In my Prototyping Business Models And Market Strategies, I wrote about Business Prototyping And The Generic Business Model Prototype and Our Business Prototyping Methodology; now let us take a concrete look at what business prototyping works like in practice.
Most prototyping activities start with a challenge, so let us suppose you are given the following challenge by your CEO:
“We are launching a new service in six months. My feeling is that in the past our sales figures have been too low given our spending on advertising. Please take some time to understand how we have approached service advertising in the past and see whether you can come up with some ideas to improve the service adoption rate in the future.”
Now, as a business prototyper, when given such a challenge, the first thing you need to do is to choose the right approach.
The business prototyping methodology provides you with four processes that work at different altitudes.
At the highest altitude, which is what I like to call “prototyping in the large”, is the transformation process. This process helps us to re-engineer an entire business: starting with the market strategy and business model, then ensuring you have the right processes and organization to deliver that strategy and implement the business model, and ultimately aligning the IT landscape with the business.
Clearly, the transformation process seems to be overkill for the problem at hand.
At the next altitude is the prototyping process itself. This is the kind of process you would use to solve problems that arise during a transformation or that arise in order to prepare a transformation. The objective of this process is to make a decision regarding a complex business issue – so in contrast to the transformation process, it is a decision support process and not a transformative process.
The prototyping process is a good match for the challenge given to us by the CEO.
Now while prototyping, you run into problems like “How do you best prototype a business model?” or “How can we prototype a new business process?” and for this, you need a process that helps you to choose the right prototyping technique; there are quite a number of prototyping techniques, both “soft”, qualitative techniques such as storytelling, playacting and game playing and “hard”, quantitative techniques such as modeling and simulation; this course focuses on using modeling and simulations and hence we have illustrated the modeling process here.
Then again, at a very detailed level, while modeling, you need to create different kinds of diagrams and for this, you need a diagramming process.
For this lesson, given the CEOs challenge, we will concentrate on the prototyping process.
The prototyping process consists of four steps: explore, prototype, experiment, and then decide.
In practice, the process is rarely performed in such a sequential manner; it is actually an iterative process, as described in the following paragraphs.
At the outset of a prototyping endeavor, you want to understand the challenge you are dealing with.
So you start prototyping the challenge using sketches and diagrams in order to gain a better understanding – this often leads you back to explore step; you will often need to check in with the problem owner (in this case our CEO) and other stakeholders to clarify what they want you to achieve.
You will iterate back and forth between “Exploring” and “Prototyping” until you really understand what the challenge is about and have ensured that you and your stakeholders are on the same page about this.
It was Albert Einstein who said that if he had one hour to save the planet, he would spend 59 minutes trying to understand the problem and only one minute on finding the solution – that fits my experience very well: often, once you have really understood the problem, the solution becomes obvious.
During these initial steps, you need to clarify what your objectives are and to define the requirements and constraints that limit potential solutions. Frequently you will come up with more objectives and requirements than you can handle given your time and budget – so be clear about what is in your scope and what is not.
Once you have understood the problem, you need to come up with a solution.
Mostly, during the exploration phase, you have already come up with some good ideas of what a solution could look like. Now is the time to look at these ideas in more detail – prototype them using models and simulations and experiment with them. Make sure your solutions cover all your objectives and do not have any undesired side effects. Understand the opportunities and risks associated with the solutions.
Again, this is an iterative process because during your experiments you will see new aspects of the solution (and sometimes even of the problem) that force you to iterate back to the prototyping or even the exploration step.
Finally, once you have worked out one or perhaps even a whole set of alternative solutions, you then need to decide which is the right solution and what the next steps could be. In all likelihood, it will not just be you personally who makes this decision but all your stakeholders, including your problem owner. My experience is that getting everyone to agree on a solution becomes a lot easier if you use a prototyping approach and involve your stakeholders from day one.
So let us get back to the challenge the CEO gave us.
The key thing during the exploration step right at the beginning of the business prototyping process is to clarify the objectives. For this, we often use so-called “causal maps”.
Causal maps are useful to clarify and structure objectives and identify which activities are needed to realize these objectives.
I will explain to you in detail later on how to create causal maps and I am just providing a small causal map here to illustrate what they look like.
So, in our case, our objective may be to develop strategies to improve service adoption rates; the activities we need to perform to achieve this are “Understand the current strategy better”, “Brainstorm ideas for improvement”, “Quantify those ideas”, and so on.
The technique itself is simple and in many ways, the results are often “obvious” – the key point here is that you need all your stakeholders to understand and agree on these points and causal maps are a useful technique for this.
The process of building the map (and of reaching an agreement over it) is mostly much more important than the resulting map itself.
One key thing about business prototyping is its use of simple sketches to capture ideas quickly.
We find such informal sketches really useful and we are always scribbling away on whiteboards, flip charts, notepads and nowadays on electronic devices. The whole point about these scribbles is that you externalize your thinking; this lets other people see your thinking and thus opens it up to discussion.
Other people can then point out inconsistencies and gaps in your thinking and because you are discussing your scribbles and not your thinking directly it is much easier to let go of your own ideas and open up to other people's ideas.
Also, I find that if you ask someone what their ideas are on a particular topic in their domain of expertise, they might actually struggle to give you a coherent description. But if you draw a little sketch, however simple, and say: “I think this is what it looks like”, they will find it very easy to point out all the things you are missing.
So, in this case, we have a simple sketch showing the kinds of marketing that has is going on or could be going on. We have got classical outbound marketing, we have got inbound marketing, we have got word-of-mouth marketing and referral marketing and during such a discussion, you may well find out that actually what you have been doing so far, typically, is perhaps outbound marketing and you have completely neglected other strategies such as referral strategies or inbound marketing.
While exploring your challenge you most likely come up with quite a few potential ideas. You always need to be clear about the scope of your assignment – which ideas should you look at now, which can you put aside and come back to later.
In our case, it probably does not make sense to look at the inbound marketing strategy for now, because it will take longer to set up than the six-month time frame the CEO was speaking about.
So let us put that idea on the back burner for now and just concentrate on referral marketing.
See, even really simple diagrams such as this one are useful in defining the scope of an assignment!
The first thing I mostly do when prototyping a new assignment is to build a concept map. Concept maps are very useful to identify and capture all the concepts that are relevant to one issue and to put them into context.
I find these maps particularly useful when I am new to a topic and there are a lot of concepts and terms being mentioned that I have not heard of before.
The same is true of situations when a lot of people are involved and you want to get them on the same page; you will often find that even within the same company or department not everybody agrees on what the key concepts are and what they should be called.
Concept maps help you to clarify these things – identify the key concepts, name them, relate them to each other and define their role and purpose in your challenge.
As you can see in this diagram, I have built a very simple concept map that shows that custom acquisition takes place in a target market and a target market consists of potential customers and current customers.
In our case you can measure the success of your customer acquisition process by the service adoption rate; up till now, this has included the people reached through advertising, in this assignment we want to investigate the effects of referral marketing.
The concept map also shows that customer acquisition is managed by the marketing department who is responsible for the marketing budget and the marketing budget also constraints the service adoption rate. Obviously, the service adoption rate is also constrained by market saturation.
Of course, this is only a simple example and therefore the concept map is very small and I mainly included it to make you aware of this technique, but I think you can see already that in larger more complex situations involving many people, it makes a great deal of sense to map out all the key ideas that are relevant to your challenge.
Once you have understood the key concepts, the next thing to do in prototyping is to build a more detailed model of how the system you are trying to change works. Depending on the kind of challenge, quite a number of different kinds of modeling techniques could be useful here.
In our concrete case, we want to understand the factors that influence the service adoption rate and the potential benefits and costs associated with any changes we make to the current approach.
We are dealing with a dynamic problem because we would like the service adoption rate to change and increase over time – whenever you are confronted with dynamic complexity at a strategic level, causal loop diagrams are a good weapon to choose.
They are useful to capture the key interactions in a system and to capture the dynamic behavior of a system. We will cover causal loop diagrams in detail in the next chapter of this course.
Let us take a brief look at what this little model is telling us: On the left-hand side we have a loop that shows how we acquire customers via advertising – the more money we spend on advertising, the more people we will reach, and some of these people will become customers of our service. This is a loop because all marketing is constrained by market saturation – if our service is really successful and we gain more and more customers, advertising will become less effective because a lot of our adverts will reach people who already are our customers.
In the middle of the diagram, we can see the new referral marketing idea we want to experiment with – the idea is to get people who have already subscribed to our service to refer new customers; we give them a – yet to be determined – amount of free service time for every referral. This is a positive loop because the more customers we have the more referrals they ought to generate, thus – if the referral scheme is successful – increasing our customer base very rapidly.
Needless to say, we are interested not only in the benefits of such a referral schema but also in its cost. On the right side of the diagram, you can see all the factors affecting the profitability of the service. We assume there is an operative margin associated with each subscription and we use this to recuperate the initial investment and pay for marketing activities.
So while this is a small model at a very abstract level, it actually captures all the essential elements. We probably could use this basic model quite well in a real-life situation – we would probably end up making it slightly more detailed to account for different advertising channels and there would be a number of special effects in service adoption rates we would have to account for … but it certainly would be a good starting point.
Now that we have our basic model, we need to get quantitative and assign values to each of the factors in the model.
There are not that many numbers we have to define – the key ones here are that we are targeting a market of 6 million potential customers. Our customers pay €10 per month for using the service and there is an operative margin of 50% associated with the service. This margin includes the running costs of the service, but not the initial investment of € 1 Million and not the marketing costs.
What is also important is that 0.1% of our adverts have been successful in the past, that is every 1000th person who sees our ad actually adopts the service.
Once we have quantified the model, we can build an interactive simulation to experiment with different strategies. It is actually quite easy to do this – we could build such a model using a spreadsheet or using specialized simulation software. We will take a look at how to do that in the next chapter.
For now, I have provided you with such a simulation cockpit so that you can experiment yourself.
If you would like, you can open the cockpit in a new tab.
Be sure to test the base case: this is our “old” marketing scheme without referrals. The base case shows that we reach break-even after around 24 months.
You can also play with the referral program to see what effect it could have on profitability, depending on your assumptions of how well the referral program is adopted. For instance, if we are conservative and assume that 1% of our customers will adopt the program and they have to bring one referral per free month of service, then we would make slightly more profit than in the base case.
The next step after experimenting with the model for a bit is to identify the critical factors that are relevant to making a decision.
By definition, a critical factor is one that will have both a high impact on your results and is fraught with uncertainty – you simply do not know which value these factors will really have.
In this example, there are two such factors – we do not know how successful our advertising campaign is going to be (though we do have a lot of experience from previous campaigns here) and we have no idea how well the referral program will be adopted.
What we do in such a case is take a look at a realistic range for each of these values and build scenarios from them.
In this example we end up with four scenarios:
The “Here We Go” scenario assumes that 10% of our customers adopt the referral program, getting three months of free service for three referrals; in this scenario, the advertising campaign is also successful, at the same level of 0.1% we saw in previous campaigns.
On the other hand, we also have a “Service Flop” scenario, which assumes that only 1% of customers adopt the referral program and the advertising campaign also is much less successful at 0.01%.
The “Rethink Advertising” and the “Refer someone, please!” are mixed scenarios.
What we learn from these scenarios is that unless the service flops completely, referral marketing could actually be a good approach – even in the “Refer someone, please!” scenario, we improve customer base and thus our profit.
Before we move on we should of course also look at opportunities and risks – it actually turns out that what is an opportunity also carries some risk.
Let us take a look at a scenario which I have called “Boom But Bust”: we offer three months of free service for every referral. The program is adopted by a staggering 30% of our customers. In the long run, our customer base and our profit go through the roof.
But look at what happens in the short run – we end up with a cash shortfall of around €24.5 Million after two years. That could be very difficult to finance.
Now that we have analyzed new marketing strategies, we are ready to make a recommendation to the CEO – adopt a referral program, because unless the service flops completely, you cannot really lose.
If the service does flop, we need to pull the plug very quickly.
If the referral program takes off, our customer service base could expand very quickly. We ought to prepare for that to ensure our service and organization scale appropriately.
So, this concludes our tour of a small example of how to apply the business prototyping methodology. I think it shows nicely how we use informal sketches and diagrams and more formal models and simulations to explore business challenges, prototype new ideas and strategies, and – ultimately – make decisions on how to move forward.
In my Key Benefits of Business Prototyping, I will conclude the “Introduction to Business Prototyping” by taking a look at the key benefits of business prototyping. Then we will move on to take a closer look at the Causal Loop Diagrams.
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