Business Modeling For Micro, Small and Medium Enterprises

71% of all MSMEs close shop within the first three years of operation according to the latest statistics by KNBS. There are a variety of reasons for this phenomenon such as lack of financing, lack of information among many more reasons. I would like to focus on flawed business model. A business model is important to small businesses since it defines how you are going to make money. At the centre of your business model is your value proposition.

Value proposition is in simple terms is what is your proposed benefit to your target customers. A good example is Google whose value proposition is to create a user friendly platform which directly connects people’s queries to the information desired, enhancing the overall user experience.  This attracts a wide variety customers which are interested in utilizing Google’s free services, promoting an advertising environment for business in which both the end-users and businesses alike benefit. Similarly for Equity Group’s Equitel whose value proposition is to ensure the masses and low income people join the bank through affordable products.

This means that if you are trader in downtown Nairobi selling fruit salad, your value proposition could be that over and above selling fruit salad is that you offer free delivery to the ever busy working class Nairobians. Similarly depending with your customer segment you could offer fruit salad customized to each customer’s preference, off course at a higher fee.

It’s important to note that for your business to succeed, you have to have a competitive advantage over similar competing businesses. Such an advantage could be free delivery of fruit salad or customized salads as per the above examples. Competitive advantage enables you to convince your customers to buy your product instead of a competitor’s product. Customers might even be willing to pay a premium for your product.

It is important to ensure you maintain your competitive advantage by continuously investing in your product.

Another important consideration in a business model is price. Price in this sense must incorporate all your costs plus a profit margin. Your revenues are a function of your price times the number of units that you sell.

Bringing all these elements of your business model together leads to your business having a business model formula. Business Model formulas vary from one business to another. Your business model formula translates your business model into financials. For example, you sell fruit salad or Event management services to a certain target customers. The reason your customers buy your product is this compelling benefit. You have an advantage over your competition because of this sustainable competitive advantage. You will be become profitable in the say 3rd quarter of 2017 by selling so many fruit salad or Muffins or Chapati or cups of Coffee, whatever it is you’re selling, to so many customers. You are going to sell through these channels or partners. Or you are going to sell directly at a price of X per Fruit Salad or Muffin or cups of Coffee. With a cost of X Shillings for each customer you acquire

Most of us have watched Shark Tank and most recently in Kenya Lion’s Den sponsored by KCB, it’s important to note that Investors popularly known as the Sharks or Lions want to know that you really understand more than just the strategies and tactics of your business model. They want to know that you understand how to translate those strategies into how you make money. They are going to want to know that you have a financial understanding of the implications of everything in your business model.