It is perhaps even more essential that we are committed to creating valuable products – valuable both to society and commercially. Here’s how to help make that happen.
Consultants across the world have managed to convince themselves that it’s possible to predict the future. All you need is bright people, benchmark data and a spreadsheet. The result? Promises get made, bad bets are placed and good ideas get missed.
I’m talking about an exercise often referred to as ‘commercial modelling’. If you’ve worked in a product or growth team, you’ve probably created a commercial model (I have created many over the years).
For me, how we think about and use commercial modelling is fundamentally broken. In order to get value from such an exercise, we must shift how we think about its purpose and its effectiveness.
The intent behind a commercial model makes perfect sense: increase confidence that an idea is going to give a financial return. But the way we use commercial models has morphed so much, it’s unable to provide that desired confidence. This is down to two main reasons:
The most common cause of failed commercial models is that people ask the wrong questions. Some of the most common ones I hear are:
Instead, try a more flexible approach. Think in short-term experiments and focus on the economics rather than the totals. More on that later.
One of the most common things I hear product teams say is “we don’t need to look at the commercials yet, we’re way off that”. Yet according to CB Insights, 18% of startups that fail do so because they have pricing or cost issues, and 17% fail for having a product without a business model.
For me, these two stats are related. Many teams focus too much effort on the product and wait too long to design (and prototype) a business model capable of monetising that product. They also wait too long to test the risky commercial assumptions behind it.
It is possible to use commercial modelling effectively. In fact, it’s necessary in order to build financially successful products. Here’s how:
Use a commercial model to help you to make decisions and prioritise between ideas from the get-go. Ask yourself:
Understanding the economics will tell you the commercial levers that you have at your disposal to make this product a financial success. Ask yourself:
Experiments don’t just have to be customer ones. A good commercial model can be used to run quick experiments during product ideation. Ask yourself:
Whilst top-down calculations can be useful for producing quick answers (e.g. market size), only bottom-up analysis can de-risk your commercial assumptions. Building your model from the ground up means thinking at a customer level rather than a market one. Doing this early will let you segment your commercial model and your assumptions more easily, allowing you to experiment at a more granular level later on.
More often than not, a product team knows their product better than anyone else. Don’t be afraid to use this knowledge and experience to make assumptions around your commercials. Just make sure that when you do, you document them and can replace them with evidence later down the line.
I’m not telling you to avoid creating commercial models – far from it. My main hope is that you’re now reinvigorated to build your confidence in the commerciality of your ideas. Now more than ever, confidence is key.
While your teams are probably under a lot of pressure right now, this is an exercise really worth making time for. Just remember, approach this as a real test of how good your idea is. Not a tick box exercise for the next round of funding.