Entrepreneur Clinic – Value Proposition

Monique: Welcome to this week’s edition of Entrepreneur Clinic with me Monique Chambers and my guest this week Simon Azzopardi. Today we’re going to be talking about how to build your business plan.
Simon, so why do you actually need to write a business plan?

Simon: A business plan essentially what it does is, it puts your idea, your plan what you want to do from a business perspective on paper and that allows you to self criticize or look at this document and understand whether it makes sense. Another reason why you would want to do it is to communicate this plan or this business idea to a third party like a bank or an investor or someone other stakeholders that you’d want to get involved.

Monique: What sort of things should you include in a business plan? What are the basic necessities? What points need to be in there?

Simon: I think rather than looking at what points, I think the first question you need to ask is the reason why you’re writing it. If you’re writing a business plan, and that is to sell an idea to yourself, because you are not convinced of it, then a business plan might not be the right way of going down the whole planning stage. There are other tools you can use for testing hypothesis or testing whether a business venture makes sense and a business plan will come much later when you’re more convinced of the plan, rather than having only one road, you have a thousand roads that you can go down.

But yes, essentially the elements that you would include in a business plan is have to be obviously your finances. I think that is a critical thing making sure you get your numbers right in terms of costings, and predicting what type of revenues you can get. And then looking at the various other factors such as your marketing, your resources, your activities, and what’s going to happen, what are you actually going to do in the first twenty four to thirty six months if you can look so far.

Monique: And so do you write the business plan once you’ve the idea, like you said, to self criticize and make sure that the business is viable? Or do you get to the stage where you potentially have a prototype? And then you write your business plan when you’re looking to finance it further? Is there a rule?

Simon: Okay, so if your business is adopting a standard typical traditional business model, and then you could at a very early stage start putting pen to paper and actually writing down some of

the details. If, however, you don’t know where this is going to take you then you end up writing a document where you’re for the sake of writing documents, it is very difficult to have an accurate plan on day one when you don’t know what the day two is going to look like. So it wouldn’t make sense if you haven’t something which is slightly different to the norm.

If you’re going down the route of having something which is different then you’d go down the business model canvas. What that will do essentially is that it will allow you to create or come up with certain hypothesis on your business model and then change parameters within the hypothesis to come up with a plan. That would make sense. It also allows you to test certain business models very quickly without having to spend hours on having to rewrite heavy document.

Monique: So you keep referring to business models, what types of business models are there and are specific do specific ones work? Say you’re writing an e commerce or an app versus a physical products? Do the business models vary or are there specific models for specific types of businesses?

Simon: Okay, so when we talk about innovation in business, normally what you’re talking about is there are generated three types but two tend to get the most attention .Well, one is innovation in technology. So you’ve created something which is innovative and has never been seen before or Applied Technology which has never been done before. The second one is an innovation around the business model and the second one obviously being where you actually change a business model rather than the technology. In this case we can use Uber as an example. Uber is a taxi company. Taxi companies have been around for decades or they have changed is simply the business model on how to deliver the service. So they don’t own actually own any taxi. All they do is use a community of taxi drivers with all their own costs and with their personal car and they will delivery service using a crowd using the people and the general public basically. Another model which is quite popular in Malta and has been receiving some attention would be Airbnb, who have done the exact same thing but within the travel tourism space, and so they would compete against hotels and rather than going to hotels, you go to someone’s house and you would rent out a room or his apartment out to the public. So again, it’s one of the largest hotel travel accommodation businesses but yet they don’t own any property.

Monique: So when these business plans you referred to Business Model Canvas, so on there, could you just talk us through the things that would be on a business model canvas so that listeners can perhaps look at the headings and start to consider what they would write?

Simon: Okay, so the business model canvas is nothing but a business plan broken down and simplified. It’s something which can be Googled. If you Google it, you’ll find a lot of references and information on it. And what he talks about is the various elements within your business that

you need to test against or need to document in some way. So to begin with, obviously the first one would be your value proposition. Value proposition is basically saying, explaining what value you are creating for your customers. So what problem are you solving and talking about this value creation in some detail. And over here when anything to do with the business model canvas, you need to be as specific or as accurate or as detailed as possible.

Monique: So the business model canvas is actually one page essentially, it’s not like a very thick business plan that you imagine.

Simon: Yes, exactly. So it’s essentially a one pager which I would recommend you stick on a wall, you grab post it notes and you use stick these post it notes into the various boxes or elements within that canvas.

Monique: So once you’ve done your value propositions, where do you go from there?

Simon: The next one would be your customer segments. So over here, what we’re talking about is understanding or documenting or listing the type of customers that you’re going to be targeting. So let’s apply it. So if we’re talking about these espresso pods type of products that are out there, and obviously this is something very new, it is something which is very innovative. But it is not just the way coffee is made. A lot of innovation happens around its own business model. So if you have to look at the value proposition, it’s being able to make a good decent quality coffee at home with very little knowledge and expertise in terms of customer segments, you could say it’s will get any coffee drinker but it’s not. And if you have to look at your standard instant coffee, they also have a customer segment and that would be very different from your standard instance to your coffee machine fan would want a particular machine at home. So that would probably be someone who enjoys a cup of coffee and is a bit more fussy, or a bit more of a [Monique interrupts]

Monique: Coffee snob. [Laughs]

Simon: Exactly. You’d fit within a certain demographic. So you’d have to set in revenues or cash that you can spend every month on things that you like, which will be very different to your standard instant. To continue going through the canvas, if you’ve to look at your type of relationship that you’re going to have with your customer, so again, in the case of these coffee pods type of businesses, it’s pretty standard e-commerce type of businesses just actually how it started off today it’s down the standard retail distribution in terms of channel and again so channel it started off online and today I’ll move completely offline. So now you have distribution channels through your supermarkets, technology shops, as well as online retailers.

Monique: And physical shops. So there are shops around just selling coffee pods, which surprises me.[Laughs]

Simon: So it had started off only selling items online. I think that’s how it started. So they were selling machines at a reduced price. And they still do today. So they don’t really make that much revenue so that much first profits from these machines, but where the real money comes from is the pods. So the pods is the big moneymaker. And it’s something that you buy again and again and again, once you buy the machine. So they tie you in.

Monique: And they get you addicted to new flavors, and they can keep you on the hook essentially by giving you more and more types of coffee.

Simon: Exactly, exactly. So they start coming up with new lines, you will different coffee flavors, whether it’s cold and hot, so therefore they’re quite a range. So if you have to look at sort of the positive side of our business, in terms of anything that creates value for your customers, and how you reach your customers and the relationship you have with your customers. All of this basically creates value which hopefully means create revenue. And this is essentially what you need to define. So how much revenue will the value I create and what is that value or revenue. Obviously, there are two sides to every coin, and you need to look at what you’re actually going to do within that business and the cost elements behind that business.

Monique: So in this, in this scenario you’re looking at the revenue stream would be from the machine, from the pods and potentially from the accessories to hold your pods, you know, a stirrer or a cup orcoffee mug, etc. So those elements are what you would put in your revenue streams box. Okay,

Simon: Yes, exactly. Monique: And from there?

Simon: So from there you look at your cost base. So for you to make this happen essentially you need to have resources, infrastructure, people to make it happen and these this resources,

infrastructure and people need to actually do something be to actually create something for you to deliver this whole value proposition this whole business what you want to do.

Monique: So you’re talking that the sales or marketing the product developer and that sort of thing?

Simon: Yes, so again, this goes down into the analysis of what you actually want to do as a business. So if we had to look at these coffee pods again, machines to stick to the same example. When they had started out, what they were doing is essentially that they had actually partnered with all the pod machine manufacturers and then these pod machine manufacturers were responsible for sales and marketing of these machines. And then they were selling the pods to the consumer and this is for the initial business model which had failed miserably. The reason for that is that this company that were created the machines did not have the expertise to be able to sell and market it. So what they did is they took a slightly different approach and they simply outsourced the manufacturing of these machines and then became more responsible for the sales and marketing of those machines and then obviously plugged in consumables after that.
So if you have to look at how that business model changes in itself, and you say, okay so the entities or the partners, so to speak involved within that business model obviously changed as well as the activities of that business. So within this space key part was obviously the manufacturers of these coffee pod machines. And they also decide the manufacturer of the pods for the consumer, and the quantity that they have to create. And if you have to dig deeper into what these businesses actually do, most of them is around the sales and marketing. So any manufacturing is outsourced through patent, through process, which is owned by that company however as an activity it’s purely sales and marketing.
So then again, if you have to look at its partners, it would be manufacturing. If you have to look at its key activity, so what it does on a day to day basis, it is sales and marketing as well as RND. So looking at what new products they can throw into this type of business and low key resources in terms of what the business needs in terms of resources to make this happen, a lot of it is skill sets; so people who are able to understand sales and marketing and implement sales and marketing effectively as well as distribution.

Monique: And obviously and in addition to that, you’d have to account for where these people are going to work from the tools that they’re going to need to do their jobs, etc, etc. So all of that needs to be within your cost structure element of your business model canvas.

Simon: Yes. So once you look at your key partners, your activities and your resources, then you break it down or you dig deeper into the cost structure of each element. So if you have sales and sales need to be on a plane and need traveling, then obviously you have to apply your travel costs etc, etc.

Monique: So that’s the business model canvas that we’re suggesting people can Google so they can see the elements to fill in to be able to see if they have a viable business, essentially.

Simon: Yes. So Business Model Canvas is excellent, because you can have multiple business models for your same idea. And then look at what variables you can change within that canvas. And it’s quite simple and easy to do. So being able to say, Okay, what would happen if I had to change an element within this business model? So if I have to change the value proposition, for example of my business, how will it change my customer, or my customer type; how will it change the relationship I have with customers and everything sort of flows off from there.

Monique: And but this isn’t guesswork. This is something you can’t just fill in. And just because you feel like this is something you have to do the go back to the market research checking out who the customers really want to be the size of that market, etc. It’s not an exercise you can do in an evening.

Simon: Actually, it is that like an exercise that you can do in a few minutes. It doesn’t mean that once you finish the exercise than what you’ve actually documented is correct. So what you’re doing is essentially you’re making huge assumptions on what you think would be your customer. And what you think would be that relationship you would have with a customer. And after you do the business model canvas, after you fill it up, then you need to test the hypothesis, you need to validate, go on and see whether these would be your partners and these would be your customers. This would be the type of relationships and make sure that whatever you have put into that canvas is in fact correct. You will notice as you do this, it’s relatively tough you will be wrong and this is a normal process and the more times you are on the better it is because you’re getting closer to the truth and eventually you will come to a point where you’re feeling confident or combo confident in the hypotheses that you have made. And then you can start talking about a business plan.

If you’ve just joined us you’re listening to Entrepreneur Clinic on campus FM with me Monique Chambers and my guest this week Simon as we’re discussing how to build a business plan
This show is at a Wednesdays at 930 and repeated again on Thursdays at 1:30

Monique: So now you’ve completed the business model canvas you have all of those elements are filled up what happens next?

Simon: Once you have filled up your canvas and you have a better idea of what your business is going to look like, the next step would be probably looking for either some form of financing or

some form of partners or bringing on some third party that can help your business become a reality.
To do this, you need to have some form of documentation, you need to have something which gives this third party, the stakeholder, these new people that you want to bring on board, something that they can read that they can refer to. So they can understand and digest in a bit more detail. So saying this is my idea and this is what I want to do and this is how we could work is not enough. Going into the both the numbers as well as how execution is going to happen is critical. And a business plan is a good way of doing this not the only way but certainly a good way of doing this.

Monique: So what should a business plan then include? What does it need to look like and feel like. I’m imagining you should be able to have a one liner to be able to get somebody to pay attention to your business plan. But then what’s in the business plan?

Simon: So a business plan has all of the elements within your canvas so if you obviously talk about your customers or the market side, you talk about your costs, we talk about your activities for you took out all of the elements within your canvas and you simply go into more detail. So as you’re going through, as I said before, when writing your canvas, you’re coming up with hypothesis and you’re validating, as you’re validating your learning, as you’re learning you should document so you should capture what you’ve learned in sample documents. Little by little you can start transferring data into as part of your market research which would make a part of your business plan. So as you move along as your understanding, however, all of the components within your business are going to fit together, that is where you get your information from and you start sticking it into this tone document. In terms of length, there isn’t really a standard length for a business plan. If you had to go to a large consultancy firm and they give you multiple hundreds and hundreds of pages for your business plan, however if you can fit it into ten, I would say fit it into ten if it has enough detail for you to explain what you need to explain. So, more is not always better in the case of a business plan unlike cake.

Obviously there are a couple of rules so things like if you are going to write a business plan and it is not your standard retail. So it’s something which is technologically complex or involves something which has a lot of jargon. Try to avoid using the jargon or simplify it.

Monique: Okay because obviously the person you’re talking to may not be an expert in your field, but maybe a bank.

Simon: Yes. So if you are speaking to a bank, then your bank manager needs to understand what you’re on about if you’re speaking to an investor and the investor might not be exposed to that particular technology or industry. So you still need to need to break it down. I mean, I would

recommend if your mother can understand it or your grandmother can understand it then that’s a good place to start. If they can’t then I would simplify it even further. So you’re keeping it as simple as straightforward as avoid jargon so don’t use words like, this is an innovative product, why is it innovative , explain the value explain something which is concrete, something realistic and factual.

The second thing is a business plan is there to be as realistic as possible. So avoid trying to sell it as much as possible. So try and be able to factor in; if there are risks, list the risks; it shows that you’re mature and if you think that everything is going to work and everything is going to be fine and dandy, then from dying investor’s perspective, and they will probably shy away you know, so yes, show that you believe in the product or idea or venture but be realistic about it be clear that you know these the risks and these are the things that can go wrong and just be factual about it. A business plan is also an opportunity to manage expectations. So if you are getting a stakeholder, a third party on board, and whether it could be a supplier and you want to share like a version of your business plan with a supplier, you might want to use this document in a way to manage the expectations of this third party coming on board. So you don’t want to say listen we’re going to be making millions in the first few months, but you show progression, you show growth at realistic rates, you might even want to have an optimistic and pessimistic view of what can happen but be realistic and manage that expectation.

Monique: So if you’ve done your sums and you’ve done all the work and you actually see that you’re not going to make money for the first year, is that a bad thing to have in your business plan? Would that be eternal for? What’s the usual expectation for you to be able to break even and make your first cent.

Simon: So a lot of it depends on what type of business you have, one; and two the band rates that you’d in order to get there.

Monique: So band rate is?

Simon: So band rate is the amount of money that you spend every month for you to operate right making so just to give an example if you need 2000 euros a month for 12 months to start actually making something so you have a band rate of 2000 euros a month and a cost base of 24,000 euros a year and at day one so when you launch so you’d have your 24,000 euro investment that you need. Is that a bad thing; not necessarily if obviously you’d want to get to market as quickly as possible and you might want to touch on the subject of MVP, minimum viable product, getting some thing on to market as quickly as possible even if that something is not perfect but simply solves the problem doing it in the shortest amount of time and testing your hypothesis as you go along.

Monique: So once you’ve finalized your business plan, what should it physically look like? Should it have lots of pictures and diagrams and things or this literally the business case the numbers the statistics, the validation of the idea.

Simon: So again, this depends on the type of business. If your business is a fund of funds structure, some super complex financial type of business and then you’d expect maybe some graphs but a lot of content and complexity to detail and math stuff.
If you’re going to something which is, you know, some new design type of sunglasses. And then obviously the design aspect is important. So a showing that even within the business plan, you are design competent, and maybe a couple of styles of the sunlight is going to look like then obviously you’d want that to reflect within your business. I think a business brand needs to reflect on a bit on your brand that you’re going to create. And again, there’s no real hard and fast rule when it comes to writing a business plan. So there’s no expectation that you need to fill. I think expectations would come much later on when you’re looking for a large investment or you have an acquisition or merger and acquisition coming up and that is when you’d have certain details are certain standards that you need to follow but typically by then you’d have a big consultancy firm backing you up and doing all the legwork, which you’d want to avoid.

Monique: So once you you’ve written this business plan, your product is now launched. What’s the lifetime of your business plan in fact, is it till launch? Or does the business plan have to have a life longer than day one of your products being on the market?

Simon: So a bit of a personal view, I think there are two types of business plans there’s a business plan that you would give to a bank manager where you may be trying to sell it as a concept you’re trying to win the bank manager. A second business plan is something for you; it is a document which is alive, a documentary which is going to be changing continuously after you launch and even before you launch and we will continue to adapt to circumstances as they change from day to day.

Monique: Okay so as you go along the life of the plan can change along with the expectations of your customers who are buying a product and the next version two three four five an six?

Simon: Yes, as time goes you’d learn things and things we need to tweak. Market is never constant, market is always changing and you need to change with it.

Monique: And this obviously goes back into you go back to your business model canvas I would guess to start the process from that?

Simon: Yes I mean essentially using the tools that are made available to you. So if you more comfortable in writing a document because text is something you’re more comfortable with use that and if posted notes on a canvas is more comfortable then go for that.

Monique: Well, thank you very much. Simon Azzopardi, this week’s guest on the Entrepreneur Clinic and we’ve been talking about business plans and Business Model Canvas is and how to prepare them. Next week, I’ll be talking to Fiona Ewins Brown about staffing and when and how to hire your team. Thank you very much for listening.

You’ve been listening to entrepreneur clinic with me Monique Chambers
The program is that every Wednesday on campus FM at 9:30am and repeated on Thursdays at 1:30pm.

Join us again next week to hear more about your journey in starting up a new business or launching a new product.