Lately, I’ve been thinking more about David Friedberg’s Rubric for Business Value Creation. I’m always searching for ideas that capture an important concept with broad applicability. After working on it a bit, I’ve distilled the six value creation questions into simpler phrasing and tweaked them slightly.
Six questions for business value creation in 10 words:
- Customer profitable?
- Customer profitably acquirable?
- Investment scalable?
Can you actually make the product or service? Is it possible? Some categories are easier, like a mobile app, while other categories are significantly harder, like a solar panel with dramatically more efficiency.
Do people want what you’re offering? Is there authentic demand? Most new ideas suffer from a lack of demand — no one wants the product — ultimately resulting in failure.
Can you make a positive gross margin on each unit you sell? For software, this is easier, while other categories, like more complicated physical products, becomes much harder.
Customer profitably acquirable?
Can you make a positive gross margin on each unit you sell after adding in the sales and marketing costs to acquire the customer? Acquiring customers is often expensive, making it challenging to both produce the product and sell it with a positive gross margin.
Can you continue to invest in the business and earn a high ROI as the business grows by improving gross margins, economies of scale, etc.? Some businesses, like software, have high ROI from continued investment whereas others don’t see an improvement in their business.
Can you add more products and services to upsell and cross-sell customers thereby taking advantage of your scale and infrastructure? Also known as a multi-product strategy, the main idea is being able to scale beyond the initial product in a way that creates additional enterprise value.
Now, in 10 words, we have six questions for business value creation that are universally applicable and readily understandable. Use these ideas the next time you’re contemplating a new business or working with an entrepreneur on her business. Creating value is challenging, but not impossible. Good luck!