religion, race, nationality, and more. A demographic
segmentation might be useful to companies also to create several product lines.

What is geographic segmentation?

This market segmentation is based on reaching people in areas that are closer to the final customer. For
instance, take McDonald’s, the chain has restaurants all over the world, yet the strategy will be
localized, as much as possible:

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In this picture, you can see how McDonald’s uses a famous Italian-American food entrepreneur as a
testimonial for a selected menu. In a country like Italy where high-end food is critical, McDonald’s
associated its brand image with quality food.

What is behavioral segmentation?

This market segmentation strategy is based on customers based on benefits sought, occasion, usage rate,
brand loyalty, user status, buyer readiness status.
In short, it looks at purchasing behaviors, device usage, and other activities.

What is psychographic segmentation?

Psychographics started as an attempt to go beyond demographics. As computational power grew more
data became available, this gave a chance for marketers to better segment potential customers. As
recounted on archive.ama.org when Emanuel H. Demby, one of the founding fathers of psychographics
when he was asked “What do you call what you’re attempting to do?” he said “Psychographics!” which
was meant as a combination of psychology and demographics.

Source: archive.ama.org
Another founding father of psychographics was Paul Lazerfeld and his associates during the 1950s at
Columbia University’s Bureau of Applied Statistics. As pointed out by Emanuel H. Demby, Paul
Lazerfeld taught that any market research that wanted to understand consumer behavior had to “involve
an interplay among three sets of variables; predisposition, influences, and product attributes.”
Therefore, psychographics is an attempt to move away from just demographics and give meaning to
numbers by focusing more on individuals with feelings and tendencies. Giving meaning to numbers is
the primary aim of a marketer. Imagine those two scenarios, Mr. X earns $40K per year. With the other
situation, Mr. X earns $40K, after getting a 10% rise compared to the previous three years’ salary.
Without going too far we can put ourselves in the shoes of Mr. X, how accomplished he feels, and the
purchasing tendencies he might have after such a raise. Maybe he wants to buy a new car or a new TV
set. Keep in mind that marketers’ focus is to increase sales. And there is no better salesperson than has
insights and personalized information about her target customer. While in the past it was tough to get
valuable psychographic data, that isn’t the case anymore. For instance, at the time of this writing, tools
like Google Ads and Facebook Ads allow marketers to go quite in-depth with psychographics definition
of their audience:

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 Source: searchengineland.com
Above an example of how Google Ads enable marketers to target specific interests and psychographic
traits of a group of people. This allows a segmentation that can be laser targeted.

The four-level of market segmentation

As Philip Kotler suggests in “from mass marketing to mass customization” to reiterate, the four steps
of market segmentation which are: probing, partitioning, prioritizing, and positioning. This is an
ongoing feedback loop. He also divides the market segmentation into four levels:

● Mass market.
● Segmented markets.
● Micro-markets (distinct from segmented markets).
● And individual markets.

Mass marketing and the shotgun approach

As Philip Kotler recounted in “from mass marketing to mass customization” it all started in Japan where
he noticed market researchers going to one household as a sample for a product launch. Philip Kotler
noted, “how can you generalize from the sample of one?” and as the story goes, the Japanese market
researches replied “We Japanese are homogeneous. We’re all alike. If this family likes the product,
everyone will like the product.” This kind of “market segmentation” can be referred to as a shotgun
approach. In short, just like a shotgun is used to aim at moving targets in the air, so the shotgun approach
tries to reach a wider audience, with no specific focus. In short, mass marketing runs along with mass

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production, mass distribution, and mass promotion. In this scenario, Mass media has played a crucial
role. This kind of approach favors such large audiences that can be reached with mass marketing media,
like radio and television. While this kind of approach might have had a sense in the 1980s, it has become
obsolete now. Large corporations, like Coca-Cola, still spend a significant amount of money as a
branding effort to feature TV spots shown to millions of people. For large corporations that want to
keep a strong brand and be on “top-of-mind” for their consumers, this strategy is still robust. For small
businesses or startups using a similar approach might lead to bankruptcy. That is also why startups have
made the scientific method and measurable results more and more their credo, with disciplines like
growth marketing and growth hacking.

Segmented markets
When a market gets segmented based on several characteristics (like demographics: sex, geographic,
behavioral, and psychographic), this is where marketing and communication campaigns can be
customized to the need of the still large group of people, yet in a way, those are differentiated. Thus,
we move from an undifferentiated approach of mass marketing to a differentiated approach to
segmentation.

Niche marketing and micromarketing

To give you a visual representation of niche marketing, think of it as being a big fish in a small pond.
Niche marketing is about becoming an authority for a small community of people of which you know
their main characteristics. As Peter Thiel, co-founder of PayPal, pointed out successful companies target
monopolizing markets instead of going where competition is. In his book Zero to One, there are four
steps to take to dominate a market:

● Start small to monopolize.

● Scale-up.
● Stop with the BS of disruption.
● Be like a chess player, think about the endgame.

While niches are mainly based on interests, when we move toward micromarketing this might become
more localized. Therefore, where niche marketing focuses more on behaviors, benefits, features,
lifestyle, and so on. Micromarketing focuses on small localized groups. The niche and micro-marketing
approach are more suited for a small business or startup as it allows them to have a way higher and
measurable ROI on their marketing effort. Also, in small segments, it might be easier to create a
feedback loop that allows small businesses to learn and grow faster!

One-to-one marketing
One-to-one marketing is the approach that starts with creating personalized interactions with potential
customer and personal relationships with customers. In an article dated 1999, HBR asked “Is Your
Company Ready for One-to-One Marketing?” defined as “being willing and able to change your
behavior toward an individual customer based on what the customer tells you and what else you know
about that customer.“ The main aim of one-to-one marketing is to establish a “learning relationship”
with your potential customers and customers. In short, for any interaction, there will be a learning
experience, a better understanding of that customer’s needs. Most companies opted for the mass
marketing approach. It consisted of reaching the highest number possible of people with a message that
needed to be simplified. One-to-one marketing starts from the opposite assumption, and it is based on
two types of one-to-one marketing:

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 ● Personalized: Think of Amazon personalized experience:

● Customized: Think of Converse where they give you a basic shoe, and you can customize it
with your own creativity:

In the era of large tech companies like Netflix, Amazon, and Spotify which have built their success on
subscription business models (Amazon Prime is still a small part of Amazon revenue, but it is very
promising) the one-to-one marketing has become the norm. In fact, the reason why many people stick
with those services is due to the degree of personalization. Netflix algorithm knows your TV series
preferences better than your best friends, while Spotify knows the kind of music you like better than
yourself. This is possible thanks to algorithms based on behavioral patterns create predictive models
based on customers’ data. As data becomes critical for one-to-one marketing, the essential asset for
those companies becomes the so-called User ID, which contains the whole history and interactions of
customers with those personalized platforms (though the growing number of educated users
deactivating tracking is giving rise to privacy-based marketing) .

The most powerful online tools for the marketer

In this section, I want to show you some practical tools today marketers have at their disposal to segment
customers, users, and grow a business with the power of data.

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Google Analytics: from behavioral to psychographics advertising
As defined on neilpatel.com:

Behavioral advertising is a technique used by online advertisers to present targeted ads to consumers
by collecting information about their browsing behavior.

What kind of data does behavioral advertising aim at? Once again Neil Patel helps to define the sort of
data it targets:

● The pages browsed on a website.

● The time spent on the site.
● The clicks made.
● The recency of the visit.
● The overall interaction with the site.

With Google Analytics you can quickly get any data that goes from demographics to psychographics:

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As a user navigates between web pages, Google Analytics uses cookies to store and remember valuable
pieces of information. In short, Google creates a so-called Client ID used to identify users and their
activities on the site (anonymously).

Retargeting and the art of repeating the message

Retargeting starts from the assumption that message repetition brings to conversion. In fact, the
traditional sales funnel (an imagined path a person goes through before becoming a customer) looks
something like this:

This path seems linear. However, in the real world the path a user takes before it becomes a customer
is very unpredictable. Retargeting might help in making the path of a user more predictable by repeating

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the message. For instance, have you noticed that after you visit an e-commerce store, when you land on
an unrelated website through Google, you find that same store as a banner ad? That is retargeting in
action.

Google’s in-market audiences

With Google in-market audiences you can target a wide number of variables:

● Apparel and Accessories.

● Autos & Vehicles.
● Baby & Children’s Products.
● Beauty Products & Services.
● Business Services.
● Computers & Peripherals.
● Consumer Electronics.
● Consumer Software.
● Dating Services.
● Education.
● Employment.
● Financial Services.
● Gifts & Occasions.
● Home & Garden.
● Real Estate.
● Sports & Fitness.
● Telecom.
● Travel.

Google knows a lot about you based on the data it collects. For instance, if you go to
adssettings.google.com/u/0/authenticated you can see how Google has profiled you just like it profiled
me:

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What about Facebook?

Facebook audience insights

For years users have been giving Facebook a growing amount of critical data about themselves.
Facebook has built a business on that data. In fact, marketers can select their audience with a laser
target:

Source: facebook.com

What does Facebook know about you?

You can check how Facebook profiled and segmented you here: facebook.com/ads/preferences, to see
the information that best describes you (according to the Facebook algorithm), click your Information
> your Categories:

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As specified in the ad preferences “the categories in this section help advertisers reach people who are
most likely to be interested in their products, services, and causes. We’ve added you to these categories
based on the information you’ve provided on Facebook and other activities.” Even though I seldom use
Facebook the algorithm knows quite a few things about me and those are passed on to marketers that
use Facebook Ads. In fact, those marketers get access to Facebook audience insights:

Source: facebook.com

With this suite, marketers can gain insights into demographics, page likes (thus interests), location and
language, Facebook usage, purchase activity, and more.
With this kind of tool, you can build smaller and smaller segments but also more qualified.

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 Source: blog.hubspot.com

It is important to notice that targeting a narrow audience will make the marketing campaign way more
expensive yet that same campaign will get better results regarding ROI!

Key takeaway
In this guide, you got an in-depth understanding of the advertising world through market segmentation,
its evolution, and its tools. It is easy to lose sight of what marketing is for. Too many times it becomes
an end in itself. Instead, I’d like to repeat Peter Drucker’s statement “there will always be, one can
assume, be needed for some selling. But the aim of marketing is to make selling superfluous. The aim
of marketing is to know and understand the customer so well that the product or service fits him and
sells itself.” Will the day come when marketing will have reached its final mission, make selling
superfluous?

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Sales vs. Marketing

Source for matrix a16z.com/2018/09/02/sales-startups-technical-founders

As pointed out by Peter Levine, a general partner at the venture capital firm Andreessen Horowitz:

As a former software engineer and CEO, I used to hold the “engineer-centric” view that sales is not a
critical function in an organization. I believed that product excellence and market fit obviated the need
for a formal sales function: Build a great product, and customers will come.

That view was short-sighted, to say the least. The technology companies that are able to both build great
products and integrate a strong sales function are the ones that succeed, whether consumer or enterprise
— from Microsoft to Salesforce and yes, even Apple and Facebook. You may not hear about it, but all
the world-class companies have a strong sales force.

This is critical to remember especially for founders that often have a technical background. As tech
companies are gaining momentum, more and more often we see founders that are also engineers,
developers, or programmers. That technical background is critical as it allows them to develop
applications that might improve 10x over competitors. Think of Brin and Page, Google’s founders.
When they started to pitch their new search engine based on PageRank, they knew it was 10x better
than any other search engine on the market. However, it was when they started to think like
businesspeople and stopped thinking as academics that the business took off. They understood the
importance of distribution. And it is important to remark that even though Google initially was already
used by millions of people, it is very far from becoming the tech giant we know today.
In a story told by John Doerr, a venture capitalist and one of the first investors in Google, in his book
“Measure What Matters.” When he met the young Larry Page, he knew that even though Google had
entered the market pretty late (Google was the eighteenth search engine to enter the market), it was a
product, 10x better than its competitors. Yet John Doerr’s future valuation of the company (the
maximum growth it could achieve) was about a billion in market capitalization. However, when he
interviewed Page, that young entrepreneur surprised him by saying they would reach instead of a ten
billion dollars revenue mark! Which according to Page made the company worth around a hundred
billion dollars. At the time of this writing, Google is worth over eight hundred billion dollars. What
made Google successful? Several factors - comprising pure luck -but of course, an incredible execution

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is what mattered the most. When you have a company that is growing so fast the most challenging thing
is to make sure it will not implode. In short, putting together a sales process that works it means to keep
well in mind the difference between marketing and sales. At the same time, it is also critical to remind
that sales are primarily about the bottom line, but it can also be used as a propeller for a company’s
brand. Google's AOL deals with one of those cases.

Distribution can be a branding hack

You might think that Google was great at marketing itself, and in a way it was. Yet, what propelled its
growth wasn’t just the marketing side, but rather the distribution side. Many associate sales and
distribution as something purely connected to the bottom line. While sales and distributions focus on
the bottom line, they can also be leveraged to build up a strong brand. Think of when Google got the
AOL deal, by taking it away from its main competitor at the time (Overture). Well, the distribution
agreement with AOL, not only was a sales strategy that guaranteed explosive growth. It also represented
a massive branding campaign. One that with marketing alone would have taken years to build. In other
words, Google used an already established brand to grow its business, and it also worked as a propeller
for its brand. As suggested by Google Ngram, by 2004 the term “Googled” had already become a cult!

Therefore, the primary role of sales and distribution should be to look at the bottom line. Yet, once that
role is resolved, it can also be leveraged as a powerful branding tool. You might think that a consumer
product company like Google, which offers a set of free tools to the masses has been mainly driven by
marketing. However, if we look at the business part of it, what brings revenues to the company is the
advertising network where millions of small and medium businesses and enterprises spend their
marketing budget. In this scenario, you can understand how sales and distribution become critical.

Some practical suggestions for your sales processes

Peter Levine, suggests a few practical ways to have a sales process within your company, as a CEO:

● Have a weekly meeting with your sales VP (to review the pipeline and how it can be improved).
● Hold the team accountable with clear KPIs.
● Make sure sals people know extremely well how the product works, even if that means making
sure that engineers and salespeople spend more time together.

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How much to spend on Marketing vs. Sales? It’s all about the product
and the target customer
When it comes to marketing vs. sales, it is critical to start the assessment from your target customer. In
general, we have three kinds of customers:

● Consumer.
● Small and medium businesses.
● Enterprise.

The idea is the more you move from consumers to enterprise clients, the more you’ll need a sales force
able to manage complex sales. However, imagine the case you sell a simple product, which is worth
$20, would it make sense to have a dedicated sales force? It might not. This would be too expensive
and not scalable.
In other words, with a less expensive product that is targeting consumers, marketing will be a critical
aspect. Where, instead of an expensive product, which focuses more on small and medium businesses
and enterprise clients, sales will become the most relevant aspect of your business. Of course, this is a
simplification. Yet it is a good starting point to understand and trace a line between marketing and sales.
Take the case of a freemium business model. In that case, the investment in sales would be minimal if
not none as you’ll be leveraging on free product features as marketing investment for the company.
While in a subscription business model that targets mainly enterprise clients, the sales force will solve
a critical role.

We’ve seen the main difference between sales and marketing. But also how sales and distribution can
be used to hack the branding of an organization – where marketing would take years to build a strong
brand. A single distribution deal can generate revenues and visibility for the business. We’ve also seen
how in some cases marketing might be easily confused with sales. Take the case of Google, where it
has a free product targeting consumers. In that case, you might be fooled to think Google is all about
branding. Yet if we look at its beginning, Google’s main ability has been to create a powerful
distribution strategy by closing the right deals. That distribution strategy turned into a branding hack,
which turned the company into a cult, by 2004. We’ve also seen how a few actions can have a large
impact on a company’s future growth, by establishing some practical actions (like weekly sales
meetings, accountability, and clear quotas). A last critical aspect you can understand how to create the
right sales and marketing mix by looking at two things, the kind of product you sell and what customers
it targets. The more it will be an enterprise customer the more the sales processes will become important.
The more we move toward an inexpensive product thought mainly for consumers, the more marketing
will lead the game.

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Week Four: Growth And Distribution
A distribution channel is the set of steps a good or service has to go through to reach the final consumer.
At a higher level, distribution channels can be either direct or indirect. At the same time, direct and
indirect distribution channels can have multiple variations, according to how the good or service gets
to the final consumer.

Why a distribution channel strategy matters

Often companies undervalue distribution channels as they think that a good product or service will
automatically create its distribution. While this might happen, it is more of a utopia than reality.
Distribution needs to be created, at times with sheer force combined with strategic planning and deep
understanding of customers’ needs, or demand generation. A traditional distribution strategy looks at
the classic 4 Ps (product, promotion, price, and placement). Those are the key ingredients to grow the
revenues of a business, quickly and sustainably. Thus, a distribution strategy starts from:

● Understanding the wants of their customers.

● Leveraging insights to create a better purchasing experience.
● Developing new products and services that customers will want to buy.
● Creating go-to-market strategies that reach the proper customer target.
● Generating demand for a set of products and services offered.

Without an appropriate strategy of distribution, it is hard to have a successful and sustainable business
model.

Types of distribution channels

At a higher level, distribution channels can be broken down into direct and indirect. This primarily
depends on how long is a chain between who makes the product and the final consumer. The number
of steps it takes will make the distribution channel direct or indirect. Let’s visualize a distribution chain
to understand the difference between direct and indirect strategy:

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Where in a direct distribution strategy a producer can access the consumer, in an indirect distribution
strategy, the producer will meet its consumer demands via third-parties wholesalers or retailers. Thus,
a direct approach makes the value chain shorter and at the same time allows more control by the
producer on how the final customer experiences the product or service offered. At the same time, a
direct to consumer strategy is quite expensive and not always effective enough to allow proper
distribution. Therefore, companies often use a mixture of direct and indirect distribution strategies,
which determine their marketing mix. Between the direct-to-consumer and entirely indirect distribution
strategy (where the producer sells to a wholesaler), there are several indirect variations, based on how
many steps it takes to reach the final consumer and how long is the value chain. For instance, in the
scenarios in which a producer sells to a wholesaler, the wholesaler sells to retailers, who reach the final
consumers. However, in some other cases, the distribution channels might be shorter. Think of the
Costco business model, where the company purchases a selected variety of goods in bulk from
producers. Yet instead of reselling that to retailers, Costco itself acts as a retailer, by leveraging on its
membership-based business model and selling those items in bulk quantity directly to consumers, who
appreciate the convenience of its prices together with the selection of high-quality products. In other
cases yet, the distribution channels strategy might be even shorter. Take the example of the Apple
business model where the company sells part of its products via its retail stores, which creates a unique
experience for Apple‘s consumers and makes the value chain shorter.

Distribution channel vs. supply chain

It is easy to confuse and mix up the definition of distribution channels with the supply chain even though
the distribution channels and strategies might sometimes cross with the supply chain. The distribution
strategy concerns primarily with bringing the product in front of customers, and especially customers
that are willing and ready to buy it. Therefore, in some cases, bringing a product in front of the right
people might be a matter for the supply chain. For instance, in the Luxottica business model, vertical
integration means the ability to control the full customer experience and to choose also the location of
the retail stores. Thus, this is a case in which supply chain management also becomes a distribution
strategy. It is critical to maintaining a clear difference between supply chain and distribution channel
strategy. While the supply chain comprises all the planning, manufacturing, and logistics activities that
make the product go from the purchase of raw materials, transformation into a final product that might
get delivered to the final customer (Zara business model leverages on supply chain management as a
distribution strategy). In short, where supply chain management concerns itself with integrating supply
and demand, a distribution strategy involves itself primarily about the demand chain. To have a deep
understanding of the difference between the supply chain and distribution strategy it is important to
consider three main aspects.

Supply chain vs. demand chain

Where a supply chain seeks efficiencies that can, for instance, reduce the cost of purchasing raw
materials, integrating several parts of the supply chain, or creating better logistics. Distribution channels
and strategy looks more at creating demand for a product or service by leveraging on several strategies.

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For instance, having insight into potential customers can allow a company to generate demand via
distribution and marketing just like in the Nike business model.

Internal vs. external

A supply chain concerns all the aspects that begin with sourcing raw materials, production processes,
inventory management, and all the other processes that bring a product or service in front of the final
customer. On the other hand, a distribution strategy concerns primarily the demand chain. Therefore,
the difference is primarily internal vs. external. Supply chain affects costs and how to reduce them via
efficiency. Distribution channels and strategy looks at how to grow the demand. Thus, increasing
revenues for the business. This distinction is not absolute. As in some cases when a core competence of
a company is its supply chain management, then that also becomes a distribution strategy, just like in
the Amazon business model case study. Via efficient inventory management, Amazon can keep large
facilities where most tasks are automated. This allows Amazon to host third-party inventories, of sellers
that are part of the Amazon network. That in turn, makes Amazon stores more interesting for final
customers as they can find more products they need, they can get them faster and purchase them in a
bundle. In this case, the Amazon supply chain strategy in part crosses with its distribution strategy.

Process-centric vs. customer-centric

Where supply chains are often process-centric. In short, it wants to improve efficiency, reduce steps
among several parts of the chain, and make the process as smooth as possible. Distribution channels
and strategies focus on the customer. Where is the customer? How do we get more of them? Is that a
matter of price? Value or product? A distribution strategy is obsessed with customers. Once again, this
is a rough distinction as in some cases, companies’ have a customer-centric approach at any company’s
level. That’s what Jeff Bezos means when says that successful companies need to stay in “Day One.”

Why you need to understand the demand chain

Demand chain management is a complex endeavor that involves the relations among suppliers and
customers and how those interested grow the demand of the product or service.
At the core, it is about designing a business model which makes it possible for the organization to meet
customer needs, create desire and demand with an existing supply chain. Thus, the demand chain is the
value chain from your customers’ perspective. This implies synergies between the supply chain and
distribution and marketing to design a business model that delivers the most suited value proposition
and generates higher revenues for the business. It is almost like demand chain management allows
supply chain management to look outside the company’s boundaries and understand the market.
Therefore, demand management will primarily understand, generate and stimulate customer demand
and align the supply chain processes with that. A proper distribution strategy focuses on understanding
the supply and value chain to design a sustainable business model, where for instance:

● The company has to guarantee enough margins and the proper condition to third-parties
distributors to allow them to run sustainable operations.
● Align the incentives between the company, the distributors, and consumers
● Train and educate distributors so that they can offer the best customer experience.
● Create alignment between distributors to avoid fragmented pricing, placement, and promotion
strategy.
● Understand what products or services might allow the organization to grow its reach.

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B2B, B2C, and distribution channels
A distribution strategy and therefore the distribution channels involved will change based on the target
customer. Indeed, selling to a business clientele is not the same thing as selling to consumers. This
implies different capabilities and distribution strategies. For instance, a B2B (business to business)
distribution strategy might be shorter, as you might be able to reach directly the businesses that will act
as intermediaries between you and the final consumer. Think of the case of a company selling software
as a service (so-called SaaS). If that software is complex and requires a certain degree of expertise, it
will be better suited to be sold via other agencies and third-parties, which in turn will have access to the
consumer business. This will imply a distribution strategy focused on acquiring the proper salesforce
to manage more complex clients. On the other hand, if a company sells an app for the iPhone, which
doesn’t require any particular expertise from the final user. The company will have direct access to its
consumers and will use marketing channels, which don’t necessarily require a complex salesforce. This
is a critical difference between marketing and sales.

Traditional distribution channels vs. digital distribution channels

As consumer behaviors have swiftly changed in the last decades, more and more people purchase via
the internet, and they feel more and more comfortable buying expensive items on the web.

For instance, Tesla allows you to order a $65K car directly on its site. Therefore, digital distribution
strategies are critical for any business, also one that has always operated off-line. As explained by
Gabriel Weinberg, CEO, and founder of DuckDuckGo, there are at least 19 distribution channels
between online and off-line:

1. Targeting Blogs.
2. Publicity.
3. Unconventional PR.
4. Search Engine Marketing.
5. Social and Display Ads.
6. Offline Ads.
7. Search Engine Optimization.
8. Content Marketing.

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 9. Email Marketing.
10. Viral Marketing.
11. Engineering as Marketing.
12. Business Development.
13. Sales.
14. Affiliate Programs.
15. Existing Platforms.
16. Trade Shows.
17. Offline Events.
18. Speaking Engagements.
19. Community Building.

Each of those channels can be a critical ingredient to enhance the revenues of a business.

Distribution management: marketing or sales?

Understanding whether distribution management is a matter of sales or marketing is superfluous as it
might make us switch the focus from what’s important. However, it makes sense to draw some lines as
this allows proper attribution of responsibility and accountability across the departments of an
organization. Thus, distribution management is typically seen as a marketing function. Yet, once again
it depends on the kind of organization you’re running. Imagine the case of a company that sells to
wholesalers or retailers; this means most of the contracts might be managed by salespeople, as they
require an understanding of deals terms, relationships, and partnerships in place. In that case, your
salesforce will be able to give you insights that can help you improve the distribution strategy. In the
opposite scenario, where the company sells a product directly to consumers, most of the processes might
be automated. Thus, most of the insights will be in the hands of the marketing department.

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Pricing: What Model Will Work For You?

A pricing strategy or model helps companies find the pricing formula in fit with their business models.
Thus aligning the customer needs with the product type while trying to enable profitability for the
company. A good pricing strategy aligns the customer with the company’s long term financial
sustainability to build a solid business model.

Pricing strategy and revenue modeling

Revenue modeling is a process of incorporating a sustainable financial model for revenue generation
within a business model design. Revenue modeling can help to understand what options make more
sense in creating a digital business from scratch; alternatively, it can help in analyzing existing digital
businesses and reverse engineer them. A revenue model is a key component of a business model. When
that becomes scalable, it also makes the whole business sustainable. That is why figuring out how you
will make money is a key part of the future success of your organization. Where many tech companies
do not stress over revenue generation, early on, once the product has been validated by the market it
will need to become financially sustainable. For that, pricing strategies and patterns can help to figure
out a revenue model that works. The pricing patterns below can be used to build up a viable business
model.

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AppSumoed: transforming subscriptions in lifetime deals

AppSumo partners up, usually with SaaS (Software as a Service) companies and offers life-time deals
only available on its platform, for a limited time. If you know AppSumo, that is among the most popular
deals platforms in the SaaS space. AppSumo takes a company with a subscription revenue model,
transforms it (only for its platform) into a lifetime deal, thus making it a no brainer for its audience to
purchase the deal. This sort of pricing strategy can be effective at launch. When you have a product and
a brand that none knows, leveraging on this sort of pricing strategy can:

● Help you feature your product on deals platforms which can amplify it in a very short time
frame.
● Enable a large number of users to join an entry product, thus prompting those users to convert
to higher-paying tiers over time.
● Making it possible to gather feedback from a large number of initial users, thus helping them
refine your product.

Thus, at launch, it can be a good pricing strategy also for software products (which require continuous
updates and support). However, that is not suited as a long-term pricing strategy. It’s instead a good
long-term strategy only for those products not requiring many updates over time (digital products, one-
time services).

Auction: the winner takes it all

In an auction pricing strategy, two or more people bid on a product, and the product gets sold to the
bidder who offers the most.
As highlighted on eBay’s website:

In an auction-style listing, sellers name a starting price and you bid against other buyers. You can
watch the item to see how the bidding is going. When the listing ends, the highest bidder wins the item
and completes the purchase.

eBay core business is a platform business model that makes money from transaction fees happening
through its marketplaces (eBay and StubHub). eBay also makes money through advertising on its
classifieds marketplace and other services. The company primarily makes money by charging fees on
successfully closed transactions. The auction makes sense in eBay’s case as the company is a
marketplace (or platform business model) that succeeds in turning a revenue when sellers and buyers
can close the bidding successfully.

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The auction can be a good pricing strategy in a few circumstances:

● Fast-changing inventory: the bidding system is successful as it enables a quick turnover of

inventories, which in turn can drive more people on the platform as they are always on the look
for new, exciting stuff.
● Curated goods: this sort of system might also be very suited for platforms enabling transactions
of goods which are harder to find anywhere else.
● Maximized value: when the platform is highly curated and the items are well selected, the
transaction value can be driven up by the fact that buyers are willing to pay more for those
objectives they are looking for (collectors are willing to pay more).

Thus, in this scenario, this sort of system would work. In other cases, though, if the platform sells regular
stuff, available anywhere else, it might make less sense.

Bundled: more for less

Bundling consists of grouping a set of products and services, more conveniently priced, of if they were
priced singularly. Thus in the bundle, they cost more than the single product, yet overall way more
convenient. For instance, a single pen sells at $1. A bundled package of ten pens, each with a different
color, can be bundled and sold at just $5. The customers pay more in absolute number, yet less in relative
number, and they can get more variety. Your margins are reduced, yet you also make the offer more
attractive, and you can sell more, based on volume. Thus, the advantages of bundling are:

● Amplify the reach of the product.

● Expand the customer base.
● Make the product more accessible.
● Test pricing variations of otherwise products that get sold singularly.
● Experiment with product variety.
● Use the best selling products to push otherwise less known products.
● Create higher-ticket, yet convenient offers.

Therefore, bundling can be a powerful pricing strategy. Yet, it needs to be tested carefully, as the risk
is to dilute the core product offering. As companies build up distribution power in a market, they bundle
up products in adjacent and complementary markets.

Consumption-based: pay what you consume

In a consumption-based model, customers only pay when the product gets used. This is usually well
suited for those services or products that require continuous usage. For instance, cloud services are
primarily charged on a consumption-basis. This pricing model is the opposite of a recurring model
where certain resources are comprised independently of their usage. For instance, you pay your Netflix
subscription whether or not you watch it. Yet you also pay a convenient price, as if you do watch it as
you could potentially watch the full library of content. Customers usually like consumption-based,
especially on a B2B, as this doesn’t create lock-in or overheads, and businesses only get charged if they
do use it.

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Couponized: discounted as default
In a “couponized” scenario, the platform acts as a sort of deal platform, where you can find as default
continuous discounts. For instance, e-learning platforms like Udemy leverage on aggressive coupon
strategies to enable a large number of people to join in. Also, a platform like Groupon built a whole
business model on matching people with businesses offering coupons for the services offered. While
coupons can be a great way to attract more customers (we all like to save or feel like we’re saving
money), and you can build a whole business model around coupons. Companies that offer a wide variety
of products, or connecting a large number of sellers with potential buyers, can use coupons effectively.

Fixed-price: the safe price

In a fixed-pricing pricing strategy, the company “promises” to keep the same pricing level forever, thus
assuring customers about the potential future market fluctuations. While fixed-pricing can be great to
attract a larger number of customers, at the same time, it might not scale well. Indeed, fixed pricing is
just the opposite of a dynamic pricing strategy where pricing can vary according to demand and offer
and the company, so the offer and demand of those services can adjust accordingly.

Pay-as-you-go: charge it up and go

In a pay-as-you-go pricing strategy, you can enable customers to prepay for a certain level of service,
to be used at their discretion. In this sort of pricing model, flexibility is the key advantage for the
customers, as the service can be used within a time frame.

Pay as you want: customer-made pricing

In a pay-as-you-want model, customers make the price. This sort of strategy can be useful when
launching a service that can have highly variable pricing, given its low marginal costs, thus making it
possible to make an informed guest (driven by customers’ feedback) on what’s the best pricing for that
product. in short, rather than guessing you can just see what most customers pay for that product and
price accordingly. Beware though, pay as you want might work only in certain circumstances. For
instance, if you apply the pay as you want the formula, for customers who already know you, they might
use it fairly and not against you (to get it for free). In addition, pay as you want might be a good strategy
to launch a product, as feedback (make sure though to set a minimum price) to know how much people
would feel comfortable paying. Or a pricing strategy applied to a limited set of customers and conditions
(for instance, to give back to lower-income customers), but make sure to prevent cannibalizing your
existing customer base.

Platformed: get a cut on one or both sides

In a platform business model, you can make money either by charging a single side of the platform
(LinkedIn charges recruiters) or by collecting a fee from both (Airbnb earns a commission from both
hosts and guests). When you develop a successful platform, where people can transact with each other,
you have the potential to charge on both sides or perhaps evaluate which side is willing or able to Austin
the cost of the transaction in exchange for a continuous stream of customers.

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Airbnb is a platform business model making money by charging guests a service fee between 5% and
15% of the reservation, while the commission from hosts is generally 3%. Due to the pandemic, Airbnb
is stretching its business model and experimenting with new formats like online experiences to
transition toward fully digital experiences.

Psychological pricing: change the product’s perception

In a psychological pricing strategy, rather than changing the physical nature of the product offered you
can leverage psychological elements to carve the perception around your product. Some examples are
time constraints (offers for a limited time), others are based on using the “9” at the end (for instance,
use $1.99 rather than $2, as it might give the perception of a less expensive option). More than a pricing
strategy this is a tactic to be used whatever pricing option you choose as it can help you change the
perception of your product by using only psychology. The key here is experimentation also based on
what psychological tactics are been used by others. Model after them and test.

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 See also how companies like Netflix use psychological pricing to their packages.

SaaSified: transform a product into a service

In the SaaS industry, most software is sold as subscription services. This model proved viable as it
enabled those companies to keep investing in continuous updates of the software, bug fixes, and the
willingness to keep improving the product thanks to customers’ feedback.

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WeWork defined its revenue model space-as-a-service claimed to be more scalable than a traditional
commercial real estate. With a bit of thinking and tweaking, almost any product can be transformed into
service. The advantage is that of creating a continuous relationship with customers while creating a
more stable revenue stream. Of course, continuous service requires an important investment in product
development. And a great customer support team.

Subsidized: let the rich pay for the poor

In a subsidized pricing strategy, there is a set of customers who pay for all else. This sort of pricing
strategy makes the product free for most customers, while the premium for others. It can take the form
of various revenue streams from freemiums (where only a small percentage pays for the premium
service, while most users will pick the basic, free service) to sponsorships (where a small number of
sponsors pay to make the service available to a large segment of people who don’t pay for it).

Companies like MailChimp leverage a freemium offering as they have a stable and strong customer
base able to sustain the free offerings for accounts that might never convert into paid customers.

Uberized: dynamic pricing

Dynamic pricing is the practice of having multiple price points based on several factors, such as
customer segments, peak times of service, and time-based consumption that allows the company to
apply dynamic pricing to make the transactions on the platform more scalable. Indeed, with dynamic

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pricing, demand and supply can adjust accordingly. For instance, if suddenly there is way more demand
for a ride at a time of the day where fewer drivers are available, the price surges, thus making it possible
for the few drivers left to accept the ride, as they can gain more. This pricing strategy can work pretty
well in case of service offered that can go through high volatility in terms of demand and offer, thus
making it possible to scale revenues even when the volume of transactions grows exponentially.

Unbundled: let them get what they want

In an unbundled scenario, rather than trying to lock in with a higher-priced product bundle, the company
can make available the only product people want the most. For instance, Apple iTunes unbundled CDs,
by enabling people to purchase single songs, which finally gave people the option to get only what they
wanted, rather than purchasing the whole CD. Unbundling is a business process where a series of
products or blocks inside a value chain is broken down to provide better value by removing the parts of
the value chain that are less valuable to consumers and keep those that in a period in time consumers
value the most.

Business Development

Business development comprises a set of strategies, tactics, and actions to grow a business via a mixture
of sales and marketing. Indeed, while marketing usually relies on automation to reach a wider audience,
sales usually leverage the one-to-one approach to close complex deals. Business development is about
creating distribution strategies to scale up a business. A good business development process should
have the primary aim to drive business growth with strategies, partnerships, and unconventional
marketing to 10x the output of the organization. The success of companies like Google also depended
on their business development capabilities. Although you might be looking for a straightforward
definition of what business development is, you need to understand that this is a discipline in continuous
evolution, which has as a main driver business growth. In this context, a good place to start is to define
what business development is not.

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Business Development vs. sales
Thinking about the business developer as the sales guy, it’s limiting. Not that a business developer
doesn’t sell, but it does so by creating a distribution. In other words, rather than looking at the single
sale, the business developers try to find sales channels to tap into to speed up the process of scaling up
a company. If that means selling a product or a service directly, then the business development person
will temporarily become a sales guy. Imagine the scenario of a company that has no clients. In that
context, a business developer will need to find the first clients as quickly as possible. Those clients will
serve to launch the company’s growth, while the business developer will look strategically at ways to
have those clients become partners. Therefore, all of a sudden a few clients become your distribution
channel. Even though the business developer acted as a sales guy from the outside, he never lost sight
of the long-term strategy.

The successful business developer thinks like a marketer but acts like
a salesman
Business development is a mixture of sales and marketing. In fact, in many cases, a business developer
will use marketing and PR activities to establish critical relationships for the business. Those
relationships will become partnerships to generate new distribution channels.

Business development is about nurturing the right relationships with

partners that can become distribution channels
Where the sales process ends up with a closed deal. The business development relationship starts with
a closed deal. The business developer knows that a deal closed is just the starting point of a long-term
relationship that can impact the business in the long run. Therefore, the business developer will translate
that paying customer into a trusted partner, and an advocate for your business.

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Business development guides marketing automation
Marketing automation is a powerful tool for any business. However, marketing automation is also risky.
Indeed, automating processes requires a deep understanding of your customers. Thus, before you can
automate the marketing processes, you’ll need the business developers to help the marketing team
structure those processes. Indeed with unique insight about the company’s customers, the industry, and
competitors, the business developer will advise the marketing department on how to structure and set
up automation processes that fit the long-term organizational growth.

Business development scales up businesses

When Google closed its deal with AOL, it was a turning point for the tech company that would become
a unicorn first and a tech giant then. It all started with a business development activity that allowed
Google to build a partnership with AOL and kill its competitors! A successful business development
person is a quick learner and a renaissance man. He will be able to learn about as many disciplines as
needed to have a deep understanding of the industry that will drive the company’s growth. For instance,
if you think of a business developer in the digital marketing world, he’ll probably be someone that
understands SEM, SEO, funnel optimization, content marketing, sales, and all the other channels
available to grow a business.

Business development is about a growth mindset

The business development process could vary quite a lot based on the industry, business model, and
stage of maturity of a company. If you are called as a business developer for a startup, most of the
activities will be connected to grow the startup and bring it to the next stage of growth. Therefore, the
successful business developer will need to have a mindset fine-tuned for growth.

Business development requires a high level of understanding of a

potential partner
To be able to build a relationship quickly, a business developer has to understand the business dynamics
of a potential partner. Indeed, just by tapping into the economics of a partner, the business developer
can craft the perfect deal/solution. For instance, when Google proposed the deal to AOL, the deal was
so good for AOL, and it had no risk for them, that they couldn’t say no to it. Yet AOL was an established
network, which was what allowed Google to get into the next stage of growth and scale.

What activities does business development imply?

Anything that helps build up a solid distribution strategy falls into the business development processes.

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The sales pipeline is a basic tool for a business developer

A sales pipeline is a visual representation of your sales process where all your potential customers are
displayed and neatly arranged according to their phase in your sales cycle. A business developer has to
be able to build up predictable sales processes to generate continuous streams of leads for the
organization. The sales pipeline is a useful tool to set up those processes. Also, being able to track your
sales pipeline is a critical activity. A sales pipeline is just a way to have clear in which stage of the sales
process you are with a potential client. And it usually goes something like that:

● Initial contact.
● Qualification.
● Meeting.
● Proposal.
● Close.

At each of those actions, we can assign a probability of closing a deal. For instance, at the initial contact,
you don’t have an idea yet whether the person you’re reaching out would later become a customer.
Therefore, the more you move forward down the pipeline, the more the chances of closing the deal
improve. Just as a reference this is what’s the probability of closing the deal as you get closer to the
qualification of the potential customer, as you understand more about the customer’s business and as
you build more and more trust:

● Initial contact – here you have about 0% chances of closing the deal. A very few audacious
people are willing to do business with you if they don’t know you, your business, and your
product.
● Qualification – approaching the 5-10% chance of closing the deal as you do your first
qualification. That can happen through email, a quick call, or also a brief meeting. At this stage,
you want to understand who is the person in charge of the budget and involve that person in the
next step.
● Meeting – as you finally arrange the meeting and discuss the project you get closer to the
closing line, so a 10-30% chance of closing it might be reasonable. Here you need to make sure
you have aligned the people that have control of the internal budget and that can make the final
decision.
● Proposal – while for most salespeople the proposal is just a quotation, which doesn’t make the
closing of the deal. In reality, for great salespeople when you get to the proposal you need to

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 have already addressed most of the objections, understood the budget, and who is in charge of
approving it. Once there, you can say that thanks to it you are at a 60-80% chance of closing.
● Close – you can’t say you have closed a deal until you don’t cash the cheque and for a
salesperson being focused throughout that final stage, is like a runner a few meters away from
the finishing line. You have to have the stamina, keep pushing, and making sure you control
the process. That is how you get to 100% of this process.

Therefore, after you have qualified a lead, you have 1 in 10 chances of closing it. Once you have met,
defined the project, and sent a proposal, then your chances will improve up to 60%. The chances of
closing a deal also depend on other factors. For instance, have you previously worked with this person?
In short, if you have already built trust, it will be easier to close the deal. If you are expanding a project
you were working on, then it might be easier as well. Therefore, it will depend upon several factors
crucial to any deal. Yet the business developer can have clarity about the stage of a business deal. In
that way, the business developer can plan the actions and activities that will get the sales process going.

What actions can the business developer perform to improve the sales
pipeline?
There are several ways to improve sales processes. Some examples comprise:

● Experimentation with new tools, or channels.

● Finding out new tactics from your peers.
● Creating new partnerships.
● Managing existing partnerships to expand the scope of work.
● Direct sales (outreach, live demonstrations, free training).
● Off-line activities (live seminars, or industry events).
● Content marketing or PR activities.
● Talk to clients to improve product/service.
● Learn how to build relationships with influencers.
● Use LinkedIn for social selling.
● Experiment with new distribution channels.
● Develop relationships with media partners.
● Create new packaging for your service.
● Draft commercial offers.
● Up-sell, cross-sell, leverage on the core product to offer complementary services.
● Create sales processes.
● Build up a predictable sales funnel.
● Help marketing to build sales funnels for continued lead generation.

Why undertaking a career in business development?

Being a business development person means having an entrepreneurial spirit. It’s almost like you are a
business within your business. Therefore, working as a business development person helps you:

● Develop an entrepreneurial mindset.

● Get more freedom compared to a traditional job.
● Dynamic work that pushes you to learn new things quickly.
● Make more money (the variable is an important part of the remuneration).

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 ● Higher pressure but also more fun than a traditional job.
● Be your own boss (if it is in a large organization, of course, you will respond to someone.
However, the only boss you have are the commercial objectives you agreed upon).
● Build a professional network quickly.

What are some downsides?

Of what I can think of here are some, I identified:

● The bottom line is your mixed blessing. In fact, although you might be doing things right for
specific periods, you just don’t seem to be able to close enough deals, partnership, or create a
proper distribution strategy. From the outside that might look like you’re not doing your job
properly. What I like to call the outcome bias. In those periods you have to be good to think
about your track record.
● Your pay is proportional to the objective you’re able to achieve. Therefore quite volatile.
● Some days it just seems you’ll never get to achieve the financial results agreed. It is normal to
feel like that. The good side of it is that you’ll feel what any entrepreneur experiences.

Overall the balance is positive. Now the most critical question. How do you make a business get
traction?

What’s a secret weapon for the business developer? LinkedIn

LinkedIn is a fantastic tool to generate conversations that can help you speed up the prospecting phase.
What can you do with LinkedIn?

● Find new B2B clients.

● Build new partnerships.
● Get media coverage.
● Personal branding for business.

Those things are possible if you are consistent. Three ways to build relationships with business are:

● Outreach to people that might get value from what you offer.
● Use LinkedIn publishing to create awareness or become a thought leader in your niche.
● Share and like posts about people you admire to strengthen your relationship and create value
for your network.

Check out the complete guide on how to use LinkedIn.

A crash course in sales canvassing

Sales canvassing is a sales process where you get in touch with potential customers that have never
heard about your brand. Examples of sales canvassing are door-to-door sales and cold calling. Those
are critical strategies as they might be an inexpensive and sustainable way to generate qualified leads
without having to rely on sales consultants or expensive lists. However, to be successful, the process of
sales canvassing needs to be structured.

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Why can sales canvassing matter?
As many new startups operate in the digital space, it is easy to assume that old sales techniques are also
outdated. Thus, we all like to speak about marketing funnels, automation, and multiple touchpoints.
However, any business to be sustainable needs a continuous stream of leads, and in many cases, this
implies cold calling or approaching people that never heard of you before. Indeed, unless you have a
massive marketing budget that you can use to grow your brand quickly. In most other cases you need a
sales force that can venture into the world and create contacts with customers that don’t have a clue
about you. However, to make the sales efforts effective y you’ need to make sure your sales force has
a plan, a strategy, and a process to follow. That is what sales canvassing is about. That is a process
through which salespeople can have consistent results nonetheless of the single outcome. When you
make the sales canvassing process yours, that is when your company can become sustainable in the long
run as you won’t need to depend on other companies to provide you with a consistent stream of leads,
you’ll be able to generate them on your own. Also, you’ll be able to grow a sales department able to
create new opportunities independently from the marketing department. That doesn’t mean you’ll need
only sales canvassing. In many cases, having multiple touchpoints with a potential customer via proper
marketing strategies is a good strategy as it makes it way more comfortable for your salesforce to close
a complex deal. In other cases, though it is also critical to have an independent sales force able to open
up new opportunities, primarily when your brand isn’t yet established. So what steps do you need for
your salesforce to take advantage of sales canvassing? Some key ingredients are:

● Have the sales force once understand the product/service and its strength and unicity.
● Make sure your sales force understands what problem your product or service solves.
● Have them set clear targets and share them with the rest of the team.
● Make the value proposition clear to your sales force.
● Prepare scripts and speaking points but let them be flexible enough to handle a complex
conversation.
● Get them ready to be rejected.
● Rejection is key to the learning process.
● Focus on a single channel but leverage on several media.

Understanding the strength and unicity of the product/service

When a salesperson ventures to bring in customers that never heard of your brand before, it becomes
critical that the sales force is very knowledgeable about the product and service, and they can explain it
in the simplest terms.

Focus on the problem and payoff

When approaching someone that never heard about your brand, why even focus on explaining who you
are. Instead, focus on their issue and what solution you have for them. They need a short term pay off.
Find out what is the payoff and struggle your potential customer has and propose a solution. That is
when you’ll listen.

Set a target customer

During sales canvassing it is critical to have a laser focus. You need a list of contacts, but it makes sense
to start from a profile that fits best the profile of existing customers your company has. Indeed, when
approaching a customer that never heard about your brand, you’ll need to understand what problem you

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can solve. But she/he won’t trust you can answer it unless you showcase studies that resemble the
situation they are in. When you can tell a business owner you’ve already helped someone in a similar
situation it’s easier to trust you even if they never heard of your brand. When you take the time to
understand the problem, propose a solution, and show a similar case study that is when sales canvassing
becomes way more effective.

Have a script but leave it flexible

Many salespeople like to use scripts. Scripts are prepackaged dialogues usually drawn by old
conversations with existing customers. While scripts are a good starting point, you need to be flexible.
Indeed, with sales canvassing, you’ll deal with people that never heard about your brand and your
company. Would it make sense to engage in a dialogue you had with a client that already knew you?
Not really.

Rejection is part of the process

During sales canvassing the risk of being rejected is exceptionally high. It is critical to allow your sales
force to understand that is not something personal, but rather that is part of the process. Rejection is
what makes them more effective.

Focus on a single channel but leverage on several media

During sales canvassing, it is important to focus on a single channel. Therefore, if your preferred way
is telemarketing, you’ll use the phone. However, not all customers like to be reached by phone. In that
scenario, you’ll need to learn how to use several channels, from social media to emails. The important
thing is to be able to generate a conversation for long enough that the person, on the other hand, trusts
you can bring an actual value. When you get there, you win.

Examples of sales canvassing

Sales canvassing can be done in several ways, like:

● Telemarketing.
● Door-to-door.
● Direct mail.
● Networking.
● Events.
● Introductory sales letters.

Whatever medium you choose it is critical to have a process, with clear objectives, which is repeatable
and where rejection is part of the learning process.

A crash course in sales and marketing alignment best practices

In Marketing vs. Sales, a cleared out the distinction between the two activities and when it makes more
sense for an organization to leverage on marketing rather than sales and vice-versa. While it is essential
to understand the difference between marketing and sales, it is also critical to understand how they work
together.

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Marketing and Sales working together
As Peter Drucker pointed out in his book Drucker Management, “there will be always, one can assume,
be need for some selling. But the aim of marketing is to make selling superfluous. The aim of marketing
is to know and understand the customer so well that the product or service fits him and sells itself.”

While marketing can get to the point of understanding the customer and make the sales team superfluous
– to a certain extent. The sales team though is a critical link between the marketing department and the
customers. Salespeople are involved in the whole process of and customer journey at a personal level.
Indeed, not only the salesperson might speak to the potential customer in the most delicate moment
when she/he is deciding whether it makes sense to purchase your product or service. But it assists the
customer throughout the entire process.
For instance, a critical moment of the whole customer journey is when she/he needs assistance or
support. While this phase might be in part automated, in most cases, you’ll need a support team, which
is often sales-oriented to assist the customers. In those phases, you can unlock many insights about the
customers that marketing will never manage to have with automation alone. That is when sales and
marketing come together to create a customer-centric journey. In what other ways than sales and
marketing work together?

Lead generation
The usual funnel sees it the marketing department in charge of giving to the sales team a list of leads
(people that might be interested in your product or service) they can work on and bring them in as
customers. While this is the traditional process, it is important to remark that often the opposite happens.
For instance, if you take the sales canvassing process that allows the company to acquire customers that
have never heard about your brand. In that scenario, a sales team can give valuable insights to the
marketing team on where to focus their attention and understand the areas where the marketing activities
of the company might be improved.

Automation
In the era of AI and machine learning, it’s easy to assume that automation should come before anything
else. However, automation, if done with no coordination between the marketing and sales teams, it
doesn’t add any value. If at all it can create irreversible damages to your brand. Therefore, before you
set up any automation, you need a deep understanding of your customers, your product, your value
proposition, and the whole journey customers take to go from the first touchpoint with your brand up
to the referral stage and on. Thus, before the marketing department creates any automation you need
them to coordinate as much as possible with the sales team to make sure the automation process
leverages on customer insights that only the sales force, which is in touch with the customer base on a
daily basis – has at its disposal.

Viral marketing
Many believe that all you need is a viral marketing campaign to make the lead acquisition process
smooth and inexpensive. However, even though viral marketing can do that, you might initially need
intense coordination between sales and marketing (and engineering) to understand what part of your
product might carry some virality. For instance, if you run a SaaS business in some cases, it might make
sense to create a free version of the product (the so-called freemium model) that becomes an essential
part of the lead generation process. However, what features, or how much volumes can you offer for

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free to acquire enough customers? A/B testing and big data will help. However, to set it up correctly
you need insights from the sales teams. Those mentioned above are just some of the activities for which
sales and marketing working together can really create an effective strategy for the growth of your brand
and business. Therefore, even though it makes sense to understand and keep a clear distinction between
sales and marketing so that each of them can focus on specific aspects of the business with
accountability and set results. On the other hand, it is critical to understand the level of coordination
that sales and marketing can achieve.

More sales best practices to apply to your business

Sales and distribution are the two primary ingredients for any business success. Thus, starting from the
best practices for your sales team is the first step toward building a profitable business. Of course, once
you have mastered those the time is right to start experimenting with new sales strategies that none out
there is doing. Yet if you’re missing the best practices, this is an excellent place to start.

Action plan
Salespeople have to act and do it as quickly as possible. Procrastination is the first enemy as the more
time you spend thinking, the less you’ll have time to act and start for instance sending those emails that
can lend you new clients or calling those contacts you have on your desk. However, to make your action
more effective, a plan is needed. An action plan is merely a set of predetermined steps you will take and
a workflow you’ll need to make your effort more organized.

Customer targeting
One key ingredient to make sales processes successful is the ability of the sales team to target the right
leads. Indeed, imagine the case of a salesperson contacting a hundred people and closing none. In many
cases that happens when the salesperson doesn’t know who’s the ideal target that can benefit from the
company’s service or product.

Sales canvassing
When a company has mastered lead generation by automating part of the activities from its marketing
department it is easy to have salespeople forget about the first and hardest stage, get in touch with people
that don’t know your brand. Instead, have your salespeople spend a part of their time doing sales
canvassing or contacting cold calls or emails to people that don’t know your brand. When they master
this process, they can also uncover insights about why your business didn’t manage to be recognized
among valuable segments of the market as well.

Sales scripts
When a company starts up, you’ll probably have one or two salespeople that have a weird profile. In
short, they are not typically just people that mastered the sales process; they are more like renaissance
men and quick learners. They ventured into the business world when none or few people knew your
brand and built the company from the ground up. Thus, those people know your company and product
better than anyone else. Therefore, you don’t have to reinvent the wheel each time. Instead, have the
new team members of the sales team take advantage of scripts that cover up the main concerns and
questions potential customers might have and how to address them. Keep in mind that the script is just
a tool to guide the sales force, but it is meant to be improved over time.

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Email templates
Just like scripts, email templates can be a great help to salespeople to use what has already worked and
rolled it out on a larger scale. It is essential to keep improving those templates to allow sales emails to
gain higher and higher conversion rates. Even though templates do work, it is vital to let at least a small
part of it to be personalized. Thus, while you can have a template, you still need to do your research and
make sure you offer some valuable information to get the lead interested in what you’re saying. Why
would anyone listen to you if you’re sending out the same message to anyone?

Personalized message
Before contacting anyone make sure to do your research. People are interested in listening to you when
you can deliver solutions to their problems. None cares about your product or service or who you are
(unless you’re a rockstar). Thus, before sending out that message, are you providing something valuable
to the person on the other side?

Value proposition
One of the less understood aspects of selling is the fact that you only need to pick up the phone as many
times as you can and sell your product. However, while this is a prerequisite, it is not really what makes
the difference. When you’re reaching out to someone, you need to understand what motivates them,
their value proposition. Marketing usually can deliver a value proposition and make it seen by as many
people as possible. But that value proposition will not be tailored. In short, your product or service
doesn’t have a single value proposition, but it will have as many as many potential clients exist out
there. The salesman has to be able to find the value proposition in the product or service that most suits
the potential customer on the other side. That is how you get attention.

10x goal setting

Among the most misunderstood things about sales is the goal-setting process. Many believe that it is
fine to set reasonable goals. Thus, they won’t shoot to the moon but rather be happy with a discrete
objective. For instance, they might say, “why don’t we increase sales by 50% this year?” And for many,
this is a massive increase. Yet if you are not ambitious enough not only you won’t reach the objective
but you won’t even take the necessary actions to get there. In short, to reach massive results, you need
to have quite ambitious goals, and targets. Those will ask for the kind of actions that will get you
motivated in the long run.

Understand the client business model

If you’re selling to another business, you need to understand its psychology. While indeed when you
sell to a consumer, you want to understand their necessities. When it comes to business, you want to
study their business model indeed. How do they make money? Who are their customers? What do their
customers want? What cost structure does the business have? All those aspects will be critical to
understanding what the person, on the other hand, is motivated by and getting you closer to deliver the
solution that works best for them.

Follow-up
This is the most critical word in sales, yet many neglect it. When you’ve spent hours in prospecting,
researching, and meeting a client you’ve done only part of the work. However, when you don’t follow

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up, you’ve wasted your time. You could have well not done the work at all. The follow-up is probably
the thing that requires the least effort (that is more a matter of organization), yet that is what gets you
to close the deal. Until the potential client gives you an answer which might be positive or negative,
you need to follow-up!

Fill your pipeline, always!

In some cases, you might think your pipeline is good enough. That is when you start losing ground. To
avoid the risk of being left with an empty pipeline, you need to be prospecting at all times. Some deals
might take way longer than expected to be closed, in that scenario you need a backup plan, which is
your pipeline and how full it is.

Keep in touch
When you’ve closed a deal or received a No as the answer, you can’t just leave it up there. You need to
keep in touch with that person as what might have prevented closing the deal might have been timing.
On the other hand, if you already closed a deal with that person keeping in touch might allow you to
understand when that person has additional needs and whether you can help your company to fulfill
them.

Deliver value before closing

Many think of selling as closing a deal. While closing is part of the process, you’re selling (or serving)
at all times. The common mistake is to think you have to deliver value only when the customer has been
acquired and he has given you the credit card. Instead, you need to deliver value as soon as you start
interacting with a potential client. Why does she/he need to trust you? That person doesn’t know you,
how she can be sure you’re the person she wants to have business with. There is only one way to prove
it, to deliver value before the sales are closed.

Outstanding support
After you’ve closed the sales, it isn’t like your work is over. If you provide a service the most delicate
part of it is the first stage of usage of that service by the new customer. Indeed this is still a process in
which the person needs to understand whether you can be trusted to deliver the value you promised.
Therefore, you need to be on top of it. The way you support the client once she has acquired your
product or service determines how much your business can be trusted. Also, an essential part of any
sales funnel is the referral side. When you’re providing outstanding support not only you’re retaining
valuable customers, but you also have those people refer your business to others.

At the end of it, it’s about listening

Based on the research by Hubspot those are the top four ways to create a positive sales experience,
according to buyers:

● Listen to their needs (69%).

● Don’t be pushy (61%).
● Provide relevant information (61%).
● Respond promptly (51%).

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Therefore, it is critical to learning to listen, which does not mean thinking about what you have to say
next when the other person is listening. But instead to focus solely on what the other person says
emphatically. One mantra I have (or at least I try) to follow is “how do I create value for this person?”
Once that becomes hardwired, it will be much easier to get things going!

Growth Marketing

Growth hacking is a process of rapid experimentation, which in a way has to be “scientific” by keeping
in mind that it is used by startups to grow quickly. Thus, the “scientific” here is not meant in the
academic sense. Growth hacking is expected to unlock growth, quickly and with an often limited
budget. Growth hacking could be readily applied to anything. However, it finds its playground in digital
marketing, as it is quite inexpensive and easy to track and analyze a massive amount of data. Also, in
digital marketing, it is possible to experiment fast and with low costs and reversible failures. For
instance, if you put up a landing page, which has already a substantial amount of traffic, you want to
A/B test it. Thus, you create two versions of that page and send traffic to both and see what converts
best. However, it is important to remember that things like A/B testing are tools that the growth hacker
uses. In short, growth hacking is about the process and mindset that the process requires. The tools,
tactics, and strategies come later. Just like the scientific process, it has to be testable and repeatable.
Unlike the scientific method, it has to be fast!

Why growth hacking is critical for your online business

January 2015 Sean and his team at GrowthHackers.com were experiencing stagnating growth. Although
they grew at about 90,000 unique monthly visitors in a year, they were mainly growing on the back of
Twitter. Time to change strategy. They decided to implement a High Tempo Testing Program. That is
how growth picked up and accelerated:

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 Source: GrowthHachers.com

Growth Hacking is one of the most exciting subjects today. Not only in the marketing arena but in any
other conceivable area. I’m not trying to emphasize when I tell you that growth hacking can make you
become the next President. Kidding aside, let’s see instead why this discipline will be useful to your
business.

What is Growth Hacking? (and what is not!)

As the story went in 2007, Brian Chesky and Joe Gebbia couldn’t afford the rent on their San Francisco
apartment that is why they decided to transform their loft into a lodging space. Yet instead of relying
on Craigslist, they built their site, which they called Airbed & Breakfast, and hacked Craigslist to drive
users back to their website,

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 Source: GrowthHachers.com

Long story short that is how they grew from a loft to a company worth $30billion, which we all know
by the name of Airbnb. Yet that is only part of the story. Airbnb didn’t grow into a multi-billion business
from a day to the next with a single magic trick. Instead, they had to undertake several experiments
before seeing their listings grow. Experimentation is a critical ingredient of growth hacking. For it to
work, you have to experiment through a rigorous process that mixes rapid and cross-functional testing.
That is what Sean Ellis called growth hacking. In short, growth hacking overturned the traditional
founders’ myth. In which, one brilliant individual has a genial idea that makes the company go from a
garage to a palace. Therefore, it isn’t anymore about a person but the team. It isn’t anymore about one
genial idea but a process generating ideas. There’s no such thing as a growth hacker, but only a growth
hacking team driven by the same mindset.

The Growth Hacking Mindset

The first step in hacking growth is to acquire a growth mindset. There is no tool, skill, or strategy which
you can use, master, or implement if you don’t develop the right mindset first. That mindset starts with
the way you learn.

From Personal to Incremental: Two Approaches to Learning

The key to pursuing excellence is to embrace an organic, long-term learning process, and not to live in
a shell of static, safe mediocrity. By Josh Waitzkin from The Art of Learning In a world that becomes
increasingly competitive the most essential skill to master is “The Art of Learning.” In his homonymous
book, chess player, martial arts competitor and author Josh Waitzkin explain the two modes of learning:
entity vs. incremental theories of learning. The entity theory treats intelligence as fixed and stable. The
incremental theory of intelligence makes it something malleable, fluid, and changeable. In other words,
if you believe in the former, you will identify yourself with the activity/experiment you’re undertaking.
Therefore each failure will be unbearable and a demonstration of your lack of intelligence and skills.
Instead, with the latter approach, you will stop identifying with the learning process and start to see
each failure as an opportunity to learn something new. In short, to develop a successful growth hacking
mindset, you must remove your ego from the learning process and use an incremental learning approach.
That is how you develop a growth mindset.

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The Power of Yet: The Growth Mindset
Mindset change is not about picking up a few pointers here and there. It’s about seeing things in a new
way. When people…change to a growth mindset, they change from a judge-and-be-judged framework
to a learn-and-help-learn framework. Their commitment is to growth, and growth take plenty of time,
effort, and mutual support.

This is how Carol S. Dweck, author of “Mindset: The New Psychology of Success” explains it. If the
growth mindset is not about you; it is about the process. How can you make sure to change the way you
learn, while also making sure your team is on the same page? Use the power of yet:

Praise the process and make sure your team knows the process is what matters
reward effort, strategy, and process not individual intelligence learn and teach to push outside the
comfort-zone so that failure becomes a normal aspect of the growth process

Once acquired the incremental learning method and the growth mindset, there’s a third non-trivial
aspect of growth hacking, the scientific mindset.

It Got to Be Data-Driven: The Feynman Approach

It doesn’t matter how beautiful your theory is, it doesn’t matter how smart you are. If it disagrees with
experiment, it’s wrong by Richard Feynman

If you want to build a growth hacking team, you have to have a scientific mindset. The method to follow
is pretty simple. Identify a problem, do some research, form a hypothesis, do an experiment, analyze
your data, and draw conclusions. It doesn’t matter how beautiful your theory is if it doesn’t match the
data then it is wrong! In short, every decision has to be data-driven and based on the actions of the users
rather than on the beliefs of the founders.

The growth hacking methodology

Sean Ellis shows us the process critical to the growth hacking experimentation:

The process is simple yet powerful. From data analysis to testing and back to that analysis, the loop of
growth must be followed consistently.

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T-shaped: To be a growth marketer multidisciplinarity is the rule of thumb

As Davis Jones, author of the Udemy Bestselling course Growth Hacking Masterclass in Digital
Marketing multidisciplinarity is the norm. SEO, email marketing, social media, copywriting, and online
advertising are the necessary skills to acquire to thrive in the digital marketing world. However, what’s
critical is to become a T-shaped person.
In other words, you need to develop an in-depth competence in a single skill (for instance, SEO or
content marketing) and competence in multiple disciplines that give a high-level understanding of how
to grow a business, quickly.

Growth Hacking is about the whole funnel

Growth hacking isn’t anymore about MRR or acquisition, but it involves the entire funnel. From
awareness to purchase the funnel accelerates at the speed of light:

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The AARRR funnel has the following stages:

1. Acquisition.
2. Activation.
3. Retention.
4. Revenue.
5. Referral.

The way you look at the funnel though highly depends on the kind of business you operate. For instance,
if a business provides software that has a trial period. When a user activates the trial, there is no revenue
yet. You will need to retain the user after the trial period to finally earn revenues. Also, when a customer
starts referring to your service, that is when you are at the end of the funnel. It is important to notice
that the funnel is only an abstraction that doesn’t exist in the real world. Often people take non-linear
paths. However, the funnel is a decent tool to identify and focus on a set of activities and metrics to
grow a narrow area of the business.

Top growth channels used by marketers

A blog is one of the most important places that any company can use to nurture its brand. From
awareness to sales a blog is crucial for any business or start-ups to acquire customers, maintain
relationships with current ones, and enhance sales. Today one of the most significant challenges for any
company is to generate enough leads to sustain its revenue growth.

The importance of direct traffic to assess your branding strategy

Direct traffic is critical. First, though, let’s define it. Direct traffic comprises sources that are accessing
directly to your website for several reasons. As specified on Moz there might be several reasons for
getting direct traffic. Some of these are the following:

1. Manual address entry and bookmarks.

2. HTTPS > HTTP.
3. Missing or broken tracking code.
4. Improper redirection.

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5. Non-web documents.
6. “Dark social.”

While part of some direct traffic might be due to technical reasons and the inability to track all the
referral traffic that gets to your site. Direct traffic is critical as it points out that your investments in
branding are paying off. In fact, people are looking actively for your website, and this means that they
might spend more time on it. This isn’t just a theory but can be backed up by some data that Moz has
gathered:

Source: moz.com

As you can see above, direct traffic seems to point out that users that come through it are more loyal
compared to all other traffic sources. How do you grow your direct traffic? You need to invest a bit in
increasing your brand awareness. For instance some ideas:

Guest blogging
When writing a guest post on another site link back to your site through the branded keyword. For
example, when I blog on another site, if it makes sense I’ll link back to my blog by using the branded
keyword “FourWeekMBA” that links back to my homepage. You can do the same with interviews for
podcasts. And the interesting part is you don't have to stress too much about links as also a mention is
a great signal if users search for your brand on Google!

Interviews
When getting interviewed by other blogs also have them link back to your site with the branded
keyword, like above.

Social media
When people recognize your brand on social media, there are more chances they’ll search for it on
Google. If this becomes consistent, also your branded keyword will grow in importance, and you’ll get
more direct traffic over time

Community building
If people learn about your brand, then they will actively search for it or access it directly with no need
for a search engine or social media as an intermediary. The more people have your brand on top of their
minds, the more your online business will be solid.

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Get off-line
Meeting with people at events is another great opportunity to grow your brand. Thus, if there are key
events in your industry, you need to be there!

Spark curiosity
You can also be more creative with your online marketing. For instance, I remember a story Neil Patel
tells often. When he was trying to grow his brand “Neil Patel” he had a bunch of models go around the
city with a billboard that said “Neil Patel” When people started to search for “who’s Neil Patel?” That
hack helped him create some traction. How do you know you’re on the right path in growing your brand,
thus your direct traffic? First, of course, you can monitor the growth of direct traffic over time. Second,
and most importantly, you’ll notice if you’ve been successful in your branding effort if your branded
keyword gains some momentum. What is a branded keyword? This is the keyword that includes the
name of your brand. This is the name of a person, but also the name of a website and a brand.

Why organic traffic means a sustainable business

Organic traffic is what you get from Google and other leading search engines which is not paid. In short,
you’re producing quality content that Google ranks because relevant to an audience that is searching
for an answer for specific keywords. Building organic traffic might be the holy grail to grow an online
business.
However, it isn’t easy at all. I’ve been struggling for almost three years to build up a consistent stream
of organic traffic that would allow me to monetize my blog. I’m still working on that. The truth is that
organic traffic takes time and proper strategy.

Ahrefs.com suggests a few strategies summarized below:

1. Choose the right words to target in your SEO campaigns to increase traffic quality.
2. Make good use of your competitors’ keywords.
3. Answer the questions of your potential customers.
4. Go long-tail and forget keyword stuffing.
5. Revise your old content and update it.
6. Get some paid social media promotion.
7. Don’t blindly follow every advice about website traffic you can find online.
Beside those strategies that are pretty useful, I also suggest the following:

8. Use structured data to allow Google to better understand your web pages.
9. Target lower volume and less competitive keywords that solve a specific issue for your users (in a
way this connects with points 3 & 4).

An integrated SEO strategy that brings together social media and content
marketing
For many either social media experts and for some SEO “experts” those are two separate channels. In
reality, they’re not. In fact, what matters is bringing qualified traffic to your blog. When this happens
Google measures the user engagement and experience to understand the relevance of your content.
Thus, decide whether to rank it higher or not. That is why social media is critical for SEO. If you bring
qualified traffic back to your blog that is almost the equivalent of a proper SEO strategy, that will over

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time grow your organic traffic. No surprise, the top digital marketers we analyzed so far, also use social
media as the main distribution channel for their online business.

Gain referral traffic to diversify your acquisition channels

Referral traffic is what you get from other websites that are either linking out to your websites or from
some social media platforms like Quora.

The 10 building blocks of the growth hacking canvas

Growth hacking canvas has ten building blocks.
We’ll specifically look at two growth hacking canvas, from alexandercowan.com and
growthhackingcanvas.com.

According to the growth hacking canvas from alexandercowan.com, those are the following building
blocks and questions to ask:

● Segments & Personas: Who are the customers? What do they think? See? Feel? Do?
● Value Propositions: What’s compelling about the product to these personas? Why do they buy
it, use it?
● Brand Experiences: What are the key experiences customers have with the product? How do
they find it? Buy it? Use it? How does this differ across actors? If a CIO or parent buys it and
then a support person or child uses it, how does that work?
● Branding: What is the personality of the brand? Its positioning? How does it talk about itself?
How do is that executed?
● Lexicon: What words and phrases do customers use to talk about the area? What do they type
into Google?
● Assets: What are the product’s most important brand assets?
● Activities: What are the most important growth activities?
● Organic Channels: What organic (unpaid) channels are most important to the product’s
branding and growth?
● Paid Channels: What paid channels are most important to the product’s branding and growth?
● Promotional Infrastructure: What promotional infrastructure (email lists, in-store displays,
social media accounts) is working for the brand?

The growth hacking canvas from growthhackingcanvas.com comprise ten building blocks that can be
summarized in:

● S.M.A.R.T Goals: Goals that are specific, measurable, attainable, relevant, and timely
● Target Audience: Who are you targeting with your specific marketing actions? Why are these
segments so important?
● Acquisition: How do users find you?
● Activation: How can people refer to their friends?

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 ● Retention: Why would users come back?
● Referral: How can people refer to their friends?
● Revenue: How will you get paying customers?
● Budget: What budget will you allocate to which actions?
● Growth areas: Which areas will you focus on?
● Tools: Which tools do you use for each area?

Key takeaway
Many digital marketers operate like content distribution strategies as something that works separately
from each other. In short, they lack a holistic view of it. Instead, content distribution is as much about
SEO as it is about social media and other acquisition channels. Even off-line marketing is relevant to
SEO. In fact, when people meet you at an event and look for your brand online, that is data that Google
is recording. When that data becomes consistent your brand name starts to gain some traction, and that
is also how Google will send organic traffic to your site. The same applies to social media. When you
gain relevant traffic to your blog. That is a way for Google to understand through user engagement
whether that web page is relevant or not for specific keywords. Those are simplifications. However,
this is to remind you that content distribution is about keeping a holistic view of your content strategy.
In fact, what matters at the end is how much, qualified traffic, you can get to grow your business and
get a consistent ROI.

Product-Market Fit In A Nutshell

Marc Andreessen defined Product/market fit as “being in a good market with a product that can satisfy
that market.” In an article entitled “The only thing that matters” Andreessen also highlights a few points:

At any given startup, the team will range from outstanding to remarkably flawed; the product will range
from a masterpiece of engineering to barely functional; and the market will range from booming to
comatose.

In other words, Andreessen takes into account three major factors for the success of any startup:

● The team.
● The product.
● And the market.

He argues that if you asked Entrepreneurs and VCs of the three elements what mattered the most, they
would have picked the team. On the other hand, if you asked engineers about the most crucial element,
they would argue that the product matters the most (Andreessen mentions Apple and Google as an
example of that). He takes a third path though. Rather than the team or the product, what matters is the
market!

In a great market — a market with lots of real potential customers — the market pulls product out of
the startup.

From here he introduces the concept of MVP or minimum viable product.

He defined it as:

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The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes
along…
…The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how
good the team is, as long as the team can produce that viable product.

From here it is essential to understand two concepts that help startups and entrepreneurs in general to
launch successful products:

● The lean startup methodology.

● And the MVP.

We’ll also see a third element that has become critical even before an MVP can be developed: the
problem/market fit. In other words, where the lean methodology is the “How,” the MVP becomes the
“What” and the problem/market fit becomes the “Why.”

The Lean Startup Methodology in a nutshell

Steve Blank, launched the Lean Startup Movement, which as he explained in a 2013 HBR article “Why
the Lean Start-Up Changes Everything” defined it as:

It’s a methodology called the “lean start-up,” and it favors experimentation over elaborate planning,
customer feedback over intuition, and iterative design over traditional “big design up front”
development.

In a nutshell, the lean startup methodology aims at creating a repeatable process for product
development to minimize the time it takes to build a product that the market wants. This process consists
of three phases:

● Build.
● Measure.
● Learn.

Once you go through the build > measure > learn that will need to be repeated over and over, thus
creating a virtuous cycle or feedback loop. Steve Blank also highlights a few core principles at the core
of the lean startup methodology:

● Business plans rarely survive first contact with customers.

● Five-year plans are worthless and a waste of time.
● Start-ups are not smaller versions of large companies.
● The lean start-up movement is about agile development.

Thus, the primary purpose is to come up with a minimum viable product (MVP) which helps companies
reduce the time to market. For that matter, it is essential to understand what an MVP is.

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The Minimum Viable Product in a nutshell
Back in 2009, Eric Ries defined MVP as:

The minimum viable product is that version of a new product which allows a team to collect the
maximum amount of validated learning about customers with the least effort.

And he continued:

MVP, despite the name, is not about creating minimal products. If your goal is simply to scratch a clear
itch or build something for a quick flip, you really don’t need the MVP. In fact, MVP is quite annoying,
because it imposes extra overhead. We have to manage to learn something from our first product
iteration. In a lot of cases, this requires a lot of energy invested in talking to customers or metrics and
analytics.

Ash Maurya also described it as:

The smallest thing you can build that delivers customer value (and as a bonus captures some of that
value back).

At the same time, other entrepreneurs like Rand Fishkin also highlighted the drawbacks of the MVP
approach when you have an established brand. Indeed when you have an established brand, it might
make more sense according to Fishkin to adopt the EVP or Exceptional Viable Product approach,
summarized as:

My proposal is that we embrace the reality that MVPs are ideal for some circumstances but harmful in
others, and that organizations of all sizes should consider their market, their competition, and their
reach before deciding what is “viable” to launch. I believe it’s often the right choice to bias to the EVP,
the “exceptional viable product,” for your initial, public release.

In my view, an MVP done right should already have the features described by Fishkin EVP. However,
Rand Fishkin raises an important point. A company with an established brand should be cautious of the
way it releases its MVP. One classic example of what a disastrous MVP can do is Microsoft‘s launch
of Bing, which promised to take over the search engine industry, and replace Google as the monopolist
of search and the meme of our generation (Microsoft wanted to establish the meme “bing it”) but failed
miserably:

While Bing today represents a decent presence for Microsoft in the search industry (Bing makes a few
billion dollars to Microsoft) it never really recovered from that MVP launch.

As of 2019, if you ask the SEO industry (the practitioners that position their content via search) many
still curl their lips at the sound of “Bing.” Indeed, while SEOs are both a blessing and a curse for Google,
that community has helped Google get better over the years. For instance, thanks to the so-called Black
SEO practices (attempts to manipulate – successfully – Google’s algorithms, the search engine has
evolved more quickly, by releasing algorithm updates that allowed it to get better and better over the
years. Before building up an MVP, entrepreneurs have learned the hard way, that there is another step,
the problem/solution fit.

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Problem/Solution Fit comes first
MVP makes you fall into the trap of building up a product even before understanding the problem the
target market faces. That might delay the ability of a company to build a product that satisfies the
market. Ash Maurya describes this phenomenon in “Don’t Start With an MVP:”

You raise your odds of success significantly by spending the requisite time first defining the MVP, then
validating it using an offer, before building it. Think of it as Demo-Sell-Build versus the more traditional
Build-Demo-Sell approach.

Therefore, where the entrepreneurial world has stressed so much over the solution by trying to build an
MVP, that has delayed the ability to deliver a product that the market wants. Instead, by focusing on
the problem first, you can understand the problem, and as Ash Maurya said it, you’ll make the market
“an offer your customers cannot refuse.” The demo > sell > build process has become common
nowadays with many platforms (Kickstarter is one of them) that make it possible to validate an idea,
selling it, even before the product is ready.

Product-market fit myths

In a blog post entitled The Revenge of the Fat Guy Ben Horowitz points out the four myths about
product-market fit. You might want to know them as they might compromise the all product/market fit
endeavor.

Myth #1: A product-market fit is a one-time event

Some companies are looking for this magic moment to happen. Yet in most cases, product-market fit
doesn’t happen as a result of a single event, but rather as a result of a process of experimentation and
iteration. And it might take time. What happens though is that once the product-market fit is achieved,
growth becomes exponential. This leads to the belief that product-market fit happens as a single event.
This connects to another critical point.

Myth #2: Product-market fit is a linear process

Another core belief is that this process of product-market fit is linear. In reality, it takes years to build
up critical mass, and a few days to see that critical mass fully roll out. Imagine a company working for
three years to reach a million in sales and doing its next million in less than a week. This is what
happens when you reach momentum, which is part of the product-market fit process.

Myth #3: Product-market fit is a one-time achievement

Once reached this magic moment where traction arrives, momentum seems to keep going, you can sit
down and relax. I wish this was it, however, product-market fit is a continuous process, a sweet spot
that can be easily lost if the market context changes or a further scale wants to be achieved.

Myth #4: Product-market fit = no competition

When you reach a product-market fit there is no competition, and you can enjoy high margins forever.
That’s not the case; unless you can “hide” to the market that you reached that, the product-market fit
will attract a lot of potential competitors. VCs will start pouring money into the market, other larger

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companies will move their resources on your vertical, and if that becomes hot, the competition will
stiffen very quickly.

Connecting the dots

Product-market fit can be defined as the ability of a product to satisfy the market. The market itself can
be segmented to start from a niche market; throughout this process, it is critical to use a method called
market segmentation. At the same time before going to build a product through the lean startup
methodology, it is essential to define the problem itself. That can be done via the problem-market fit
model which goes through a process of demo-sell-build. Thus, you will maximize the chances of success
of your MVP. Once the MVP is ready, you want to keep improving it to grab more and more market
share or to broaden the market wanting the product. At that point, you’ll have reached product-market
fit. However, the product-market fit isn’t something that lasts forever. If the market conditions change,
you might lose your product-market fit. Therefore, you’ll have to start the process to regain your
product-market fit. The whole point of the process highlighted in this guide is about coming up with
ideas that you can validate and sell even before building a product. Today that is possible via
crowdfunding platforms, or by setting up offerings, and only after enough people join in, you start
building a product. Thus, in this era, where digital allows entrepreneurs to quickly and at low costs
gather feedback from a large group of people. It is possible to sell something even before you’ve built
it! I summarized this process in the infographic below:

The Five Stages Of A Technology Adoption Life Cycle

In his book, Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers,
Geoffrey A. Moore highlights a model that tries to dissect and represent the stages of adoption of high-
tech products. More precisely this model goes through five stages. Each of those stages (innovators,
early adopters, early majority, late majority, and laggard) has a specific psychographic that makes that
group ready to adopt a tech product.

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Why is the technology adoption life cycle useful?
There is a peculiar phase in the life cycle of a high-tech product that Moore calls a “chasm.” This is the
phase in which a product is getting used by early adopters, but not yet by an early majority. In that stage,
there is a wide gap between those two psychographic profiles. Indeed, many startups fail because they
don’t manage to have the early majority pick up where the early adopters left. Understanding the
technology adoption of a product helps you assess in which stage is a product and when the chasm is
close enough so that the gap can be filled by the early majority to pick up the void left by the early
adopters. That void is created when the early adopters are ready to leave a product that is about to go
mainstream. The market is plenty of examples of companies trying to conquer the early majority but
failed in doing so, and in the process also lost the enthusiasts that made that product successful in the
first place.

What are the stages of a technology adoption life cycle?

The stages of a technology adoption life cycle, it comprises five main psychographic profiles:

● Innovators.
● Early Adopters.
● Early Majority.
● Late Majority.
● and Laggards.

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Innovators
Innovators are the first to take action and adopt a product, even though that might be buggy. Those
people are willing to take the risk, and those will be the people ready to help you shape your product
when that is not perfect. As they’re in love with the innovative aspect behind it, they are ready to sustain
that. This psychographic profile is all about the innovation itself. As this is sort of a hobby for them,
they are ready and willing to take the risk of using something that doesn’t work perfectly, but it has
great potential.

Early Adopters
Early adopters are among those people ready to try out a product at an early stage. They don’t need you
to explain why they should use that innovation. The early adopter has already researched it, and she is
passionate about the innovation behind that, however, while the innovator will adopt the high-tech
product for the sake of the innovation behind it. The early adopter will make an informed buying
decision. In that stage, even though the product is only appealing to a small niche of an early adopter,
it’s great and ready. Those early adopters feel different from the early majority. And if you “betray
them” they might probably leave you right away. That is where the chasm stands.

Early majority
The early majority is the psychographic profile made of people that will help you “cross the chasm.”
Getting traction means making a product appealing to the early majority. Indeed, the early majority is
made of more conscious consumers, that look for useful solutions but also beware of possible fads.

Late Majority
The late majority kicks in only after a product is well established, the brand well known. Thus the late
majority has a more skeptical approach to technological innovation and feels more comfortable in the
adoption only when a product has gone mainstream.

Laggards
Laggards are the last in the technology adoption cycle. While the late majority is skeptical of
technological innovation, the laggard is adverse to it. Thus, unless there is a clear, established advantage
in using a technology those people will hardly become adopters. For some reason, which might be tied
to personal or economic aspects, those people are not looking to adopt a technology.

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Business Model Canvas In A Nutshell
A business model is a way in which organizations capture value. Not only the economic value but also
the social values an organization can foster and the cultural values it can sustain in the long run. In other
words, generating a business model isn’t just about how companies make money but how they create
value for several players. Unlocking profits for the organization that came up with that business model
is one of the critical elements. There isn’t a single way to design and assess a business model. However,
the business model canvas is a holistic model that takes into account nine factors or building blocks.
Alexander Osterwalder proposed the Business Model Canvas. He’s a Swiss business theorist that in
2000 together with a team of 470 co-creators in an attempt to create a tool that entrepreneurs could use
for their businesses. The aim of having a sharp understanding of your business model is critical to
provide strategic insights about your customers, product/service, and financial structure. Thus, to take
action and iterate the business model until it unlocks value for your organization as a whole. Let’s take
a real case study. I often mentioned the Google business model as a great example. You might like or
not the giant from Mountain View.
Yet what made this company so profitable – I argue – was its ability to unlock value for several players
in the digital marketing space. In fact, on the one hand, with AdWords, Google allowed businesses to
transparently bid on keywords based on the clicks those ads received. This allowed companies to
disintermediate advertising from intermediaries that were taking up most of the margins (of course now
Google gets them). On the other hand, with AdSense, Google allowed small publishers around the world
to monetize their content. All they needed was an AdSense account and enough traffic to start earning
money.
Of course, as of today, this model isn’t sustainable anymore for many businesses. In a way, AdSense
democratized the ads revenues, which before were only taken by large players. With Google, those
profits got shared with content creators. Also, Google offered the best search experience compared to
any other search engine. Even though it wasn’t the first to take over the market (it was actually among
the last movers) Google offered a free service that worked wonders. The focus on a great search
experience was one of the most crucial factors in Google‘s success.

Little critical note: Just like professors study birds flight and go around the world to teach birds how
to fly while they can’t. So entrepreneurs that tinker on a daily basis with business models might have a
better feel for that compared to theorists trying to teach them what a business model is. In short, my

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point is that you don’t need to get bogged down on its definition or to stick with the business model
canvas to assess your business model. You might want to develop your way to look at your business as
– if you’re an entrepreneur – there’s none better than you to do that. In short, use the business model
canvas as one of the many methods you can use to assess your business. Don’t let professors or theorists
tell you that is the only way. It’s not. At the end of this guide, we’ll see a few alternative tools you can
use to assess, and design your business model. Going back to the business model canvas Alexander
Osterwalder, outlined several prescriptions that form the building blocks for a business model. Those
building blocks enable entrepreneurs to focus on operational, strategic, and financial assessments of
their business.

Business model canvas in a nutshell

The nine building blocks of the business model canvas comprise vital partners, key activities, value
propositions, customer relationships, customer segments, critical resources, channels, cost structure,
and revenue streams.

Key partners
Who are your key partners/suppliers?
What are the motivations for the partnerships?

It all begins with your partners. If you don’t have the right partnerships in place, you don’t have a
business at all. That is the starting point of your business model. Finding the right partners is critical.
The success of your business and the traction depend upon your ability to identify and offer your
partners a compelling reason to do business with you. For instance, if you think about Google, the
principal partners are the small publishers part of the AdSense program, together to the businesses that
are part of the AdWords network and the users that daily keep going back to the Google search box by
giving it critical data to sustain its business model. If you think about Uber instead, you’ll notice how
the key partners are its drivers for which Uber means an additional if not a full-time income as self-
employed. Its engineers that keep the platform smooth and running and people that sustain the cause of
Uber. If you think instead at Airbnb, you’ll notice that those key partners aren’t only hosts and travelers
that transact each day on the platform. Also, freelance photographers that travel the world to take
professional pictures that enrich the user experience of Airbnb are also key players. When it comes to
partners “who” and “why” are critical questions. In short, who’s the niche of people that can sustain
your business? And why, so what compelling reason are you giving them? What value do they get from
this partnership? It doesn’t have to be just in terms of finances. Of course, initially, a better deal would
do. But it could also be about social values or personal values. For instance, initially for its drivers,
Uber didn’t mean right away full-time income. But it also meant more freedom for its drivers to work
when they wanted. So initially freedom might have been a critical aspect.

Key activities
What key activities does your value proposition require?
What activities are important the most in distribution channels, customer relationships, revenue
stream…?

In short, those are the activities needed to make your value proposition compelling for your key partners.
Thus, they can vary from removing friction (think of a marketplace that is hard to use), add features, or

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make transactions smooth. In short, the more your organization acts as an enabler of business
relationships among several players the more its value proposition consolidates. Thus, anything that
solves a customer problem, or satisfies an unfulfilled need would do. Based on my personal experience
from the case studies I’ve looked at, the more the value proposition can adapt to several players' needs
the more it makes a business model become the driver for an organization's growth. Take Quora:

The Q&A social network can bring together several partners (users, writers, top writers,
publishers/online businesses, and investors) with different value propositions; all met on the same
platform.

Value proposition
What core value do you deliver to the customer?
Which customer needs are you satisfying?

Although the value proposition is not listed as the first element. In reality, this is the first thing you
should assess. I’d say this is the foundation of your business model. That is what keeps the blocks
together. Without knowing the core values for your customers or partners and what needs you’re
satisfying, or what problems you’re solving for them you might have a product but not a business. This
is connected with the previous building blocks and with the next ones. This is the glue that keeps it all
together. As explained in the last point a value proposition doesn’t have to be for only one player,
partner or type of customer. Take the case of a multi-sided platform like LinkedIn. The value
proposition can embrace both sides of the marketplace:

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The value proposition isn’t marked in the stone, but it can change over time. As new partners join; and
as you tinker with your business model and as new unforeseen needs come about your value proposition
might also change.

Customer relationship
What relationship that the target customer expects you to establish?
How can you integrate that into your business in terms of cost and format?

Let’s take Uber’s case, where the company is built on top of a complex spider of relations. Each of
those relationships will have different dynamics. For instance, drivers might be concerned about safety
risks while regulators might be worried about transparency and proper data management. Another
example, if you take the Airbnb business model, hosts are critical to the success of the platform, and
concerns like liability coverages are essential for them to keep using it. That is why hosts are provided
with insurance and liability coverage, the “Host Protection Coverage” (of course that might have
happened because of some accidents).

Customer segment
Which classes are you creating values for?
Who is your most important customer?

Once you have the previous building blocks in place, it shouldn’t be hard to define for which class of
people you’re creating value and what are your most important customers. It is important to stress that
although this is a list of blocks, it is not necessarily meant to be read or assessed in order. In fact, at
times you might have some blocks but miss others. For instance, let’s take the case of a startup that has
created an innovative software based on new, emerging technologies. The startup founders might know
for sure that technology is valuable and it will open up market opportunities. Yet that same founder
might not have a clue about who the potential customers might be. This shouldn’t surprise you. Starting
up a business doesn’t necessarily mean starting from a problem people have. That is true in more
traditional industries. In tech, the opposite might apply. You have new technology and a product that
does many things. However, you struggle to have that business take off. How to find your customers?
Often they will come to you as the interactions with the first customers become more intense. You’ll
also refine your service to make it more focused on specific features and needs. That process of iteration

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will bring you to the so-called “product-market fit.” This process can be at times painful and time-
consuming.

Key resource
What key resources does your value proposition require?
What resources are important the most in distribution channels, customer relationships, revenue
stream…?

The value proposition is the glue that keeps all the blocks of your business model together. Thus, it is
critical to assess what financial and human resources to allocate to allow your value proposition to keep
your business model going. For instance, on Airbnb, it is critical to continue growing the offering and
the quality of it to give more and more options to travelers. Also, Airbnb has noticed users wanted more
experiences. It started to offer a whole new section focused on those experiences.

Distribution channel
Through which channels that your customers want to be reached?
Which channels work best? How much do they cost? How can they be integrated into your and your
customers’ routines?

A Peter Thiel might say if you don’t have a distribution you don’t have a product. As engineers are
running many successful tech companies, it’s easy to get deluded by the fact that engineering alone can
generate a successful business model. This is false! The business world is a competitive environment.
It doesn’t matter if you’re technically skilled if you don’t have the guts to take action in critical moments
your business might well sink with your technical skills. If you take Bring and Page, Google‘s founders,
they are engineers, but they are businessmen. When Google paid $300 million for keeping its search
engine as default choice within Mozilla, when Microsoft was about to steal it, it was an aggressive move
to keep one of the most important distribution channels (at the time). Microsoft was trying to have Bing
featured as the default choice of Mozilla. When Google’sfounders understood what was happening,
they didn’t stop thinking for a second. They didn’t build algorithms to make that decision. They acted
out of their guts feelings. If I had to name what’s the most important asset of any company, the

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distribution would come first. Finding the distribution channels that best fit your business isn’t a natural
process. Traditional channels are word of mouth, paid marketing, and media coverage. In the digital
business world instead, there are channels like SEO, social media and content marketing. I know you
might look at them as marketing tactics and they are. However, those are meant to build distribution
channels. For instance, content can be used as a way to connect with key players in your industry that
you’d want to have as business partners. Google can also act as a “distributor” as with a proper SEO
strategy can bring a continuous stream of qualified traffic to enhance your business and so on.

Cost structure
What are the most cost in your business?
Which key resources/ activities are most expensive?

In the business community often growth is confused for profitability. That is not the case. Many
companies that achieved staggering growth rates have failed to be profitable. This isn’t necessarily bad,
but a successful long-term business needs to become profitable as soon as possible. When Google
opened its hood in 2004 after its IPO, the numbers were staggering. In terms of growth, revenues, and
profitability. A cost structure is then crucial to allow sustainable long-term growth.

Generally speaking, your customer acquisition cost has to be lower than the lifetime value of your
customers. Easy said than done. This connects us to the next, critical building block, the revenue stream
generation.

Revenue stream
For what value are your customers willing to pay?
What and how do they recently pay? How would they prefer to pay?
How much does every revenue stream contribute to the overall revenues?

Until you don’t have a stream of revenues coming in you can’t say you have a business. This might
seem a trivial point. Yet the way you monetize the company will also affect the overall business model.
There isn’t a single way to generate revenues. You might choose a subscription business model, a
freemium, a fee or membership model. That also depends upon the industry, product, and service you
offer. For instance, Facebook uses a hidden revenue generation model. In short, the utterly free platform
in a way “hides” to its users the way it monetizes. Of course, business people and marketers are well
aware of how Facebook makes money as it has been so far a proper advertising channel for many
businesses. However, the average user doesn’t have a clue. Things are changing now that privacy issues
and new regulations have brought attention to the Facebook business model. Yet for a decade Facebook

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has benefited from a vast stream of revenues and high profitability without most users ever noticing it.
Many might argue that the hidden revenue generation model is the most powerful. And in fact, it has
proved so (Google is another example). Indeed, as Peter Thiel remarks in his book, Zero to One, sales
works best when hidden. As none likes to be reminded of being sold something. However, a business
model that works, in the long run, needs to be aligned with users’ interests. Thus, the way you monetize
isn’t only about the bottom line but also about the kind of organization you’re building. If the revenue
streams you generate provide value and are in line with your users’ interests, there is no need for
corporate slogans like “don’t be evil.” What more? Once you’ve found a revenue stream the works and
that is in line with your business model you can’t stop there. You need to keep experimenting with new
revenue models. In short, the business model canvas is the starting point for your business, rather than
the ending point of your entrepreneurial journey.

Google business model canvas case study

So far we’ve seen how a business model canvas is a framework to design a company’s business model.
At the same time that can be used as a tool to dissect, understand other companies’ business models,
and how they are positioned in the marketplace. Let’s look at the Google business model canvas. Keep
in mind that the business model canvas is just one of the frameworks you can use to build, design, or
assess a business model. Also, a business model canvas will capture where a company is or where it
will want to be in the future. Thus, we’ll look at where Google business is at the time of this writing.
While a business model does create a long-term competitive advantage, being able to innovate it over
time is critical. If Google itself doesn’t want to be disrupted, it will need to evolve its business model.
This might imply a complete change in a few years on a few things that comprise its business model
according to the business model canvas like key partners, distribution channels, and customer
relationships. While the vision of a company might stay the same, other things like value proposition
might change substantially.

Google key partners

Each day billions of people get online, and they “google things up.” For many of those people, Google
is de facto the web. Yet it hasn’t always been this way. There was a time, back in the late 1990s when
the web was called AOL. Indeed, probably more than half of the traffic on the internet went through
this portal. When Google launched, while it had figured a great product and search engine, it didn’t
have a business model yet. For instance, by reviewing some of the thoughts of Google founders Page
and Brin, it seems clear that they thought advertising wasn’t well suited for a search engine:

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In the paper, they pointed out their “mixed feelings” about the advertising business model. As they
believed any search engine based on the premise of advertising in a way went against its primary
mission. However, over time Google figured a way to show advertising in a way that would not affect
user experience.
Since the beginning traffic going through Google’s digital properties (its search pages) has been a
critical ingredient for its long-term success. That is also why initially Google made a deal with AOL to
be featured as a primary search engine on its portal, which gave it massive visibility. AOL on its hand
was offered such a good deal, and it also saw search as a secondary feature, that it couldn’t say no to
Google. Therefore, while we give for granted the billions of queries – that each day – go through
Google. We miss the fact that Google had to build up a vast distribution network that each day
guarantees it this traffic. This isn’t a simple network, but rather a massive infrastructure worth billions
of dollars each year.
What does this infrastructure look like? There are a few elements:

Partnership agreements
One example is the multi-billion dollar deal with Apple to have Google featured as a default search
engine on Safari. Traffic doesn’t come from thin air; it comes from physical devices. As the web has
shifted from desktop to mobile devices, Google has developed its distribution strategy (for instance via
Google Chrome). However, a vast array of devices (take iPhones or iPads) are operated by Apple IOS
operating system and its internet browser (Safari). To be featured on those devices Google invests a
substantial amount of money.

Open handset alliance

As pointed out above mobile users have grown massively in the last decade. This implies that whoever
takes hold of the mobile content consumption can build a sustainable business model for years to come.
With other 84 technology and mobile companies, Google forged the Open Handset Alliance. In fact, in
2005, Google acquired Android (what would become the prevailing operating system for mobile). Just
after a few months from the launch of the iPhone by Steve Jobs, Google announced its Open Handset
Alliance. The aim was to build “the first truly open and comprehensive platform for mobile devices.”
The business model behind the Open Handset Alliance is a simple one. Google provides its free of
charge, the operating system for mobile devices, Android, and in exchange for many apps, like Google
Play and Google Chrome come pre-installed.

AdSense network
It wasn’t just traffic the critical ingredient for Google success. It could offer relevant and high-quality
content compared to any other portal, or search engine.
On the one hand, Google had figured out how to offer relevant ads by introducing AdWords with its
quality score. On the other hand, it needed to balance that with high-quality organic content from the
web. While Google did offer that by indexing the entire visible web, it managed to improve quite a lot
when it offered to any publishers (independently from their brand) the possibility to monetize their
content via the AdSense network. Comprising millions of websites around the world; those websites
allow Google to tap into their sites to place banners from businesses that want to advertise their services.
Google shares the advertising revenues generated from those banners with these publishers.

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Webmasters
A great payoff of Google is its ability to send qualified traffic to any site, based on searches people
perform. For instance, if I search for “car insurance” on Google, you will find a few text-based ads on
top of its search results. At the same time, you’ll also find many other organic results that didn’t pay a
dime to be featured there. This is possible because Google has a massive index of the web, and if that
content is relevant, it will be featured on Google’s first page. Being on Google’s first page might turn
in substantial income for those sites able to rank through it. In particular, web owners can submit their
website via Google Search Console (a platform to monitor the indexing of a site) to control how Google
sees the site. This allows publishers – independently from being part of Google AdSense – to “control”
their rankings via Google organic search engine. Millions of webmasters each day help Google index
their content, and make it easier for the search engine to keep a qualified index of the web!

Google key activities

Google’s mission is to “organize the world’s information and make it universally accessible and useful.”
This bold vision requires Google to keep innovating in the search industry, while it also looks forward
to new ways the web is developing. From voice search, visual search, machine learning, and more.
Google needs to invest first of all in a robust and secure infrastructure that makes it possible for the
company to handle each day billions of queries. This implies a few key activities:

● At a basic level, Google has to keep innovating its search algorithms. This alone requires
substantial investments.
● As voice search is growing it is critical that Google keeps innovating by also offering new
products. For instance, Google launched its new voice devices, such as Google Home, which
compete against other tech giants, like Amazon‘s Alexa and Cortana.
● Google still generated most of its revenues from advertising. A business model based on a
single source of revenue might not be sustainable in the long run. That is also why Google is
investing resources in betting in other areas that might lead to the next innovation.

Google’s value proposition

For a tech giant like Google, which has a sophisticated business model, based on a hidden revenue
generation, there isn’t a single value proposition. Instead, several value propositions will serve the
purpose of keeping key partnerships that allowed Google to scale up and let it today to maintain its
market dominance. Thus, if I had to summarize the fundamental value propositions those would be:

The value proposition for billion of users

Free search engine for billions of users around the world. This is how Google managed to grow quickly.
A great, reliable, and free service that allowed users anywhere in the world to find the information they
needed, fast.

Tools and productivity apps

Besides its free search engine, Google also offers a set of free tools and apps (to mention a few: Gmail,
Google Analytics, Blogger, Google Books, Google Chrome, and many others). Those free tools are
among the most used in the business world.

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Google advertising business
The core of the Google business model is advertising, focused on targeted text-based ads for businesses
offered via the AdSense network. Before Google existed,d there was no way for marketers to know in
detail all the conversion metrics of their ads. While Overture was the first in offering CPC advertising,
Google managed to scale it up at massive levels.

Google AdSense
Before Google disrupted the advertising world and took over the digital advertising market, a few
established publishers could make money via advertising. With its AdSense network, Google also
allowed small publishers to monetize their content. In a way, it was a democratization of the digital
advertising market, where anyone with the content that got the most eyeballs and attention could
monetize it, independently from its brand. Google AdSense is still an essential element of Google’s
value proposition.

Google customer relationships

The cash cow for Google is its AdWords network, made of a growing number of businesses looking to
sponsor their products and services. That implies two things. First, Google needs to keep offering
targeted ads that allow those businesses to generate leads. Second, Google is as worth as much as the
qualified traffic it can generate. This implies that Google needs to keep focusing on making sure that
users go back to its search results pages. Indeed, even if users do not pay for Google search results, they
are the products. As any attention merchant, Google is selling back their attention. That means Google
will need:

Salesforce able to support AdWords (now Google Ads) businesses

Offering the proper support to businesses part of the AdWords network requires a substantial investment
in business development people able to expand the list of companies that join Google’s advertising
network. This implies local initiatives, training, and support to those businesses.

Privacy
Companies like DuckDuckGo have built their business on Google's weakness in terms of privacy. If
those concerns are not addressed Google might be losing an increasing chunk of users, willing to switch
because of privacy concerns

Google customer segments

In terms of value creation, with its massive business model, Google has several “customers” not
intended only for businesses paying Google for service but also those people or organizations that
contribute to Google’s financial success. In that respect we have:

Free internet users

Internet users around the globe. Even though Google is a free service, Google‘s users are among the
most important “customers.” If Google lost them, there would be no business at all.

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Agencies, marketers, and businesses
Those who are bringing big bucks to Google are agencies, marketers, and businesses part of its Ad
Network. They are driven by the fact that Google is an incredible source of targeted, and qualified
traffic.

Publishers
AdSense Network Members allow Google to offer targeted ads on its web properties. It is important
that Google keeps offering those publishers enough incentives to keep monetizing their content via the
AdSense platform. I treat them here as “customers” because Google still needs to “convince” them to
use the AdSense platform to monetize their content.

Google key resources

Even though Google is a digital business, that might make you think the company has no real assets.
This is far from the truth. As of 2017, Google had $7.2 billion of contractual obligations, primarily
related to data center operations, digital media content licensing, and purchases of inventory. This
implies a few key resources:

● The most basic thing any site with a large number of traffic needs is a massive server
infrastructure. Back in the late 1990s when Google was still in the very initial stage at Stanford,
it brought down its internet connection several times, by causing several outages. That allowed
its founders to understand they needed to build up a solid infrastructure on top of their search
tool. Today Google has a massive IT infrastructure made of various data centers around the
world.
● Another element to allow Google to stay on top of his game is to keep innovating in the search
industry. Maintaining, updating, and innovating Google‘s algorithms isn’t inexpensive. Indeed,
in 2017 Google spent over $16.6 billion on R&D, which represented 15% of its total revenues.

Google distribution channel

I believe that one of the vital ingredients to Google’s success was its distribution strategy, since its first
few years of operations. That is also why Google relies on:

● Global sales team which uses business development to keep growing Google Operations
● Google deals and partnerships that bring it on billions of devices in the world

Google cost structure

With its over $110 billion in revenues in 2017, Google reported a $12.6 billion in net profits. This
implies a few critical items in its income statements. Traffic acquisition cost is a crucial metric to assess
Google’s ability to generate value over the years. TAC stands for traffic acquisition costs, and that is
the rate to which Google has to spend resources on the percentage of its revenues to acquire traffic.
Indeed, the TAC Rate shows Google’s percentage of revenues spent toward acquiring traffic toward its
pages, and it points out the traffic Google acquires from its network members. In 2017 Google recorded
a TAC rate on Network Members of 71.9% while the Google Properties TAX Rate was 11.6%.

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 ● As we’ve seen R&D costs represented 15% of its total revenues, or $16.6 billion
● Sales and marketing represented 11.6% of its revenues or almost $13 billion
● Data Centers costs also represent another good chunk of Google cost of revenues

Google revenue streams

Google business model can be broken down into three main lines:

● Google advertising network

● Google other revenues (consisting of Apps, in-app purchases, and digital content in the Google
Play Store; Google Cloud offerings and Hardware)
● Google other bets

Key takeaways
The business model canvas is a model that helps you have an overall strategic vision of your business.
It comprises nine building blocks. Those building blocks are critical to assessing your long-term
strategy. This is one of the methods you can use. To sum up, the nine building blocks are:

● Key partners.
● Key activities.
● Value proposition.
● Customer relationship.
● Customer segment.
● Distribution channel.
● Cost structure.
● Revenue stream.

Each of those blocks is not independent of each other. In fact, in many cases, they are strictly tied to
each other. And from the interactions between them, you can build a sustainable business model able
to unlock value for your organization and other players that are part of its growth.

Beyond the Business Model Canvas And Into The VTDF

Framework
What if we want to build, analyze, or dissect a tech business model? For that, the VTDF framework
will help! A tech business model is made of four main components: value model (value propositions,
mission, vision), technological model (R&D management), distribution model (sales and marketing
organizational structure), and financial model (revenue modeling, cost structure, profitability and cash
generation/management). Those elements coming together can serve as the basis to build a solid tech
business model.

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 VTDF Business Model Template

Value model
In the value model we want to answer three core questions:

● Vision: What’s the long-term hard problem you’re solving?

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 ● Mission: How do you get closer to achieve this hard problem in the short-term?
● Value Proposition: What use cases do we prioritize, as they are in target with our customers’
needs?

It usually all starts with a value model which comprises:

● An opportunity: the size of the opportunity will be determined by whether the market exists,
it’s still building up, and its growth potential. From the opportunity, it’s possible to evaluate the
potential market size (usually tech companies look at TAM).
● A problem to be solved: a problem can be practical, or it can go beyond that. Companies like
Nike and Coca-Cola focus most of their efforts on-demand generation. This also applies to tech
business models. Before the iPhone people didn’t know they needed a smartphone in the first
place.
● A set of value propositions: from the above, a company will develop a core value proposition.
As it scales it will be able to satisfy a set of value propositions, which is the glue that keeps
together customers and the company.
● Mission and vision: as the company builds up its various models, it also develops its own core
beliefs, which are comprised of its mission and vision.

Value propositions

A value proposition is about how you create value for customers. While many entrepreneurial theories
draw from customers’ problems and pain points, the value can also be created via demand generation,
which is about enabling people to identify with your brand, thus generating demand for your products
and services.

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Mission and vision

A mission statement helps an organization to define its purpose in the now and communicate it to its
stakeholders. That is why a good mission statement has to be concise, clear to be able to articulate
what’s unique about an organization, thus building trust and rapport with an audience.

Technological model And R&D Management

Continuous Innovation: How do we handle engineering resources to sustain continuous innovation for
business model expansion? Breakthrough Innovation: How do we handle engineering resources to
promote breakthrough innovation for business model reinvention? The technological model is the
enhancer of the product, and it helps merge together the value proposition with the distribution model.
When engineering is done right, it helps bridge the gap between what customers still miss, the product,
and the way the product is distributed. The technological model will help satisfy the need for a larger
and larger portion of the market. From early adopters to potential laggards. This will determine the
ability of the company to scale up.

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In his book, Crossing the Chasm, Geoffrey A. Moore shows a model that dissects and represents the
stages of adoption of high-tech products. The model goes through five stages based on the
psychographic features of customers at each stage: innovators, early adopters, early majority, late
majority, and laggard. In the technological model, the way R&D is managed to produce continuous
innovation (to sustain the linear growth of the business) and breakthrough innovation (to enable long-
term success of the business) is critical.

Distribution Model
● Marketing & Sales: How do we communicate and sell the product to the right audience?
● Product Engineering: How do we enable built-in features that help us distribute the product?
● Partnerships: Who do we partner with to expand our audience?
● Deal Making: What deals do we close that help us get to our audience?

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A distribution channel is the set of steps it takes for a product to get in the hands of the key customer or
consumer. Distribution channels can be direct or indirect. Distribution can also be physical or digital,
depending on the kind of business and industry. The distribution model helps to bring the product into
the hands of customers. The company can leverage engineering, marketing, sales, or all of them, to
make the product fit with the market, via its distribution. That is why, based on what problems the
product solves and for whom, it will have an organizational structure more skewed toward engineering
and marketing, or engineering and sales, or perhaps a mix of the three. Other things like partnerships
and deal making are also part of the distribution model.

Financial model
● Revenue Generation: How does the company make money?
● Cost Structure: How does the company spend money to make money? (cost of sales)
● Profitability: Is the company profitable?
● Cash Management & Generation: Is the company cash positive?

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In the corporate finance world, the financial structure is how corporations finance their assets (usually
either through debt or equity). For the sake of reverse engineering businesses, we want to look at three
critical elements to determine the model used to sustain its assets: cost structure, profitability, and cash
flow generation. The financial model is what enables the company to keep generating enough cash to
sustain its operations, not only in the short-term but also toward R&D and innovation. And it is made
of several components:

● Revenue model.
● Cost structure.
● Profitability.
● And cash generation and management.

Revenue model

Revenue modeling is a process of incorporating a sustainable financial model for revenue generation
within a business model design. Revenue modeling can help to understand what options make more
sense in creating a digital business from scratch; alternatively, it can help in analyzing existing digital
businesses and reverse engineer them.

Cost structure

The cost structure is one of the building blocks of a business model. It represents how companies spend
most of their resources to keep generating demand for their products and services. The cost structure
together with revenue streams, help assess the operational scalability of an organization.

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Profitability
From how the company generates revenues and its cost structure, profitability will be determined. When
the revenue model isn’t yet efficient enough to cover up or sustain the cost structure in the long-term,
there is when we have a lack of profitability. At the same time, it might happen that a company is
profitable but it lacks cash, given its overall financial model. Or it might happen that a company has no
profits or very tight margins, and yet it generates a continuous stream of cash.

That is why it’s critical to look at the next element.

Cash generation and management

The cash flow statement is the third main financial statement, together with the income statement and
the balance sheet. It helps to assess the liquidity of an organization by showing the cash balances coming
from operations, investing, and financing. The cash flow statement can be prepared with two separate
methods: direct or indirect. Profitability doesn’t tell us the whole story. We need to look at cash
management. A company like Amazon has been running at very tight profit margins for years, and yet
generating massive amounts of cash, invested back in its operations. A company like Netflix has been
generating good profit margins but running with a cash negative model. This isn’t good or bad in
absolute terms, but it gives us an understanding of the company’s financial model. Perhaps, Netflix,
with a negative cash flow model, it has been investing substantial cash in the development of original
shows, which are both critical to generate revenue and also essential to its brand‘s strategy. Thus,
revenue generation, distribution, and marketing come together here.

Key takeaways
According to the VTDF framework, a tech business model can be broken down into four sub-models:
● Value model (value propositions, mission, vision), to answer questions, such as:
Vision: What’s the long-term hard problem you’re solving?
Mission: How do you get closer to achieve this hard problem in the short-term?
Value Proposition: What use cases do we prioritize, as they are in target with our customers’ needs?
● Technological model (R&D management), to answer questions such as:
Continuous Innovation: How do we handle engineering resources to sustain continuous innovation for
business model expansion?
Breakthrough Innovation: How do we handle engineering resources to promote breakthrough
innovation for business model reinvention?
● Distribution model (sales and marketing organizational structure), to answer questions such
as:
Marketing & Sales: How do we communicate and sell the product to the right audience?
Product Engineering: How do we enable built-in features that help us distribute the product?
Partnerships: Who do we partner with to expand our audience?
Deal Making: What deals do we close that help us get to our audience?
● Financial model (revenue modeling, cost structure, profitability, and cash
generation/management), to answer questions such as:
Revenue Generation: How does the company make money?
Cost Structure: How does the company spend money to make money? (cost of sales)
Profitability: Is the company profitable?
Cash Management & Generation: Is the company cash positive?
From the balance and mixture of those four elements a viable business model is built

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Competitor Analysis with the VTDF

It’s possible to identify the key players that overlap with a company’s business model with a competitor
analysis. This overlapping can be analyzed in terms of key customers, technologies, distribution, and
financial models. When all those elements are analyzed, it is possible to map all the facets of
competition for a tech business model to understand better where a business stands in the marketplace
and its possible future developments.

Why competition in the business tech world looks slightly different

There are several ways to look at the competition. However, in a digital world, the concept itself (for
now) has become more fluid. Indeed, when you look at companies like Amazon, Tesla, or perhaps
Google, where would you start? True, each of those companies has a main market/industry (Tesla =
electric cars, Amazon = e-commerce, Google = search), and yet when we have a closer look at what
those companies do we realize there is more to it. Indeed, as those companies operate at the edge of
business and technological innovation, oftentimes they place bets on new markets and industries that if
proven to develop, can become whole new industries. So where do we start?

Breaking down the competition in the business tech world

When it comes to competition in the business tech world, we’ll analyze it from a few perspectives:

● Current Customer Overlap: who are the key customers that are currently getting value and
sustaining the business?
● Current Technology Overlap: what is the key technological advantage that sustains the value
proposition of the business?
● Current Distribution Overlap: what is the key distribution channel the company is using to
enhance the use of the technology that enhances the value proposition?
● Current Financial Model Overlap: is the company using equity/capital, debt/financing to
grow, or perhaps is it bootstrapping?

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Once looked at the four components above, we can look at a fifth one:

● Future Technology Development: what technologies is the company developing that can help
develop a whole new market?

Let’s see each of those elements in detail.

Current Customer Overlap

Who are the key customers that are currently getting value and sustaining the business?

Current Technology Overlap

What is the key technological advantage that sustains the value proposition of the business?

Current Distribution Overlap

What is the key distribution channel the company is using to enhance the use of the technology that
enhances the value proposition?

Current Financial Model Overlap

Is the company using equity/capital, debt/financing to grow or perhaps is it bootstrapping?

Future Technology Development

What technologies is the company developing that can help develop a whole new market?

Case Study: Tesla

As an electric automaker and builder of sports cars and now trucks, Tesla’s competitors comprise
companies like Ford, Mercedes-Benz, Porsche, Lamborghini, Audi, Rivian Lucid Motors, Toyota, and
more. At the same time, Tesla is an electric energy production and storage company (SolarCity); it

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competes with Sunrun, SunPower, and Vivint Solar. And as an autonomous driving company, it
competes with companies like Zoox, Waymo, and Baidu with self-driving software. Tesla isn’t just an
automaker. Its business model spans across the electric-only car industry (a once blue ocean market that
Tesla helped open up). Tesla is also an electric generation and storage company, with SolarCity’s
acquisition, which is an essential element of the Tesla business model‘s future success. It is enabling
the ecosystem that will make Tesla sustainable as a company in the long-term. In addition, Tesla is also
investing in autonomous driving players. For that, we’ll have to analyze Tesla from these three
perspectives.

Automaking
Within the automaking segment, Tesla has over the years diversified its products‘ lines, to cover
different segments of the market. When Tesla entered the market, as a go-to-market strategy it had to
enter it (nonetheless Elon Musk’s long-term vision to make the electric car available to the masses) with
the Roadster model.

SPORT & PERFORMANCE

The primary models covering this segment is:

● Roadster: here some of the competitors are Dodge Challenger, Porsche Chiron, and Bugatti.
● Model S: in this segment, Tesla competes with players like Mercedes S-Class, BMW 7 Series,
Porsche Panamera, Audi A7 & A8, and more.

SUV
The primary models covering this segment is:

● Model X: here some of the competitors are BMW X5, Mercedes-Benz GLS-Class, Volvo
XC90, Porsche Cayenne.
● Model Y (compact SUV): in this segment, Tesla competes with Renault Zoe, Nissan LEAF,
Volkswagen e-Golf, Audi e-tron and more.

TRUCK
In this segment, Tesla just launched the Cybertruck:

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Cybertruck’s competitors comprise Rivian, Ford, Bollinger.

CITY CAR
Tesla has finally its mass-market product, the Model 3. This model competes with models such as BMW
Series 2,3,4,5 Mercedes Class C, CLA, CLS, Audi A3, A4, A5, Lexus, ES, GS, and many others.

Energy Generation & Storage

Tesla acquired SolarCity back in 2016, for $2.6 billion, and with that, it competes in the electric
production and storage industry with players like SunRun, SunPower, Vivint Sonar, Trinity Solar, and
SolarWorld to mention a few.

Autonomous driving
Tesla’s Autopilot is one of the key ingredients of its technology and one of the most interesting future
developments for the company. In this segment, Tesla competes with other autonomous driving
companies like Zoox (bought by Amazon), Waymo (an Alphabet bet), and Baidu.

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TAM-SAM-SOM

When launching or running a business, the question “who’s your target?” it often happens to hear
answers like “everyone can use my product or service.” This implies a complete misunderstanding of
the market. This can be bad for several reasons. First, it might make it harder to prioritize and focus on
a few key partners who might help the business snowball and scale. For instance, when PayPal launched
as pointed out by Reed Hoffman in Blitzscaling the company had to shift its focus four times in a short
period. When they identified their power users on eBay, they focused and prioritized on that niche
market. Thus, PayPal first dominated that niche and then moved forward. Second, if you need external
resources, such as lending and financing being able to present the total addressable market (TAM) is a
crucial element to make the value proposition for those investing in your business compelling enough.
For that matter, a few crucial questions, such as who needs your service, how much can I charge for it,
and what players are already in that market helps to find a few elements to compute the TAM. To
evaluate a business opportunity, you need to look into three metrics:

● TAM or total addressable market.

● SAM or serviceable addressable market.
● SOM or serviceable obtainable market.
Let’s start with a practical and straightforward example. Imagine the scenario you’re opening a
barbershop in Rome. Now your TAM might be any man in the world with a beard. However, of those
how many can you reach and service? It would also be great to say that your total serviceable
addressable market is those men’s beards. However, this is not realistic. Instead, to be realistic, you
might start from the neighborhood where your barbershop will be located. This means that in a
population of a hypothetical thousand people in the neighborhood, only 50% are men and of those men,
only 50% have a beard. This means your total serviceable market is now only two-hundred-fifty men
(a thousand divided by two, twice). Yet, you’re not the only barbershop in the neighborhood. It seems

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like another person had your same idea, and her barbershop serves already half of those men’s beards.
This means that your potential share of the market might be 50% of the serviceable market, or a hundred
and twenty-five people. This is your SOM. Although this is a simplified example, that is a good starting
point to understand the difference between TAM, SAM, and SOM. You don’t need to perform
complicated analyses to start understanding those concepts. All you need is to start thinking in realistic
terms about who you're trying to serve!

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Week Five: M.O.V.E. Framework (Time For Action)

I’ve devoted years of my life, putting together all the materials and resources that have helped me along
the way of becoming a digital entrepreneur and head of business development for a tech startup. I
thought it just made sense to document those things along the way so that I could form a more in-depth
understanding by writing about it, and you, my reader, could gain insights and expertise, without
spending hours and hours of research. In this post, I’m assembling all the resources you need to get
going with a business if you’re ready to leap becoming a digital entrepreneur. I suggest there are four
key areas when starting your business, which we’ll group under the acronym of MOVE, standing for:

● Mindset.
● Operations.
● Velocity (momentum).
● and Execution.

Each of those areas needs to be mastered to design, launch, and iterate a successful business. This isn’t
a size fits all model, neither the only one possible. But it is a model that can help you get “moving”.
Let’s look at each of them.

Mindset
When starting a business, in particular, a digital business, you should have a 10X mindset. The reason
is you might be starting a venture in a competitive space; none knows your brand, you might be missing
the budget to grow it steadily. Thus, you need to think and act smart. You can’t rely on conventional
wisdom, or already walked paths. While business best practices will be your baseline, you will need to
have a growth mindset, where each action you take needs to be measured and deemed successful if it
gives you massive traction.

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Never run out of ideas

A common belief is that ideas only come to creative people. In reality, we all have a flow of creativity
wired in our minds. We just need to develop the right mindset, and for that reason, the guide below can
help you achieve just that:

Why anyone can be creative

The common belief is that you are either born creative, or you will never be. However, this belief has
been long contradicted by recent discoveries in neuroscience, especially tied to the plastic structure of
our brains. Michael Merzenich, the author of Soft-Wired, explains:

Whatever the circumstances of a child’s early life, and whatever the history and current state of that
child, every human has the built-in power to improve, to change for the better, to significantly restore
and often to recover. Tomorrow, that person you see in the mirror can be a stronger, more capable,
livelier, more powerfully centered, and still-growing person.

This is not rhetoric, but the fruit of a scientific inquiry that over the last decades has shown how our
brain is elastic and plastic. Which in practice means that with the proper habits in place you can tweak
your brain to work in your favor. And in particular, you can enhance your creative flow. Thus, having
a continuous flow of ideas, that you can test in the real world, to build viable business models.

Getting into the Flow process

Have you ever experienced a feeling of oneness with the activity you were performing? In short, you
got to the point of mastering a task, like playing the piano, writing, or running, that at a certain stage,
you felt a feeling of “flow.” According to psychologist Michael Csikszentmihalyi, author of Flow, that
feeling, which he calls “flow” is a sort of balance between boredom and anxiety, where both are at a
level that becomes a flow state of mind. Therefore, when you’re challenged in, for instance, playing the
piano, you will feel a minimum level of stress; at the same time though, that stress will be coupled with
a level of skills which is aligned to the fact that if you do improve, you’ll also be able to play piano
better than before. That motivation to improve will move you toward this state of flow, which, according
to Michael Csikszentmihalyi, is at the core of improving at anything you do. And you can leverage this
concept to enter into the creativity zone.

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Creativity can be manufactured
Michael Csikszentmihalyi also authored a book, called Creativity, which is a window into how to
understand the creative process and therefore enhance your own creativity, to have a continuous flow
of ideas which you can experiment back into your business. More precisely, Csikszentmihalyi divides
the domains that can help you tap into the creativity flow in:

Acquisition of creativity and interest

He breaks it down further by looking at three essential habits to master:

Curiosity and interest

In business, we like to do things with an objective. However, often, creativity is about enjoying and
paying attention to things for their own sake. Thus, strengthening your curiosity and interest can be
done by focusing our attention on new things, or things that surround us, trying to look at them from
several perspectives and with a fresh and new eye. This process can be further enhanced if a journal is
kept, which is an excellent way to record this process and learn about your internal state of mind and
how to express it. Another meaningful way is to go for things that spark your interest, beyond the
domain of business, which can sharpen your creative flow, that in turn might be applied back to the
business world when you expect the least.

Cultivating flow
The state of flow is fundamental to get in the creative process and come up with ideas that might impact
your life and business. This state of flow implies focused attention on things around you. That also
means trying to control as much as possible the environment around you.

Habits of strength
Try to control your schedule in a way that you find the rhythms that work out best for you. For instance,
if at night, your creative flow is at its height, take a bit of time to put down your ideas, which you might
want to experiment throughout the week or month. Also enable yourself to have some time to relax
your mind and reflect, without distraction. As many entrepreneurs like to be always busy, they hardly
find some time to reflect. However, relaxation and reflection, free from any activity, can be an incredible
enhancer for productivity. Just doing something differently from how it is usually done, and by breaking
the usual schedule, can also help boost the creative flow, and work as an idea generation strategy.
Another important strategy is to make sure your office or daily environment is organized in a way that
can help the creative process. In the long run, you want to maximize the things you like, and gradually
get rid of the things you don’t like. I know it might sound trivial or unfeasible for some. But remember,
we’re talking about the long-run. If you live a frustrating life, there will probably be no space left for
creativity, as invasive, distracting, and negative thoughts will take control over you. Thus, create
leverage by time to time, to organize your life so that most of the time, you like what you do. This will,
in turn, enhance your energies, thus making your creative flow at the point in which ideas will come
naturally, and the only thing left is to validate them!

Mastering your internal traits

Mastering your internal habits is about initially manipulating on purpose your attention to focus on
things differently. To develop a new perspective, to look at things from different angles. Over time this

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exercise, which might be extremely hard in the short term, will become automatic. This also implies
challenging yourself to develop positive traits you didn’t think you could. One suggestion from
Csikszentmihalyi is to shift from openness to closure, thus moving from being open and receptive but
also hard-driving and focused.

Apply your creative energy

According to Csikszentmihalyi, applying your creative energy can be reduced back to three key
domains:

Problem finding
Which is about how to find new ways to look at things around you. By learning how to express yourself,
learn how to evaluate several viewpoints, consider several solutions to each problem. Learn how to
implement those solutions to specific problems.

Divergent thinking
Divergent thinking is about learning how to come up with a great number of responses to problems.
This implies producing as many ideas as possible, without focusing on whether those ideas are good,
for now. Try to have diverse ideas, and look at things from two opposite sides. In short, if you’re
arguing, try to look also at the other side to understand that position. Thus divergent thinking is about
putting the necessary energy to get outside the routine thinking process.

Choosing a special domain

Many creative people might be tempted to focus on too many domains. However, as you progress, you
might want to pick a primary domain, which as you become good at it will improve your creative flow.
This, in turn, will also expand the capability to see things in a different fashion.

Funneling ideas
Now that you set yourself to have as many ideas as possible (it might take a while to get into the creative
flow) it is time to funnel those ideas into a working business model. In order to funnel those ideas you
might follow three simple suggestions:

Don’t be scared to throw 99% of your ideas

As you go from jotting down your ideas to thinking about executing them. You’ll figure that most of
them are not viable in the first place. You won’t even need to spend money or time to understand that,
it will be almost automatic. It’s weird how our brain when ideas first strike, they make us feel like it’s
the most ingenious one. Yet, at a further reflection, just a few hours later, when we sit down and think
about executing it becomes worthless right away.

Are you passionate about it? Or are you willing to put together a team that might
be passionate about it?
I know that some of you might think that business is not about passion but about the opportunity. This
is true only in part. Businesses that start from scratch before they take off (except on very rare occasions)
take time to build. Thus, you might want to remove from the table those ideas you’re not passionate

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about. Alternatively, you might want to keep those ideas, if you are passionate about the project, and
about the prospect of putting together a team that might be passionate about it. This will be extremely
important to pass through the first phase before the flywheel is ready to gain traction and momentum.

Idea validation: Is there a market demand?

At the stage in which you’re left with those ideas that seem still good when you sit down, and you think
about executing them. It is time to understand whether the market might want them. For that sake
frameworks like pretotyping, or the leaner canvas (keep reading) can help! Those are very fast
frameworks to validate your ideas, before wasting time and resources in trying to build something none
will want. A market doesn’t mean an industry. Also a niche market, where a thousand people can benefit
and are willing it has the potential to become a six figures business in no time.

Find your sweet-spot

The Bud Caddell diagram helps you cut through the noise of understanding whether a business
idea has the potential for you. It enables you to assess if you want to deal with a problem, if you
can do it well and if people are willing to pay you for that. Based on a few key questions, you can
understand if you're ready to launch a successful business in the long run.

Starting a successful business is not an easy thing to do, as most startups fail in the first years of
operations. For that matter, you need to have the resources to get going in the first stage and have things
take off as quickly as possible. However, in many cases, a startup will really take off and become a
mature and successful organization in at least 5-10 years from its inception. That requires a huge amount
of stamina, passion, and resources to get going. Therefore, in many cases, to launch a successful
business, it is important to balance two dimensions:

● Personal dimension: are you passionate about the business you’re stating? The problem it is
solving? Or about managing the team that will solve that problem?
● Financial dimension: is there a market ready to respond to your potential product? If not, do
you have enough financial resources to get going until there will be a market-ready for your
product?

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Those two dimensions are critical to launching a successful company. Passion (either for the business
or the team that will manage it) is critical to get going for the long-run and even when things seem not
to work out. The financial dimension is critical, either to enable your business to gain traction (if there
is a defined, existing market to start with). Or to be able to get going even when the market is not ready
yet. Think of the case of a high tech product, based on new technology. You will need funding to make
sure you will bring that product to market effectively. The third dimension, which is about feasibility,
is less important compared to the two above. When you do balance those dimensions, you are on the
right path.

In search of your blue ocean

A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested
markets are created. At its core, there is value innovation, for which uncontested markets are created,
where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies
following a blue ocean strategy offer much more value at a lower cost for the end customers. It’s easy
to start a business in a crowded space. It doesn’t take much searching or tinkering. You just need to
look at what others are doing and go for it. That’s the reason why everyone wants to start her own
restaurant, even if it will hardly make any money. And if you need to start a business as a means to give
you the financial resources for you and your family that is fine.
However, if you have the option to build the kind of business you want, you might want to search for
your blue ocean. A blue ocean is an uncontested space where you can build your business and become
the key player.

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Find your niche, or better yet your microniche

Another common mistake when starting a business is the complete lack of definition of what kind of
business you want to build and how you want to be recognized. In short, call it as you like, positioning,
targeting, niche, or whatever. What matters is to find your perspective. Building a successful business
is about telling your side of a story, finding your unique perspective. What is that you do that makes
you different, why would people both buy from you in the first place?

How do you pick a microniche?

Let’s start with a simple example. Let’s say you’re opening up a bookstore, looking for opportunities
to kick off the store. Where do you start? The platform with the most data when it comes to books is
definitely Amazon. You start from the Amazon broadest categories to start looking for opportunities:

There was a time when it was possible to stop there. As the web was not such a crowded space for you
to start a business. However, nowadays you need to a lower level to look for your microniche. Thus,
saying something like “I’ll start from literature, or historic fiction” isn’t enough. Those are too broad.
So where do you start? Go a level down:

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Within Amazon‘s literature and historical fiction, we can identify a further category for us to start with.
For this example I took something like “historical fiction” and went a level down:

I selected for instance, “Renaissance” as the key area within the micro-target I’m picking to kick off
my business distribution strategy. Thus the process looks something like that:

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Within that microniche you can see how the bestseller has quite some substantial reach:

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The interesting thing is that what might actually seem a very small audience turns out to be a decent
audience for a business which is starting out. Indeed, by crossing the data from Amazon to the keyword
volume for the book’s author “Johanna Lindsey” you can see how she is a micro-celebrity:

Example of how a microniche analysis uncovers the audience around a micro-celebrity and it opens
up opportunities to kick off your business distribution (data: SEMRush)

It is interesting to notice how we uncovered a potential audience made of over four thousand people
each month, by just doing simple research on Amazon and by crossing that with keyword volume. Thus,
if you were to start a bookstore in that category you might want to make sure to have all the books of
that author available, create a content strategy around it. And for instance, invite the author for an off-
line session with her fans. While for instance, also transmitting that live online so that you can reach a
wider audience and create the first set of loyal customers to your bookstore!

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Pretotype

Pretotyping is a mixture of the words “pretend” and “prototype” and it is a methodology used to validate
business ideas to improve the chances of building a product or service that people want. Another huge,
and common mistake many entrepreneurs or aspiring entrepreneurs make when starting a business is to
focus on technicalities instead of asking the most important question: do people want this? In short, idea
validation is extremely important. You can use several frameworks for that, as the lean canvas. Or you
can use a technique called pretotype, which I covered with Alberto Savoia in an interview on the blog.

Iterate up to market-fit

When you get into the process of quickly validating your ideas, to get past the most difficult stage;
where you need to find that moment when customers finally get what you’re offering them, at the point
that you need to barely explain what you’re selling, as they will buy with limited friction.
Businesspeople like to call this product-market fit. Once again, the definition is not important. What
matters is that you pass that stage to build a valuable business, quickly.

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Operations
In a digital business, setting up the operations doesn’t necessarily mean to build up physical facilities.
Instead, that is about drafting a business model that will allow you to be competitive in the marketplace.
This process isn’t a one-time thing. Indeed, before your business model would take off, you’ll need to
iterate it over and over again. When will your business model be competitive? Primarily when it has
reached:

● Recurring, sustainable income.

● Flywheel effects.
● And fat margins.

In short, the right business model will be able to have a built-in monetization strategy that generates
income, based on repeatable processes, that are sustainable in the long run. Also, your business model
will need to leverage on a flywheel effect, where monetization powers up your brand, rather than
diluting it. In other words, when you start making money, that monetization needs to reinforce your
brand, so that more people will want to deal with your company. As your brand gains momentum, you
can leverage it to enjoy higher and higher margins. When you enjoy fat margins (there isn’t a fixed
percentage, but it depends on the industry and competition), that’s when you’ve mastered the
operational part. In general, the more the gap between revenues and costs increases (revenues grow
faster than costs), the more you’re on the right path to building a long-term competitive advantage.

Stay lean

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Unless you got enormous funding for your business, you want to follow a lean methodology approach.
This will help you to stay in business for as long as possible while tuning your business for the market.

Stay focused and SMART

Back in the 1970s, Intel was among the most respected and admired companies in Silicon Valley.
During that time Intel’s CEO, Andy Grove, was the man who managed to drive organizational change.
Andy Grove did that via a goal-setting process called OKRs or objectives and key results. Where the
objective is the direction, toward which the organization needs to be in the medium term. And the key
results are milestones, things that allow the company to get there. Those key results need to be easily
trackable, understandable and shared across the company. While you will be tempted to test many things
out, and you do want to test many of them. You still want to keep a focus on 2-3 key objectives that can
have a massive impact on your business.

Another framework for goal-setting to use at a personal level is the S.M.A.R.T. framework. A SMART
goal is any goal with a carefully planned, concise, and trackable objective. To be such a goal needs to
be specific, measurable, achievable, relevant, and time-based. Bringing structure and trackability to goal
setting increases the chances goals will be achieved, and it helps align the organization around those
goals.

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Stay fast and frugal
Speed is critical in business and you need to be very quick, especially when you’re starting things out
because in order for them to gain traction it will initially take a lot of push. This business plan will help
you to come up with a business model to test in the marketplace:

Velocity and Momentum

At this stage, before you go to the execution stage, it is crucial you know what distribution channels
you can tap into. For that matter, you need to prioritize the acquisition or growth channel that might
work best, based on the strategy you picked. Instead of trying to tap into all the possible distribution
channels, mastering one, in the short run is probably the most effective strategy in many cases. For that
matter, you need to understand whether you might want to leverage business development, growth
marketing, traditional sales, and marketing or else.

Switch on the engines of growth

In the Lean Startup, Eric Ries defined the engine of growth as “the mechanism that startups use to
achieve sustainable growth.” He described sustainable growth as following a simple rule, “new
customers come from the actions of past customers.” The three engines of growth are the sticky engine,
the viral engine, and the paid engine. Each of those can be measured and tracked by a few key metrics.
Once all the conditions above are met, you need to push on growth. Eric Ries points out that you have,
usually, three engines of growth you can leverage on.

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Growth framework

Growth hacking is a process of rapid experimentation, coupled with the understanding of the whole
funnel, where marketing, product, data analysis, and engineering work together to achieve rapid growth.
The growth hacking process goes through four key stages of analyzing, ideating, prioritizing and testing.
It’s very important that at this stage, you have a growth framework in place to pass the several stages
of growth you need to build a sustainable company.

Execution
When you start executing, that is when you will be able to gather critical feedback to understand whether
or not you’re moving in the right direction. This is an essential part of the MOVE model. In this phase,
you need to gather feedback on several areas:

● Is the business gaining momentum? Remember, momentum will be judged on an

unconventional, two-fold, or 10X growth basis.
● Does the market like my business model? You can decide that by growth or profitability or
both.
● How effective is my strategy? Is the real world validating it or do I need to go back and tweak
my business model?
● What distribution channel is working so far? You need to double down on what’s working.
● Am I spending too much time theorizing? If so, go back to the execution phase to gather more
feedback from the marketplace!

Key takeaways
When you start moving, you also need to make sure you’re going in the right direction. That is why, in
the execution phase, you need to reconsider whether what you’re doing is helping you achieve the 10X
growth you were looking for at the beginning of the MOVE model. Or whether your business model
generates growing margins. Or yet, whether you need to leverage network effects to enhance growth.

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Moving back and forth in the MOVE model might help you gain traction to generate a long-term
competitive advantage!

The power of the brand and your brand identity

An effective business model has to focus on two dimensions: the people dimension and the financial
dimension. The people dimension will allow you to build a product or service that is 10X better than
existing ones and a solid brand. The financial dimension will help you develop proper distribution
channels by identifying the people that are willing to pay for your product or service and make it
financially sustainable in the long run. In the business world, it is getting more and more prevalent the
approach of testing all it’s possible to make your business successful and prioritize the things that work.
However, building up a successful business is also, and especially a matter of choice and identity. In
short, if you’re building a company that might well be the representation of your ideas and beliefs
applied to business. As such, it is fundamental to have in mind what kind of business you don’t want to
build. Therefore, you will need to set some boundaries in building up your company.

What’s your essence?

A Business Model Essence according to FourWeekMBA is a way to find the critical characteristics of
any business to have a clear understanding of that business in a few sentences. That can be used to
analyze existing businesses. Or to draft your Business Model and keep a strategic and execution focus
on the key elements to be implemented in the short-medium term. While business models are complex
abstractions, when you start a business, that is the best time to define its essence. What are the core and
critical characteristics you want to build your business around?

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Master the problem

Leaner Canvas by Ash Maurya of LEANSTACK

If you’re building a business, you need to master your customers or be clear about the kind of customers
you want. That might sound counterintuitive, yet the way you design your business model, it will also
depend on the kind of customers you’ll attract. And the most important aspect you need to focus on is
to understand what problems they have and solve them. That is the simplest route. Two things to
highlight. First, solving a problem is not about functionality alone. Solving an emotional problem is as
important as solving a functional problem in certain industries. If you think about luxury items, a purse
is not an object where a woman can deposit her stuff. A purse represents a woman’s status. In short,
that woman will feel special, act as such by wearing that purse. This is the whole logic of brand building
and demand generation. Thus, as an entrepreneur, if you’re thinking about a bag as a functional object
you’re missing the main point. Instead, you need to start from the psychology of your ideal customers
and understand what problems and desires they have, which connects to the second point. Second, from
the encounter of functionality and demand generation, that is how you build a successful business. There
are certain industries where functionality matters more than perception. And other industries where
instead perception and the ability to generate demand can be very powerful. Understanding when to
leverage functionality and when to leverage on perception is a key element of your business strategy.
For instance, in the digital world, we might think that most of the value is driven by algorithms that
objectively score and rank things out. However, that is not the case. Algorithms are driven by business
logic, and perception is shaped to drive and incentivize users to act in a certain way. For instance, in
2019, Twitter redesigned the whole platform. In a story by WIRED about the Twitter platform redesign,
Stone, Twitter‘s co-founder highlighted, referring to the past years, “we were just working as fast as
we could…we weren’t trying to make it look good at all.” Yet when Twitter understood the importance
of changing the perception on its platform beyond growth metrics, that is also when it started to invest
massive resources on its redesign, to nudge people to act on the platform in a certain way. This is
extremely important to understand. Because a redesign is not just a piece of new code added to the
platform, but it represents the essence of the business. How you want your business to be perceived and
how ideally you want people to act in the context of the boundaries you defined with your core values.

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When you build a business you get your chance to build a context. Would you live in a context that you
don’t like or agree with?

Building companies to mastering the problems

I want to finish this up by emphasizing how often business education focuses on the logic or the study
of fixed case studies where the problem is well known. However, the real world is much subtle, the
problem is in most cases, hidden, and as an entrepreneur, in many cases, you might understand
instinctively what your customers want, even though you can’t really explain it and only after years you
might come to really have also the logical understanding of what makes your business sound in the first
place. That’s the normal path for an entrepreneur. You spend a life, solving problems, and as a result,
build valuable companies with a built-in instinctive understanding of those same problems. This is what
I’d call a viable business model.

Other premium resources:

● The 100+ Business Models Book
● The 100 Strategy Frameworks
● The BMI Course Bundle

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