Business Model Review Methodology and Rubric
We like to think our reviews have are not the typical startup stories one can find on TechCrunch, Mashable, or Killer Startups. When some company reaches 1 million users it's good reason for a media story but a meaningless milestone in business growth if few of them are paying or clicking ads. When someone launches yet another project management web-app it's good for them that they completed the project but the company won't survive unless it can differentiate itself from numerous competitors. We are looking to uncover the next ITA Software or 37Signals not the next Twitter or Zynga.
When we analyze companies,we look at how relevant the concept (the founders' vision) is to the market and how well it is executed. Both are broken down into smaller measurable criteria. The concept is made of Problem Statement, Value Proposition, Revenue Sources, and Pricing because they define market placement. The execution consists of Unique Advantages, Product Design, Marketing, and Distribution Channels because they show whether the actual product is relevant to that market niche. We also look at Virality of some B2C products (this mostly concerns entertainment products but if we are offered to review a fridge with some viral features, we'll be happy to look at it).
Problem Statement (Max 3 pts.)
What problem are you aspiring to solve?
Starting a business just because everyone else is making money in some industry is a bad motivation be it cupcakes, group sales, or real estate. The bubble will burst sooner or later. The only businesses that survive in the long term are the ones that offer relevant solutions to important problems.
- 0 pts. — Does not solve any new problems or imitates competition
- 1 pt. — Provides marginal improvement over the existing process
- 2 pts. — Simplifies an existing process that is currently remedied by a widely-adopted workaround
- 3 pts. — Addresses an urgent & complex need that is an obstacle to realizing full operational potential
Value Proposition (Max 3 pts.)
How are you differentiating yourself from the competition?
When every offering in the market is the same, the market becomes commoditized and customers flock to the cheapest one. In order to succeed, a company needs not only to develop a competency in mating the solution to the problem but it also must communicate that compentency clearly.
- 0 pts. — No original value vs. the competition
- 1 pt. — Features that competitors do not offer currently
- 2 pts. — Faster and/or easier-to-use product
- 3 pts. — Well-organized & well-communicated solution to an urgent need
Revenue Sources (Max 4 pts.)
What is the source of revenue (even a potential one)? Is it sustainable?
All products have users & customers. If the two are separate (as in ad-supported and enterprise products) the company must allocate dedicated resources to retain both. The best case is obviously when there users are customers and pay for the product/service directly. However, having only a few transactions over a course of the entire relationship with the customer is not going to drive business growth since the LTV is limited.
- 0 pts. — No clear revenue model
- 1 pt. — Advertisement only or any other source that depends on a large user base
- 2 pts. — One-time fees with little chance of multiple transactions (total need <5 units) unless LTV surpasses CAC by a large margin
- 3 pts. — Subscription model or the need to make recurrent purchases or regularly recurrent high gross profit margin purchases
- 4 pts. — A combination of one-time & recurrent purchases with uncommon or not obvious distribution channels (such as business development partnerships)
Pricing (Max 2 pts.)
How does product pricing compare with the perceived value, quality, and the market?
Price doesn't just determine the ROI or gross margins. In most cultures, prices are an indicator of offering's quality. However, it does not mean that price is directly proportional to the size of features list.
- 0 pts. — Price exceed product value to the customer, perceived quality, or priced higher than competition without a compelling reason
- 1 pt. — Prices match customer expectation or are on par with the market 2 pts. — Product value to the customer exceeds the price, or product is priced significantly less than the market average
Unique Advantages (Max 3 pts.)
What are some of the qualities the company possesses in its current form that cannot be replicated by the competition (e.g. team, industry experience, endorsements, significant customer/user base)? (See Jason Cohen's blog on Unfair Advantages)
The simplest unique advantage is hard work. Anything that is achieved through it will be hard to replicate. The other one is luck, and you will be almost unstoppable if you manage to capture it.
- 0 pts. — Only product features are unique
- 1 pt. — Most advantages can be copied (such as a successful PR campaign)
- 2 pts. — Core qualities can be sustained at least for some time (such as an experienced team & some product traction)
- 3 pts. — All advantages are clearly identified and are acted upon allowing the company to sustain an leading position in the long term
Product Design (Max 3 pts.)
How easy is it to use your product?
True user experience experts are hard to find. Yet, it doesn't mean your product's learning curve should be as steep as the one for Unix command line. Sure, there is a lot of cultural bias when judging product design, such as colors, fonts, or choice of words. However, little things like proprietary connectors, non-ergonomic dimensions, unexpected locations of features/options/switches, or poor documentation can destroy all other advantages at once.
- 0 pts. — Confusing user interface and/or lack of clear documentation
- 1 pts. — The advantages of the modified work-flow are not conveyed well
- 2 pts. — Minor inconsistencies in user experience and fallacies in expected behavior
- 3 pts. — Smooth & stellar user experience that has minimal to no learning curve
Marketing (Max 3 pts.)
How do you engage with potential customers?
The days of large flashy billboards screaming, "Buy our product!" are long gone. All potential customers & users are overwhelmed with such messages and many even ignore them completely. Thus, the best way to succeed is to become one of the household names in your industry by confirming your competency.
- 0 pts. — Inbound marketing chanells are not used at all
- 1 pt. — Publications are limited to press releases and product updates; company has no relationship with its customers and/or users
- 2 pts. — Content produced in official company channels provides some useful information such as advice or industry news; company engages its most devoted users/customers
- 3 pts. — Company is an established expert authority in its space and actively shares its expertise; company makes all users feel engaged in the product development cycle and engages all users/customers equally
Distribution Channels (Max 3 pts.)
How easy is it to become a user or a customer?
This is straighforward: the fewer places where the product can be purchased the fewer potential customers will know about it; the longer it is for a lead to become a customer, the fewer money the company makes as it has huge CAC. Every company must maximize the exposure to the potential customers and minimize the friction in the process of purchasing the product.
- 0 pts. — Lack of clear purchase options
- 1 pt. — Required communication with a sales agent or no direct sales
- 2 pts. — Simple see->choose->pay process
- 3 pts. — Strong affiliate or distributor network
Virality (select B2C only) (Max 2 pts.)
How easy is it to spread the word & invite others if the user experience is improved with social interactions?
When the word about your offering spreads on its own, you save on customer acquisition. Unfortunately, it works best only in the consumer world. If you find out a way to make a B2B product viral (i.e. the more companies use it the better everyone's experience is), we will love to hear about it.
- 0 pts. — No way to spread the word or invite friends
- 1 pt. — Customers can easily broadcast their experience & invite others to join but presence of connections does not improve individual experience
- 2 pts. — An established network of connections among fellow users improves experience for each individual; it's easy to spread the word; the value is clearly conveyed
Bonus: First mover advantage (Max 1 pt.)
Being the first doesn't mean you will be successful. Google did not invent the first search engine or the first PPC bidding system. Facebook was not the first social network. Ford was not the first automobile maker.
- 0 pts. — No
- 1 pt. — Yes
The brackets are based on the percentage of the total possible points for the criteria reviewed. If a company does not respond to all questions in the application, the review will be based on publicly available information and may not fully reflect the company's position in the market. It will be noted in the review if such a situation comes about
Note: All reviews are subjective. The reviews reflect the market conditions and author's position at the time of writing. We do not update the scores as the time passes. The rankings are in no way the ultimate predictor of a company's success and must be taken as reference points only. The rankings are only our own opinion on a company's success.
Scalable (over 75%) — A company with such a high score is very likely to grow large unless it is mismanaged. They should be able to raise investor funds if necessary. In the long run, these companies should bring jackpots to the founders.
Maybe (50—75%) — This company is likely to be solid lifestyle businesses that provide enough profits for founders to enjoy a comfortable life. Under certain conditions, they may be acquired or attract investor funds. However, some improvements will be needed in criteria that scored the lowest.
Hobby (30—50%) — A company located on the left side of the bell curve can provide the founders with a good supplemental income if it doesn't require a big time commitment. It is less likely to become the sole source of livelihood than a Maybe and will most definitely not attract outside investments beyond the FFF. If your company's score is in this range, it might be worthwhile to consider a pivot in the business model and explore other market opportunities.
Stillborn (below 30%) — You should be proud that you overcame your fear, created a company, and built a product. However, there is no reason for that product to be around for much longer. Look at this time as a great learning experience, pack your bags, and move on to the next venture. You will be making the most radical & toughest pivot of your life but you will save yourself anguish over things not working out later on.