One of the biggest mistakes that we observe organizations making when developing new businesses is writing a business plan, creating lengthy financial projections, and then immediately diving head first into executing on their plans. This only maximizes the risk of failure since in many cases, intrapreneurs and entrepreneurs alike are on the verge of launching a product or service that customers don't want and that their business models can't support.
Building something nobody wants is the number one reason for new business failure. But even if you do build something that customers want, you can still fail to build an appropriate business model around it. So before you begin executing on that "next big thing" you need to test your ideas to be sure you've achieved the proper fit with the market and for your company.
Three Kinds of Fit
You should always be striving to achieve three kinds of fit before you begin any tasks related to execution: Problem-Solution Fit, Product-Market Fit, and Business Model Fit. Achieving these three kinds of fit will help you minimize the risk of failure.
1. Problem-Solution Fit - this occurs when you have evidence that customers care about certain jobs, pains, and gains. At this stage you've proved the existence of a problem and have designed a value proposition that addresses your customers' jobs, pains and gains. Unfortunately you still do not have clear evidence that your customer really care enough about your value proposition enough to buy it.
2. Product-Market Fit occurs when you have evidence that your value proposition is actually creating value for customers by alleviating their pains and creating the gains they desire. Your product or service is beginning to gain traction in the market and you've gone through the long and iterative process of running tests that have validated and invalidated the various assumptions underlying your value proposition.
3. Business Model Fit occurs when you have evidence that your value proposition is embedded in a profitable and scalable business model. You have done the laborious back and forth between designing a value proposition that creates value for your customers and a business model that creates value for your organization. You have found the right business model that delivers optimal profitability.
Your value proposition will only exist "on paper" at the stage of problem-solution fit. As you approach product-market fit your value proposition will begin to truly resonate with and create value for customers. When you've achieved business model fit your business model will begin creating value for your company.
Achieving these three types of fit requires you to go back and forth between your original idea and the outside world, getting out of the building all along the way to directly test and experiment with customers. Though the process of building value propositions and business models is iterative and messy, this process is absolutely crucial to the success of your new business.
In Value Proposition Design, we created and compiled a comprehensive set of tools and techniques to help you navigate through the messy, iterative business design process effectively and cheaply. In order to minimize the high risk of failure today's fittest companies voraciously strive to apply these methods and tools in real practice before they begin executing on their ideas.