“Nothing happens until someone sells something.”

“Nothing happens until someone sells something.”

Henry Ford, American Industrialist

In the previous chapter I explained how an entrepreneur can use the Value Proposition Canvas to formulate the business’ Value Proposition. During this first step, the business owner must achieve “market fit”, matching its products or services to the customer needs.

Having clearly defined the business’ Value Proposition, explicitly showing how the customer gains from the business’ products and how the customer’ related pains are alleviated, the business owner must now consider the Revenue Side of the Business Model Canvas.

The Revenue Side of the Business Model Canvas consists of four components:

·???????? Revenue Streams,

·???????? Customer Segmentation,

·???????? Customer Relationships, and

·???????? (Sales) Channels

Revenue Streams

All businesses must generate revenues from sales of products or services, but the way businesses collect sales revenues differs.

Example: A business that provides power storage and backup systems may have a variety of revenue streams:

1.????? Revenue from sales of equipment including invertors, lithium iron batteries, solar panels, and related components,

2.????? Revenue from installation of power storage and backup systems, and

3.????? Revenue from maintenance of power storage and backup systems.

As a rule, retail businesses generate revenues in the form of “cash-sales” from the sale of products or services when a client transacts with a cashier at the till. This is the simplest way to collect revenue.

A wholesale business may sell its products in a variety of ways:

·???????? Cash-and-carry transactions where a customer visits the business to purchase and pay for products.

·???????? Cash-on-delivery transactions where the business delivers consignments of stock and receives payment before leaving.

·???????? Payment-term-transactions where the business delivers consignments of stock to customers, debtors, and receives payment within a prescribed timeframe. ???

A professional services business may earn revenue in the form of consulting fees which may take on many forms, including:

·???????? A retainer where the customer pays a fee for retaining the services of a professional for a specified duration.

·???????? Billing per hour where the customer agrees to pay a certain rate per hour, but usually limited to a specified number of hours.

·???????? A medical professional may receive revenues from different sources including patients, medical aid administrators, and insurance companies.

Sometimes, a business receives payment for products or services rendered to a customer by a third party. Insurance claims are often paid not to the claimant but to a business replacing or repairing items or infrastructure damaged by a fire, flood or crime related incident. ?

Example: Recently, I got involved with contractors providing power storage and back solutions to small businesses where a financier provides a financing solution to the purchaser in the form of a capital lease. The financier acquires and owns the equipment for the duration of the lease. In addition, the financier arranges for the installation and maintenance of the equipment. The contractor may consider the purchaser as customer, but it is from the financier that the contractor receives payment.

Conclusion

Consider the following questions:

·???????? What are your business’ revenue streams?

·???????? Do you receive payments immediately or must you wait for customers to pay?

·???????? How long must you wait to receive payments?

·???????? How will you collect payments?

·???????? Who pays you?

Customer Segmentation

During the first step the customer segment, or target market, was superficially discussed in relation to the business’ Value Proposition. Who you aim to promote your product to is as important, if not more important, as understanding what you are selling.

The business owner must identify a Relevant Market for its products or services. A Relevant Market is a defined category of prospective customers that represents a financially viable opportunity and a market that the business can access, given its unique constraints.

Example: Power storage and backup systems may be useful for a wide range of customers including:

·???????? Residential users,

·???????? Small businesses,

·???????? Large businesses, and

·???????? Government Departments.

But given the business’ constraints, which of these market segments represent the Relevant Market? A small business is unlikely to have the internal capacity to manage large contracts nor have access to sufficient working capital to fund high value projects. Although large businesses and government departments need power storage and backup systems, it’s difficult for a small business to gain access to these customers.

Recently the market for residential users of power storage and backup services has been inundated with new installers offering homeowners largely indistinguishable services. Residential users may be accessible, but this market no longer represents opportunities for high profits.

Small businesses, and in particular businesses that are tenants, have been largely ignored. Tenants do not have a fixed property to offer financiers as collateral for financing and since power storage and backup systems are costly very few small businesses have been able to acquire a system. Recently, financiers now offer an asset finance solution to small businesses effectively giving access to previously out of reach power storage and backup systems. A small electrical contractor can access small businesses in the geographic area.

Many small businesses operate profitably in the geographic market of our electrical contractor. Small businesses therefore represent a potentially profitable and accessible market, a Relevant Market, for power storage and backup systems.

Conclusion

The first step to successfully sell your product or service is to identify prospective customers. It is easy to fall into the trap of believing that “anybody” can or will be interested in your product or service. Small businesses seldom have the resources to promote their offerings to a wide audience and are much better served by identifying a niche or Relevant Market.

Customer Relationships

Now that you have identified your Relevant Market of prospective customers, you must develop a strategy of how you will get in contact and maintain a relationship with your customers.

Where and how do prospective customers find information about your product or service?

Don’t be too quick to answer “google”. Sure, clients do reach for their smartphones when searching for information, but wise customers will often consult with a trusted advisor, especially when a big buying decision must be made. A business owner considering a power storage and backup system may approach their accountant for advice on the best way of financing a system and the tax implications of various choices. Do you have an accountant, and do they know how your products or services may benefit other business owners?

How will you retain your existing customers?

I used to sell life insurance and quickly learned that it is far easier to sell to existing customers than to find new clients. Once you have a customer on board you must maintain that relationship. A previous boss used to tell me that “the first day you have a customer is also the first day you run the risk of losing the customer”. ?Great businesses build systems around their client’s current and future needs to preempt customer demand.

What pertinent information about your customer should you gather and use?

I used to be involved in corporate sales and learned that the worst time to try and get in front of decision makers are the weeks preceding their financial year end. Simply keeping a diary of when my corporate clients have their financial year end made me a much more effective, and less bothersome, salesman.

Differentiate between the buyer and the user of your product or service.

Estate agents understand that even though the husband, in most cases, signs the contract, it is the wife who decides on purchasing the property. Aim your marketing messages at the user, at the person with the most influence over the buying decision.

Who in the customer-business is the responsible person?

Corporate buyers are often under tremendous pressure to make good business decisions. Building a trust-based relationship with the responsible person in a business not only allows you to gain insights into how decisions are made but also allows you to reassure buyers that your product or service best serves their needs.

Conclusion

With limited resources, small businesses rely on strong relationships with customers and must make every effort to understand and preempt client needs.

·???????? Where and how do prospective customers find information about your product or service?

·???????? How will you retain your existing customers?

·???????? What pertinent information about your customer should you gather and use?

·???????? Differentiate between the buyer and the user of your product or service.

·???????? Who in the customer-business is the responsible person?

(Sales) Channels

It is often entrepreneurs with a strong sales background who succeed in business. However, a business owner has much more to do than focus on sales. In fact, a business will only develop into an asset of value when the entrepreneur hand over customer relationships and other responsibilities to suitable employees. The entrepreneur must decide what types of sales channels will be most suitable given the nature of the business and its products or services.??

Direct Sales

Direct sales can take on many forms:

A dedicated sales team – Typically, during the early stages business owners take sole responsibility for sales. Later, as the business develops, a need arises to appoint a sales team. Recruiting, remunerating, and retaining suitable salespeople are for many businesses of strategic importance. A business owner maintains control over the way products are promoted and customer relationships managed with a dedicated team of sales professionals, but this comes with a cost. It is not uncommon to find individual sales superstars earning more than business owners.

A retail outlet – A business may decide to promote its product from its own retail stores. A retail presence can be of great strategic value if positioned in an appropriate location with high volumes of retail traffic passing through. The business owner maintains control over how the product is promoted but this comes at a cost. Landlords demand high rental rates for good retail space and are hesitant to provide retail space to start up businesses with little or no financial track record.

An online store – Technological advances make it possible for many small businesses to establish an online presence and effectively promote their products to a wider audience of prospective customers. But the world wide web has become a big place, and it is increasingly difficult to attract an audience online. Recently, a new trend has emerged termed “click and mortar” where businesses maintain a physical store but sell most of their products online.

Intermediation

To quickly reach a wider audience of prospective customers a business may consider a strategy of sales intermediation where products are promoted to customers via intermediaries. Intermediation can take many forms:

Sales Agents – The business appoints agents, often on a commission only basis, to promote its products directly to prospective customers. This option has the advantage of limiting the costs associated with sales since agents are remunerated only once a sale has been concluded. However, the business owner retains less control over how products are promoted and is likely to spend a significant amount of time recruiting and training new agents.

Aggregators – Also sometimes called “brokers”, where the business promotes its products to intermediaries with an existing client base of prospective customers. Brokers often promote competing products to their customers. The business largely relinquishes the relationship with customers in favor of a relationship with the broker. Aggregators commonly play product providers off against each other demanding larger commission and other incentives to promote the business’ products. But established brokers may give a business access to many prospective customers quicky.?

Wholesale – A business may opt to distribute their products via a network of distributors or retailers. This option can be very effective in reaching a wide market of prospective customers. Distributors sell competing and complementary products to their customers. The business must compete for prime shelf space within the retail stores which necessitates a large marketing budget. Also, large retail outlets dominate their market segment to the extent that they can demand low prices from producers together with payment terms ranging up to one hundred and twenty days. Small businesses often do not have the cashflow to do business with large retail outlets. ?

Collaboration

Some savvy entrepreneurs have learned to seek out opportunities to collaborate with other small businesses to promote their products or services.

Complimentary products – A business may opt to collaborate with another business by promoting its products as complimentary to the other business’ products.

Example: A business selling lithium iron batteries for power storage might collaborate with a business that promotes power invertors as these products are complementary.

Ancillary products – A business may promote its product alongside another business’ unrelated products.

Example: A manufacturer of high-end travel bags might collaborate with a luxury car brand where each new vehicle sold includes a bespoke set of travel bags.

Conclusion

A business’ method of getting its products or services to customers is often a key determinant of success.