Business Model Pivots
The international pandemic has forced every founder to re-evaluate their strategy, urgently! I’ve paid close attention to the media and have noticed that the business model pivot topic has certainly been well covered. The article that surprised me the most, was one by Sifted that referenced a Station F survey of VC funded startups in Europe, the USA and Israel. The stat that grabbed me was this one: 80% of the startups involved had gone through some kind of business model pivot in the last few months. That’s a lot of change, especially considering that startups are also dealing with other challenges related to the pandemic.
With so many startups having to implement business model pivots within a short time period, it is certainly a topic worthy of our attention. The startup community has always considered the business model to be a key attribute for startups and one that needs to be well defined. Tools like the Business Model Canvas have helped new entrants and serial entrepreneurs alike draft and communicate their business models more effectively. But why is a business model so important? Because it communicates how a company plans to make money:
- Who are you selling to (the customer) and how (the channel)?
- In what units (app downloads per month/monthly SaaS subscribers/widgets sold per month)?
- At what cost per unit?
As Steve Blank taught us, the difference between a startup and an established company is that the established company is implementing a proven business model while a startup is still operating in a much higher degree of uncertainty. This means that the startup is still proving its business model and has to pivot (a term coined by Eric Ries) as new insight makes the way forward clearer. And then COVID-19 hits and the level of uncertainty goes up for everyone so that even the established business needs to become more agile, adapt and possibly pivot as well! A good example is digital transformation. All businesses, big and small, have recognised that digital transformation is necessary for their businesses. But, for many, it has taken the uncertainty related to the COVID-19 crises to encourage implementation.
So, what does this process of pivoting look like and how should it be approached? The basic principles apply - you need to listen to your market/the customer and confront the brutal facts (as Jim Collins says in his book, ‘Good to Great’). With your ear to the railway line you will be able to hear the train coming, be ready for its arrival and do whatever needs to be done (get out of the way/stop it/jump on). There is a process of listening and translating what you hear into a hypothesis of what needs to happen next. In the case of a business model that may mean, for example, adding a freemium version to your business model instead of just having a free 30-day trial because this resonates with the price-sensitive customer of the moment. This ensures you don’t lose customers but actually grow your userbase. This will keep your investors happier in the short-term because they can see your traction growing. It also provides an opportunity to gently upsell to these users as well. This is the hypothesis which then needs to be tested. You may choose to test this hypothesis with a subset of your customer base and once you have sufficient evidence that it will have the desired effect you can go ahead and implement it widely.
The key to this approach is to not take the decision to pivot lightly and that learning is always the key focus. First, a hypothesis is made based on the market and only after there is sufficient evidence that the pivot has worked, is it implemented widely.
The process of pivoting a business model may seem simple but needs to be properly understood. For more information to make this process easier, do an Internet search on “lean startup” or attend our next roundtable event as part of Global Entrepreneurship Week with co-host, Empact Ventures. The roundtable, ‘Freedom to pivot: data-driven startup development’, takes place on 19th November at 2pm GMT. To attend, register here.