Hello, folks, and welcome to a new blog post!
The inspiration for today’s piece comes from a conversation with one of the lead designers I’m currently coaching. S. is a talented strategic designer with several years of professional experience under her belt, having worked for large, complex corporates, as well as medium-sized enterprises, in several different countries. Despite the professional exposure to diverse types of businesses, she feels her business understanding is not enough to comfortably navigate some conversations with senior stakeholders and achieve the impact she is striving for.
Nowadays, designers have many options to develop a better business understanding, from a few weeks of crash courses to full-on MBA programs. Often, however, understanding some basic principles is enough to navigate the organisation and stakeholders’ relationships more confidently.
In this blog, I’ll share the foundational pieces, words you need to know the meaning of, and a few of the most common business models, along with some resources to expand your knowledge on the topic. This piece is strictly about the business aspects, meaning how the organisation creates, delivers, captures and monitors value. If you are interested in the organisational aspects instead, meaning how the firm is organised to create value, then read Organisational Fundamentals for Designers.
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Business Vocabulary
I have compiled a list of the most common words and acronyms you will likely encounter in your firm or institution.
Revenue: The total amount of money generated from the sale of goods or services related to the company's primary operations.
Cost: The expenditure incurred by a business to produce and sell products or services.
Profit: The financial gain realised when the revenue from business activities exceeds the costs and expenses associated with operating the business.
Gross Profit: Revenue minus the cost of goods sold (COGS). It shows how efficiently a company uses its resources to produce goods or services.
Net Profit: The actual profit after all expenses, including operating expenses, taxes, and interest, have been deducted from total revenue. Also known as the bottom line.
Cash Flow: The net amount of cash being transferred into and out of a business. Positive cash flow indicates that a company's liquid assets are increasing.
EBITDA: It stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, a measure of a company's overall financial performance and is used as an alternative to net income in some circumstances.
ROI: It stands for Return on Investment, a measure used to evaluate the efficiency of an investment or to compare the efficiency of several investments. Calculated as the benefit (return) of an investment divided by the cost of the investment.
Market Share: The portion of a market controlled by a particular company or product.
KPI: It stands for Key Performance Indicator, a measurable value that demonstrates how effectively a company is achieving key business objectives.
Due Diligence: An investigation or audit of a potential investment or product to confirm all facts, such as reviewing financial records.
PNL: It stands for Profit and Loss. It is a financial statement that summarizes the revenues, costs, and expenses incurred during a specific period, usually a fiscal quarter or year. These records provide information about a company's ability to generate profit by increasing revenue, reducing costs, or both.
Metric: A metric is a standard of measurement used to evaluate, compare, and track performance or progress within a specific context. Metrics are quantitative in nature and provide objective data that can be analysed to inform decision-making.
Business Models
Above, I defined business fundamentals as the rules to create, deliver, capture and monitor value in your firm. Although I’d love to tell you that value is a multifaceted construct encompassing financial, social and planetary considerations, the reality in many organisations is that value = money. So, that’s what I will focus on in this piece. I will make a note to myself to write a piece on considerations regarding value, though. Worth a reflection.
A business model is a conceptual framework that describes how an organization creates, delivers, and captures value. It outlines the rationale of how a company operates, makes money, and sustains itself over time. A well-defined business model serves as a blueprint for a company's strategy and operations, guiding decision-making and resource allocation.
To understand the most common types of business models, I will refer to the work of Jennifer van der Meer, one of the best business model designers I have ever encountered and the founder of Reason Street. I had the pleasure of working with Jennifer on a project for Ford Motors a few years ago. She has the useful ability to be able to translate complex constructs into simple language, making them accessible to everyone around the table. After a brief talk with her, you are left to think that business models are not that difficult to grasp!
On her website, Jennifer has shared a library of the most common business models, with a focus on recurring revenue business models, like SaaS, that allow long-term continuous value creation and iterative learning. She compares those models with other on-off models. She offers quick descriptions as well as a detailed tear-down of how each model works for the company and its customers.
I will report the summary of her descriptions here, but please do get to her website for more detailed descriptions and examples.
SaaS: It stands for Software-as-a-Service. Cloud-hosted software purchased as recurring revenue. Examples: Salesforce and Dropbox.
HaaS: It stands for Hardware-as-a-Service. Give access to hardware for maintenance and upgrades. Examples: Hilti, Vivint, Philips.
DaaS: It stands for Data-as-a-Service. Data. Data management, or analytics as a core or underlying asset. Examples: Bloomberg and Climate Corp.
Pay-Per-Use: The use of a product is metered. Customers are charged for total usage in a specific period. Examples: AWS and Magazino.
Freemium: Key features are made available for free, with premium features made available after an upgrade. Examples: LinkedIn and Slack.
2-Sided Marketplace: A platform for economic exchange between two user groups with or without a transaction fee. Examples: Didi, Airbnb and Etsy.
Subscription: A product, service, membership or experience is offered to a customer for periodic use. Examples: Netflix, Birchbox and Mollybox.
DTC: Direct-to-Consumer. A direct relationship with a customer through digital marketing. Examples: Warby Parker and 3 Squirrels.
Razorblade: The core product (the razor) is priced for uptake, while more money is made on the consumable (the blade). Examples: Nespresso and Gilette.
Professional Services: A group of consultants or skilled experts that deliver advice, counsel, or solutions for clients. Examples: McKinsey, Cooley and Accenture.
Advertising: Companies attract an audience to predict or cultivate intent, then sell access to advertisers. Examples: Facebook, Google and Hearst.
Flat Rate: Firms charge a published predictable fixed price rather than by the hour or other variable pricing. Examples: FedEx and USPS.
IaaS: Infrastructure-as-a-Service. Providers give users the ability to configure processing, storage, and networks through the cloud. Examples: AWS, Azure and Alibaba.
MSP: Managed Services Providers. Strategic partners take on, operationalise, transform, and optimise business operations. Examples: McKinsey, Cooley and Accenture.
PaaS: Platform-as-a-Service. Providers give developers services to accelerate software deployment with reduced cost and complexity. Examples: AWS Elastic Beanstalk and Heroku.
MaaS: Models-as-a-Service Providers. Pre-trained machine learning models over the internet for free or for a fee. Examples: OpenAI, MSFT and Amazon.
I hope this helps provide a cheat sheet to navigate some of the conversations with your stakeholders and spark some reflections on how to become increasingly more effective within your context. I advise you to take a moment to think about the way you articulate the value of your work. Can you embed some of the concepts illustrated in this blog into your narratives? If you manage to do so, your storytelling will become more accessible to those business stakeholders who are currently struggling to understand what you do.