The business model metrics are the correct answer to All these questions: How do you evaluate your business model? How do you know you have the perfect business model? How do you know the weaknesses of your business model?. Therefore, knowledge of business model metrics is significant for every business person.
The business model metrics refer to the criteria or elements by which a business model can be evaluated. and It’s consists of five main metrics: Profitability scale, Repeatability scale, Scalability scale, Competition scale, and Protection scale
The business model is the cornerstone of any business (refer to How to describe your BM article for more information about the business model description). Therefore, If the business model is not solid, this will be reflected in the business. This article shows you how to evaluate your business model using the business model metrics. Moreover, it shows you how to use them effectively and. Let’s get started.
Table of Contents
The goals of business model metrics:
The goals of using business model metrics vary among companies, depending on the size of the companies and their position in the market. But the main goal is to evaluate the companies business model. For example:
Startups evaluate their business model to ensure they have acquired a business model that meets their profitability, repeatability, and scalability aspirations.
Operating companies continuously evaluate their business model and re-evaluate it from time to time to identify and address vulnerabilities and develop the business model to cope with market changes.
Before investing their money in any company, investors carefully evaluate the business model to see if they can get a rewarding return on their investments.
Importance of business model metrics:
The following points show you the importance of having business model metrics:
- Metrics work to standardize evaluation aspects, so you can compare different business model evaluation results.
- Metrics help organize and speed up the evaluation process.
- Metrics help you evaluate all key aspects of evaluation.
- Metrics help non-specialists evaluate business models easily.
These are also some of the other advantages of having specific business model metrics. In the rest of the article, we will explain these benefits.
Profitability Scale:
Profitability is the goal of any business. Therefore, any business without profit quickly or later will fade from existence.
You need to evaluate the effectiveness of the strategies and tactics used for profit. Also, you need to assess how stable these strategies are in the face of market changes.
The following questions will help you to evaluate the profitability of any business model:
- Is the business model profitable?
- How does your business model achieve profitability?
- What is the best production level for the best profitability?
- What is the break-even point of the business model, where the expenses are equal to the income?
Repeatability scale:
What is the ability of the business model to replicate the same output when the same steps are repeated? In other words, each time you repeat the same steps, the business model outputs the same output. repeatability is an important character of any business model (refer to How To Describe Your Business Model article for more information about repeatability)
The following questions will explain the idea further:
• Are the production steps clear? Does it produce the same product quality every time?
• Are the sales steps clear? If the sales steps are repeated, will it generate the same selling size every time?
• Does the business model work regardless of the personal characteristics of the people doing the work?
• Does the business model requires highly qualified staff? Or does it need staff with average skills?
This scale aims to determine the extent to which the business model depends on the personal qualities of its employees.
The business model should be as independent of the personal qualities of individuals as possible. Instead, it should depend on its own ability to repeat the same production quality and the same sales rates each time.
Scalability scale:
This scale aims to know the business model’s ability to reach more customers in a wide range of geographical areas.
Four main factors limit the Scalability of the business model:
- The small and limited size of the target segment of customers. There is room for scalability only by targeting another segment of customers.
- Competitors’ acquisition of a large market share. Your business model does not have enough competitive advantage to acquire a larger share. The competition will be discussed in detail in the Competitiveness Scale in this article.
- Sometimes a factor in the business model may limit business expansion. For example, if there is an agreement with one of your major suppliers to operate within a specific geographical area.
- Lack of budget for expansion.
Therefore, when evaluating the scalability of the business model, ask the following questions:
- Is the customer segment size large enough to scale up?
- If you would spend an extra $ 1 on your business model, how many dollars would that return as a profit?
- Is my competitive advantage sufficient to capture a larger market share?
- What is the business model strategy for scale-up, and is it effective?
- What resources are needed for scale-up? Moreover, how to get it?
Competition scale:
Competition is one of the most critical elements of business success.
Sometimes the business model targets a highly competitive customer segment. And the company has not developed appropriate strategies to overcome this competition. This leads to the business’s inability to obtain a suitable market share sufficient to continue.
By answering the following questions, you can evaluate the competition your business model faces:
- Who are your current competitors in the market?
- What drives the customer to buy your product, rather than your competitors’? What is the competitive advantage of your business model?
- What is the ability of new competitors to enter the market?
- What is the impact of competition on the potential of the business model to generate profitability?
- What is the impact of competition on the possibility of scalability?
Protection scale:
The business model works in a risky environment, with internal and external risks. Therefore, if the business model is not protected from these risks, all parts and results are easily susceptible to demise.
The risk sources are numerous and varied. For example:
- The emergence of new technologies in production. The emergence of a new business model that depends on new methods and means, so the old business models are eliminated.
- Change of government laws and procedures may limit the company’s work in a particular area.
- Consumers move to alternative goods and products. Because of, changing consumer patterns,
- Employees in the company may be a threat. For example, an employee may behave irresponsibly and opportunistically with customers, or not preserve the company’s resources, or exploit their positions in the company to achieve individual interests detrimental to the company and its customers.
Therefore, when assessing the business model, it is necessary to determine its vulnerability to these risks and overcome them. The following questions will help you develop a comprehensive framework of expected risks and overcome them.
- Current risks affect the business model
- Expected risks affect the business model
- What strategies and tactics exist to address these risks?
- What are the plans and alternatives to face future risks?
- How to reduce the impact of these risks
- Business model’s ability to profit risk
- What are the risks to the business model’s ability to replicate
- What are the risks to the business model’s ability to scale-up
These are the five main metrics for evaluating the business model. With these metrics, you can quickly assess any business model. The following paragraphs will explain how to deal with the results of the business model evaluation.
Business model evaluation results
It isn’t easy to obtain an ideal business. Also, enterprises vary in ambition and potential. Evaluation results may satisfy some companies and, at the same time, not satisfy others. For example:
Small and medium-sized companies:
Mostly, this type of business does not aspire to scale up. This type is satisfied with a reasonable profit, usually between 30% and 50%.
This type of business may suit a business model that provides a reasonable income. Moreover, this type of business is not looking at high scale-up, repetition, and protection standards.
Startups:
These companies carry the idea of scale-up from the beginning, and they spread and sweep the markets. Their ambition may be to achieve a very high income, more than ten times the value of investments. This type of business is concerned with the standards of scale-up and protection in addition to other standards.
Operating Companies:
These companies evaluate their business model to identify deficiencies to address them. Also, they develop their business model to suit market fluctuations.
Conclusion
Evaluating the business model is an essential process for investors and all business types.
Startups evaluate their business model to ensure they have acquired a business model to build a company that meets their ambitions.
Operating companies are evaluating their business models to identify and address deficiencies.
Investors carefully evaluate their business model to see if they are fit for investment. Before investing their money in companies,
Therefore, the business model metrics are the Specific measures to evaluate the business model extensively to help accomplish this task easily and professionally.
After the business model is evaluated using these metrics, it is accepted or adjusted according to the objectives and aspirations of each business based on the results.