Every business is situated at the intersection of 3 fundamental elements.
- The problem or the pain it solves
- How far does it go in delivering the solution to the consumer
- How far does in go in preparing the solution from its raw ingredients
Let’s call this collective as the Opportunity Space
Every entrepreneur is situated at the intersection of 2 basic traits.
- Core competencies the entrepreneur has or is capable of acquiring
- Rewards (profitability and the quality of life) the entrepreneur is willing to accept
Let’s call this collective as the Entrepreneur Space.
Businesses and their owners come with their competencies, perceptions, and biases. Either through well thought out plans, by hustle or just by sheer luck, they end up starting a business which is somewhere on the intersection of the 3 elements (axes) in Opportunity Space.
If you are struggling to find business ideas for your new venture. You need to know how to find that intersection points in both of these “Spaces”. You also need to know how to traverse these axes, understand the trade-offs and locate that optimal point that you are willing to accept.
I urge you to go beyond the common notion of finding a “niche”. It’s an important consideration but is only one part of the puzzle.
Here is how.
Let’s first assign some labels to these 3 elements (axis) in the Opportunity Space.
|QUESTION TO ASK||ELEMEMT NAME (AXIS)|
|What problem does the business solve||Consumer Problem (Axis-P)|
|How far does it go in delivering the solution to the consumer||Service Model (Axis-S)|
|How far does in go in preparing the solution from its raw ingredients||Value Chain (Axis-V)|
1. Consumer Problem (Axis-P)
All problems are important to the consumer but some are more urgent than the others. Consumers must have access to food and water before the need for intimacy and friendship arises. Let’s just call the basic needs (e.g. food and shelter) as the lower-order needs and more complex needs as the higher order needs.
Usually, lower end needs offer a larger addressable market opportunity when compared to the needs at the other end of the spectrum. It’s simply because a greater number of people need food and shelter (home) than the need to “discover themselves”.
Scope for innovation
How easy is it going to be finding a niche problem to solve?
Humankind figured out how to gather or prepare food hundreds of thousands of years ago. Over last few decades, entrepreneurs have started to tackle niche problems in the food industry by offering organic food, gluten-free food, and other specialties. They have also already attempted to solve niche problems in the transportation industry by building better cars or different types of cars (hybrid or electric).
So the question is – as an entrepreneur how likely you are going to find a niche in a low order needs where there is an unmet demand.
The answer is – plenty.
But there is a catch, though.
Almost all of those problems are going to require disruption. In fact, many of the old fashioned industries such as agriculture and construction are long waiting for disruption. Bringing disruption though innovation is not going to be easy. Disruption requires a significant amount of risk, investments, and patience.
Are you up for that?
You might argue that there are still many problems to be solved in the lower-order needs segment that do not require disruption. My response is going to be that if you dig deeper, your next idea will not be on the Axis-P but rather on Axis-V or Axis-S. Let’s take an example – Uber was not created to solve a new problem in transportation. It was created to solve an existing problem (of going from A to B) using a new method. Remember that in section we are only discussing the “problem need” itself and not“Value Chain (Axis-V)” or “Service Model (Axis-S)”
Physical Goods vs Non-Physical Goods
What if you are deciding between selling physical and digital products, Here is a clue. Products sold to solve the lower-order problems are likely to be physical goods, products that you can touch, feel and eat. For example – cookies, air-purifiers, clothing and LED bulbs. On the other end, product sold at the higher end going to more non-physical. For example – dating service, meditation lessons, self-improvement advisory.
It’s possible to sell a digital product that solves a lower end problem. For example selling a unique cooking recipe on your website. Well…then you are not innovating on Axis-C. You are innovating on Axis – S (Service Model)
It is important to recognize the axis you are innovating on. If it sounds confusing wait till we reach the description of the other axes.
2. Service Model (Axis-S)
There are 3 ways your product or service can manifest into solving consumer’s problem
- By teaching them how to solve it
- By selling them the tools for solving
- By doing (solving) it for them
Let’s start with 2 examples.
- A consumer is hungry and wants to eat food.
- Another consumer wants to repair the hole in the drywall.
1. Teach them
One way you can help a consumer is by teaching them how to solve the problem. You may not actually solve their problem but you will take them closer to the solution. In the above examples
- You will sell them a recipe for making healthy soups.
- You will sell them a video on repairing drywalls
Many businesses today are in the business of teaching. Some of the notable examples are consultants, advisors, online marketing gurus and some blogs.
Do not confuse the concept of “teaching” here with the actual profession of teaching or one-on-one tutoring. As you read through rest of the sections, you will realize that such businesses will fall under third category of Service Model (“Do it for them”).
2. Sell them tools
You can sell consumers a tangible product or tool that manifests itself into solving the problem with some effort on the consumer’s part. For example, if you sell ingredients for the soup, most consumers can make soup with the basic instructions on the packaging. Similarly, if you sell a drywall repair kit (Home Depot sells one), most consumers don’t need to hire a contractor.
3. Do it for them
Instead of helping solve consumer’s problem, solve it for them start to finish. For example, instead of selling soup ingredients or creating a YouTube video, serve freshly made hot soup in your restaurant cafe. Be a general contractor (or handyman) and repair their wall and much more. Your customer does not have to move a needle.
Someone asked me which service model does Angie’s List (or any other matchmaker) follow. Angie’s List (or Craigslist) are solving the problem of reducing an enormous time it takes to find a trustworthy when you need one. So these matchmaker websites fall in the “Sell them tools” category.
Here is another quiz. Which category selling music online falls under? What about concerts and movie theaters?
Share your answers in the comments section below.
Choice of service model determines the extent of payoffs and restrictions you are can accept for you and your business.
Commoditization and margins
If you “do it for them”, more than likely you are offering a solution that is unique (custom) to your customer’s tastes. More custom the solution, less likely it is going to get commoditized. By reducing the commoditization you can charge a premium and protect your margins. I am not implying that if you offer a custom solution a competitor cannot mimic your offering and take away your customers. Of course, they can but, chances of that happening are more if you were to sell “tools” that they can build or procure from the same factory as you are using for sourcing (Think Alibaba).
Going back to the example of the food business. It is much easier to scale to a national level if you are selling only ingredients (i.e. by our definition a “tool”). If you are building a restaurant, you are more likely to operate at a local and regional level.
It is certainly possible to scale up by leveraging franchise model. But by adopting the franchise model, the entrepreneur is now innovating on the Axis-V (Value Chain) and not on Axis-S (more on that in next section)
So you see, there are many ways to innovate and come up with ideas, just by choosing to innovate on one axis over the other.
Cost of production
The incremental cost of producing one additional unit of your offering is going to be highest for “Do it for them” business and lowest for “Teach them” business.
Because to serve each new customer in “Do it for them” the business, you need to hire more “bodies”. That means more labor costs.
For every additional tool you sell, you will still incur more cost but the incremental cost of producing a new widget are not going to exceed that of service business.
For “Teach them” service model, your instructions are created one time and you can sell them over and over, bringing the incremental cost of selling an additional unit to near zero.
3. Value Chain (Axis-V)
Value chain refers to the propagation of “benefits” from the raw materials to the end product consumed by the customer.
Here is visual to explain the concept.
So far you saw that it’s possible to innovate on Axis-P by finding variations of the problem to solve. If you choose to innovate on Axis-S, you can go as far as you feel comfortable in solving the problem.
Innovating on Axis-V, the Value Chain axis, gives you one more degree to freedom to find an idea.
Let’s say you wake up one day and discover your passion for imitation jewelry business.
You quickly find out that Axis-P is saturated for innovation.
Next, you ask yourself, what should I do on Axis-S? Should I teach my potential customers how to make jewelry at home? Naah. Not your cup of tea. You finally decide that you want to “sell jewelry”.
Next, you ask how can I innovate on on Axis-V. You have many options – you can sell directly to consumers, you can be a broker, a drop shipper. Not surprisingly you again realize that it’s is difficult to compete in online direct to consumer e-commerce business due to a large number of incumbents. Frustrated, you reach out your contacts and come to know of a supplier in China that is willing to build as per your design. You jump on that opportunity and start importing directly from supplier in China and selling to distributors in US. So Instead of becoming an online retailer, you became an importer. You innovated on Axis-V.
In this subsequent parts of this article, I will explore Entrepreneur Space and show how to put to all together using a case study. Stay tuned.