Entrepreneurs can often become trapped by their own definition of customer, business model and value proposition
A classic Harvard Business Review article nearly fifty years old challenged executives to ask themselves, “What business am I really in?”
The author’s point is that if you are a railroad, you are in the transportation business, and if you define yourself as being in the railroad business, you will overlook competition from alternative sources of transportation such as trucks.
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| Philip Anderson |
In a similar way, entrepreneurs can often become trapped by their own definition of who is my customer, what is my business model, and what is my value proposition. Creative thinking starts by questioning the assumptions we take for granted about what we are doing. Only when we re-frame a problem in a fundamentally new way can we think in genuinely innovative ways about how to position an entrepreneurial venture for growth.
A creative approach to a venture starts with the question, “Who is my customer?” Often, you have to separate three economic roles: who uses what you sell, who makes the decision whether or not to buy it from you, and whose budget the payments come from. For example Bright Horizons re-defined the business model for child care centers in the United States by focusing on corporations that wanted child care facilities on their premises as an employee benefit. While employee-parents may be the users, Bright Horizons’ real customers are the executives who decide that child care will boost their employees’ productivity and loyalty.
The next question is “What is my business model?” which essentially boils down to “Who incurs what costs?” and “Who pays whom?” Often, costs can be off-loaded to your customers themselves (as in the case of customer self-service or word-of-mouth advertising) or to third parties (e.g. a store that provides your business free space because you drive traffic to their location). Similarly, only your imagination limits the ways in which you can get paid by third parties who want to reach your customers and who see you as a distribution channel.
The final question, and the most important of all, is “What is my value proposition?” Given your point of view on who your customer is, think creatively about what experience he or she is looking for. For example, an old but true saying is that customers don’t want drills, they want holes. They don’t buy drills because they want to own one; they buy drills in order to make holes. What you can sell them is a better hole, for example one that is always straight, or a hole that is always the right depth regardless of the operator’s skill level, or a hole that refills itself if you decide that you put it in the wrong place.
A close friend of mine who is a serial entrepreneur recently shared with me a story that brings home what it means to think creatively about your value proposition. Virginia Cha was born in Hong Kong, raised in Thailand (where her father worked in the textile industry), and educated in the United States. After a long career in IT with Unisys, she was attracted to Singapore to lead a government seed fund for technology companies springing out of university and research institute technology. One venture capital fund agreed to finance a company she was nurturing, but only if Cha herself became CEO, so she took charge of the venture and led it to a successful trade sale. Cha then moved to China, spent several years turning around a number of businesses, then in 2003 struck out on her own as a Shanghai-based entrepreneur.
Cha began as a master franchisee for the US-based “Slim and Tone” fitness club chain, one of the pioneers of fitness clubs targeted specifically at women. She built and ran several Slim and Tone centers in Shanghai while growing a consulting company, a firm in the “smart home” sector, and a science park development. In late 2005, however, her top priority—quite unexpectedly—became turning around a venture in which she had a minority stake.
A year earlier, the manager of one of her fitness clubs asked her blessing to start his own venture. As someone who wanted to nurture the entrepreneurial spirit, Cha not only agreed, but extended him a loan to start his own fitness club, which was not a competitor because it was in a different part of Shanghai and was targeted at both men and women. As a passive partner with a 15% stake, she was surprised when her partner told her in November, 2005 that he wanted to shut down the club, leave its debts unpaid, and strand more than 1200 customers who had prepaid for a year’s membership.
Cha’s strong ethical sense made her recoil at the prospect of bailing out in this manner, so she agreed to release her partner from all liabilities in return for turning over his stake in the club. Digging into the situation, she realized that it was dire indeed. Costs were high because Shanghai rentals keep escalating and aerobics instructors were relatively expensive by Chinese standards. Six other clubs were located within two kilometers, and at the end of each month, each club heavily discounted to attract members and generate cash for expenses.
The club was located in a residential district of Shanghai near a university, so students represented a significant part of the population. It was situated on the third floor of an anonymous residential block, with no signage or entrance designed to attract passers-by. Customers had to walk by an unfinished lobby and ascend three flights of dirty, unattractive stairway to enter the 1000-square-foot facility, some of whose rooms did not even have floors because money had run out before renovations were complete.
The easiest thing to do would have been to inject cash into the business and fix up the facility. However, because cost-cutting was so rampant, Cha believed she could never earn back such an investment. Instead, she cast about for creative ways to reposition the club so she could charge a premium while keeping the costs of renovating and upgrading the club to a minimum.
Cha’s mental breakthrough came from realizing that as long as she defined the facility as a “fitness club,” she was putting artificial boundaries around the value proposition. Instead, she focused on what experience her clients would value, casting aside the notion that its value had to focus on fitness. What would residents of this neighborhood truly value, she asked?
In China, some students have far more disposable income than their elders because the one-child policy has left them with four doting grandparents. Cha repositioned the club as a one-stop destination that provided fitness and leisure activities in a clean, vibrant and fun environment. She re-named the club “Raging Hollywood” to give it an exciting, foreign sound and put a “walk of fame” outside the entrance. In the lobby, each month featured a rotating exhibit whose theme was tied to a famous movie, such as Lord of the Rings or Star Wars. The lobby was painted to look like a theater entrance, and the stairway up to the third floor was decorated with light strings to give members the feeling they were entering a darkened movie palace. One-time use vouchers were made up to look like movie tickets. The best room was converted into “Oscar’s Studio,” offering students a place to chat, surf the Internet, learn English, taste wine, play pool—activities that had nothing to do with fitness but which turned the club into a general-purpose leisure destination. The number of aerobics classes was drastically slimmed, but in their place new offerings such as salsa dancing featuring foreign instructors were added to give the club a sense of glamour, fun, and international intrigue.
Raging Hollywood swiftly added members and turned profitable, allowing Cha eventually to sell it to an entrepreneur who had his own chain of fitness clubs. The key lesson from this turnaround is: once you know who your customers are, focus on the kinds of experiences they find compelling. Don’t be constrained by the existing identity of your business—it isn’t a “fitness club,” it is a delivery vehicle for services your customers value and are willing to pay for. The way to zig while others zag and find an innovative niche suitable for a growth venture is to focus like a laser on what value is for your clients, as opposed to clinging to the way you once defined the business at an earlier stage in your thinking.
INSEAD Alumni Fund Professor of Entrepreneurship, Director, Rudolf and Valeria Maag International Center for Entrepreneurship and Director, 3i Venturelab
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