This amazingly simple formula drives virtually every successful business. Unfortunately, many entrepreneurs and investors lose sight of these basic principles.
Success in business, especially in growing businesses, does not require an ingeniously complex solution. Often, success comes from mastering the basic fundamentals.
In short, success is about addressing a customer need better than you or your competitors currently address it. In many cases, the "new and improved" solution is surprisingly incremental, rather than revolutionary. Examples abound:
Google, one of the most valuable companies in the world, began as a slightly better search engine.
The Toyota Camry was the best-selling car in America for many years because it had better gas mileage, was fun to drive, didn't break down, and was less expensive than other sedans.
Oprah Winfrey dominated daytime TV by tapping into topics for women in more interesting ways than Phil Donahue and others had done for years.
Starbucks reinvented the concept of the coffee shop-something that had been around for generations-by consistently serving good coffee in a pleasant environment.
As we analyze the drivers of success in these and virtually all other entrepreneurial successes, we find that there is an extremely basic, and in hindsight, glaringly obvious, four-step formula common to each.
1. Develop an understanding of customer value.
What's the value equation from the customer perspective? This is defined, most simply, as benefit minus cost. Many businesses and entrepreneurs simply don't understand what would make a customer happier or better off. Often they are trying to fit their product to the customer rather than identify what product would fit the customer
2. Create a better product or solution for a specific customer.
Because each customer is different, identifying the specific customer or segment you are targeting is critical. Attempting to be all things to all people typically results in an indistinct product that benefits no one.
3. Determine how to scale the product from one customer to many customers.
Once you've mastered the value equation for one customer, you can focus on finding many customers that think and act alike. Most management teams try to scale the business before they've created a valuable product with one customer. It's similar to launching a rocket to the moon without mastering the aerodynamics. It might have the power to get there, but it's not going to make it.
4. Develop a business model that allows you to build scale while generating incremental return on investment.
In the end, you'll need to build a business case for investing capital to grow the business. If the customer value equation is still in flux, no amount of growth capital will fix the problem. We like Alex Osterwalder's business model canvas as a template for building a solid business model. But, it's important to calculate how the investment will create a return on capital.
Of course, execution is everything. If business success was as easy as following a few steps, everyone would be a mega-billionaire. But it's surprising how many competent entrepreneurs, corporations, and even experienced strategists develop business models that omit one or more of these basic steps.
KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree. @karlstark