We will now look at business models for new products.

It is essentially a business model tells a good story about who are the customers, what do they value And how does the company make money?

How do we deliver the value at a reasonable cost?

A good business model requires articulation of how you will make the product or service, how you will deliver the product or service, and innovation can focus on either or both these areas.

New resources may of course be required on both these areas.

New products typically require new business models.

It may not be essential, but it is worth reflecting whether the new product that you are about to launch requires a new business model or not.

New products can actually fail due to failed business models or inappropriate business models.

So what is a good business model and why does a new or proposed business model fail when it is inappropriate?

So a new business model may fail when it cannot pass any of these 2 tests.

The story about who are the customers, what they value, and why they will buy your product does not make sense.

The projected profits do not add up to make money.

We are unable to deliver value to customers at a reasonable cost.

If either 1 of these tests fail, business model will not be suitable for their product.

Even an existing business model may fail because the assumptions under which the business model was built may no longer hold.

So business models are built on very specific assumptions about customer behavior.

If these assumptions become faulty then the projected returns may not materialize.

Business models may have very specific limits, for example, willingness to pay within which they work.

far then the projected returns may not materialize.

too far, then the projected returns may not materialize.

If the business model is very robust to the variations in customer behavior and the limits can be stretched to some extent, then the business may survive with corrective action.

However, If the business model is very robust to the variations in customer behavior and the limits can be stretched to some extent, then the business may survive

However, if the business model is very sensitive to variations in customer behavior or the limits cannot be stretched, then even prompt corrective action may not save the business.

So how do you assess the business model required for a new product?

The first is what is known as the customer set of questions.

So it starts with who are the customers and who are not your customers.

What do these customers value in your business?

What specifically will you offer to your customers?

What will you not offer even if asked for?

Both are important questions, what you will offer and what you will not offer.

How much will your customers be willing to pay?

What they are currently paying may be less than what they are willing to pay.

Finally, how will your customers behave in terms of opting out or dropping out of the product or service?

The second set of questions is what are known as cost questions.

What activities will you perform will drive the cost of that offer and the activities?

Is there any high upfront investment required for this business?

If so, then you are taking a risk because you have to make that investment upfront before launching the business.

Do you get an advance from customers to run the business or do you need a high working capital?

So, these will determine the profitability of that business.

How much will it cost to deliver the value promised?

Sometimes it is believed that if the scale goes up, the cost will come down.

It is not necessary that when the scale goes up, the cost actually comes down.

Finally, will the cost to deliver the value vary for different types of customers, and will it grow over time?

Again, an important question because when you add new types of customers, you might face additional costs which are not part of your initial pricing for that new product.


Speaker 0: We will now look at business models for new products. What is a business model? It is essentially a business model tells a good story about who are the customers, what do they value And how does the company make money? How do we deliver the value at a reasonable cost? A good business model requires articulation of how you will make the product or service, how you will deliver the product or service, and innovation can focus on either or both these areas.

New resources may of course be required on both these areas. New products typically require new business models. It may not be essential, but it is worth reflecting whether the new product that you are about to launch requires a new business model or not. New products can actually fail due to failed business models or inappropriate business models. So what is a good business model and why does a new or proposed business model fail when it is inappropriate?

So a new business model may fail when it cannot pass any of these 2 tests. The first is the narrative test. The story about who are the customers, what they value, and why they will buy your product does not make sense. The second is the numbers test. The projected profits do not add up to make money.

We are unable to deliver value to customers at a reasonable cost. If either 1 of these tests fail, business model will not be suitable for their product. When do existing business models fail? Even an existing business model may fail because the assumptions under which the business model was built may no longer hold. So business models are built on very specific assumptions about customer behavior.

If these assumptions become faulty then the projected returns may not materialize. Business models may have very specific limits, for example, willingness to pay within which they work. If these limits get stretched too

Speaker 1: far then the projected returns may not materialize. Business models may have very specific limits, for example, willingness to pay within which they work. If these limits get stretched

Speaker 0: too far, then the projected returns may not materialize. If the business model is very robust to the variations in customer behavior and the limits can be stretched to some extent, then the business may survive with corrective action.

Speaker 1: However, If the business model is very robust to the variations in customer behavior and the limits can be stretched to some extent, then the business may survive

Speaker 0: with corrective action. However, if the business model is very sensitive to variations in customer behavior or the limits cannot be stretched, then even prompt corrective action may not save the business. So how do you assess the business model required for a new product? We ask basically 2 sets of questions. The first is what is known as the customer set of questions.

So it starts with who are the customers and who are not your customers. What do these customers value in your business? What specifically will you offer to your customers? What will you not offer even if asked for? Both are important questions, what you will offer and what you will not offer.

How much will your customers pay? How much will your customers be willing to pay? Both are again important questions. What they are currently paying may be less than what they are willing to pay. Finally, how will your customers behave in terms of opting out or dropping out of the product or service?

The second set of questions is what are known as cost questions. What will you offer? What activities will you perform will drive the cost of that offer and the activities? Is there any high upfront investment required for this business? If so, then you are taking a risk because you have to make that investment upfront before launching the business.

Or is there a float in this business? Do you get an advance from customers to run the business or do you need a high working capital? So, these will determine the profitability of that business. How much will it cost to deliver the value promised? Does the cost depend on scale?

Sometimes it is believed that if the scale goes up, the cost will come down. It is not necessary that when the scale goes up, the cost actually comes down. Finally, will the cost to deliver the value vary for different types of customers, and will it grow over time? Again, an important question because when you add new types of customers, you might face additional costs which are not part of your initial pricing for that new product.

See all EP103x_New Product Developement transcripts on Youtube

Week 1- Why do Business Models fail