Product managers often rely on user-centric design methodologies like Design Thinking or Customer Development. It helps to lower the risks that customers will NOT embrace a new business idea. But what comes next? How can you transform a product idea into a business with minimal risk?
Design Thinking and Customer Development are problem-solving techniques optimized for navigating uncertainty. They are typically used to explore user pains and needs. But how can their core principles be applied to building a business model?
The consulting firm Peer Insight in their Business Model Toolkit uses the “Investment-Risk” curve. It illustrates an approach for reducing risks through testing and experimentation. At each step, uncertainties are eliminated, and assumptions are validated or disproved with facts and empirical data. This process helps bridge the gap between a potential user saying they like your product and actual monetization. It facilitates the transition to the state, when a customer is willing to pay for your offering.
Next, we will explain the Peer Insight method for developing a new business model. The original document is available on the Peer Insight website: Business Model Design Toolkit (registration is required for download).
The Peer Insight Method for Testing Business Models #
Developing a new business model involves four key stages:
- Draft a Business Model Using Templates
Use four templates to explore and test various hypothesis options. This helps evaluate first ideas across key sections of the business model. - Create a Hypothesis List (Assumptions to Validate)
The completed templates represent your initial guesses. Identify unanswered questions by asking yourself: “What am I not 100% certain about?” - Develop a Testing Plan and Prototypes
Select 2–3 key hypotheses and create a testing plan to address the remaining uncertainties. - Run the Test
Build a product prototype for testing and start validating each hypothesis!
Step 1: Design Your Business Model Using 4 Templates #
1: Value Proposition #
The first step in scaling your idea is defining your value proposition. It helps find who you want to sell your product to (your target user) and the unmet need to tackle.
The value proposition template highlights the benefits your product delivers to the target user. It also shows how you differentiate yourself from competitors.
It’s important to note that you may have more than one target user. You’ll need to consider the differences in what they may want or need (e.g., the user vs. the customer/buyer in a B2B context).
This template is not rigid. As you gather insights through research, you can refine and improve your value proposition to align with user needs.
| User 1 | User 1 | |
|---|---|---|
| FOR Target | ||
| WHO WANT Unmet Needs | ||
| WE WILL OFFER Offering | ||
| THAT PROVIDES Benefits | ||
| UNIQUELY Differentiation |
2: Revenue Model #
The revenue model is developed after defining the value proposition. It helps decide who will actually pay for your product, not just gain from it. Key considerations include:
- How often will customers pay?
- What payment structure makes sense—subscription-based, activity based, or one-time buy?
These questions must be tested with real users in the market. Start with a reasonable hypothesis and confirm or refute it through research.
Peer Insight uses the next terms and definitions (word bank) for their revenue model.
Peer Insight Terms for the Revenue Model
| Category | Term | Definition |
|---|---|---|
| 1. USERS | Consumer [B2C] | An individual consumer is buying or benefiting from the offering. |
| Business [B2B] | A private or public organization is buying or benefiting from the offering. | |
| Third Party | A third-party is buying or benefiting from the offering. | |
| Shared / Co-Pay | A group of buyers or beneficiaries share costs. | |
| 2. SALES CHANNELS | Online Search / Paid Ads | User searches for a keyword and comes across your offering’s web page. |
| Social Media | A user discovers your offering either organically or via a sponsored post. | |
| Word of Mouth / Referrals | A user learns about your offering from trusted sources. | |
| Direct Sales | A user interacts with someone representing your brand. | |
| Store / E-commerce | A user encounters your offering while shopping online or in-store. | |
| Franchise / Reseller | A user discovers your offering while shopping through a third-party supplier’s online or physical store. | |
| 3. ON-RAMP (CUSTOMER ACQUISITION) | Free Consultation | A product representative explains the value and capabilities of your offering to a user. |
| Demo | A user explores the product’s demo, learning about its features and ways to maximize its value. | |
| Money-Back Guarantee | A user purchases the product with an option to return it for a full refund. | |
| Free Trial | A user tries the offering free of charge for a limited period. | |
| Referral Bonus | A user receives a discount for referring others. | |
| 4. VALUE EXCHANGE | Usage Fee | A user pays each time they use the offering. |
| Subscription | A user pays periodically at a fixed frequency for access. | |
| One-Time Payment | A user pays once for unlimited access. | |
| Free (Ad/Data-Based) | A user pays nothing but generates revenue through engagement or data contribution. | |
| Profit Sharing | A user pays from the profits earned by using the offering. | |
| Freemium | A user gets free access to the basic version of the offering and can pay for additional services/features. | |
| Activity Based [gained popularity with the recent development of the digital labor and AI] | Activity-Based Pricing is determined by the specific activities or tasks performed by the service or product. It is not based on flat rates, time, or subscription fees. It’s often used for selling digital labor and AI agents because these services are designed to conduct measurable, discrete tasks. |
Identify the primary capabilities of your offering using your Value Proposition (as outlined earlier). Describe how it delivers value to users.
Peer Insight Key Questions for the Revenue Model
Use these questions to find out about your target user/customer, sales channels, and on-ramp, value exchange, and retention methods.
| Who is your target user? | Are they paying for it [your value proposition]? Do they get value from your service/product (the beneficiary)? What are their pain points that your offering seeks to address? [USER] lifestyle is [ADJECTIVE]. When she [COMMON ACTIVITY THAT YOUR OFFERING ADDRESSES], she is always having to [TARGET USER PAIN POINTS]. |
| How will potential users learn about the offering? | One day, when she’s trying to [COMMON ACTIVITY YOUR OFFERING ADDRESSES], she learns about [YOUR OFFERING] from [CHANNELS]. She’s attracted to [YOUR OFFERING] because it [CORE FEATURES], which will improve her life by [KEY CUSTOMER BENEFITS]. To see if [YOUR OFFERING] is right for her, she explores it more deeply by [ON-RAMP]. |
| How will your user acquire your offering? | She finds value in [YOUR OFFERING] and decides to acquire it by going to [CHANNEL] and choosing… |
| Choose a model for how your user exchanges value for your offering: | ▢ SUBSCRIPTION User pays a rate for offering on a fixed cadence e.g. Netflix, Stitch Fix …to subscribe and pay [PRICE] on a [FREQUENCY] basis, but also has the option to [OTHER SUBSCRIPTION PLANS/OTHER VALUE-EXCHANGE MODELS]. |
| ▢ PAY-PER-USE User pays everytime they use the offering e.g. Parking Meter… to pay [RATE] every time she uses it, but also has the option to OTHER VALUE-EXCHANGE MODELS. | |
| ▢ ONE-TIME User pays for the offering 1 time and gets unlimited access. Financing: user pays a rate on a fixed cadence, with interest, e.g. Buying a car, …to buy it for [PRICE], but she also has the option to FINANCING OPTIONS/OTHER VALUE-EXCHANGE MODELS. | |
| ▢ FREE-ACCESS User doesn’t pay for offering, but they create revenue through engagement e.g. Social media, Google Search. Freemium: User accesses a basic version of the offering for free and can pay for add-on services/tools e.g. Spotify, Zoom, Conferencing. …to use it for free, with the option to pay for [ADDITIONAL FEATURES/FUNCTIONALITY]. | |
| ▢ Activity-Based Pricing User pays for the specific activities or tasks performed by the service or product. E.g., HR AI Agent collects 1,000 CVs from the web-site, processes them, and moves to the next step. … to pay for results or outcomes. | |
| How will you keep users coming back for more? | She continues to engage with [YOUR OFFERING] by [CHANNELS]/[VALUE EXCHANGE]. |
3. Supply Chain #
When creating a new business model, many assume they must build the product entirely from scratch. This often happens even before confirming whether customers will pay for it.
The Supplier Model Template helps identify what can be purchased, borrowed, outsourced, created, or restricted to test your business model.
Rather than doing everything internally, this template helps uncover ways to reduce time and costs. By leveraging suppliers for ready-made components, businesses can efficiently test their hypotheses.
| buy | make | ||
| Buy | Bring | ||
| … offering … | Build | ||
| Borrow | |||
| buy | make | ||
| Block | |||
The Supplier Model Template highlights key elements for considering external and internal options when developing a business model. Here’s what each highlighted element represents:
- Buy:
- Refers to purchasing ready-made components or solutions from external suppliers.
- This option reduces time and effort by leveraging pre-existing resources.
- Bring:
- Indicates sourcing resources or capabilities internally within the organization.
- This involves utilizing in-house expertise or assets to contribute to the offering.
- Borrow:
- Refers to temporarily accessing resources or components through partnerships, rentals, or other short-term arrangements.
- This minimizes commitment while enabling testing or development.
- Build:
- Focuses on creating new components or solutions from scratch within the organization.
- This approach allows for complete customization but requires more time and investment.
- Block:
- Represents restricting or controlling access to certain elements of the offering.
- This strategy may involve exclusivity, patents, or other barriers to protect the business model from competition.
These elements help businesses strategically decide how to design their offerings and test hypotheses efficiently.
4. Control Points #
The Control Points Grid, a tool for assessing how defensible your business idea or solution is against competitors. The grid emphasizes the importance of creating elements in your solution that are harder for competitors to replicate. This makes your business model more robust and sustainable.
| Ubiquitous <—> Constrained | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Elements of the Solution | Free, Available to All | Commodity | Many Providers Exist | Several Providers Exist | Possible to Observe + Copy | Branded + Expensive to Copy | Producible by Only a Few Firms | Protected by Contractual Secrecy | Protected by Patent | Protected by Concealment |
| 1 | ||||||||||
| 2 | ||||||||||
| 3 | ||||||||||
| 4 | ||||||||||
| 5 | ||||||||||
| 6 | ||||||||||
The grid moves from ubiquitous elements to constrained. The goal is to develop “special sauce” components—unique features that set your solution apart and ensure its defensibility. These can include proprietary algorithms, data collection techniques, or intellectual property protections.
Key Concepts:
- Ubiquitous Side: These elements are widely available or easy to copy, like commodities or services offered by many providers.
- Constrained Side: These elements are more defensible due to protections like patents, secrecy, or unique production methods.
This template helps to assess their solution’s elements and position them on the grid based on their defensibility.
When testing a new business model, map out key solution elements on this grid. Evaluate if your idea has unique, constrained features or if competitors can easily replicate it. For scaling your business, aim to shift elements further toward the constrained end to build a stronger competitive advantage.
Step 2: Make A List of Assumptions #
The “List of Assumptions” template helps identify critical assumptions before testing a business model. Assumptions are beliefs taken as true without proof.
Testing assumptions focuses on confirming or disconfirming ideas early, saving time and resources. These assumptions fall into three categories:
- Value
- Execution
- Scale
The goal is to tackle critical uncertainties, ensuring a solid foundation for the business model:
- Identify Assumptions: List out critical assumptions for each category.
- Test Hypotheses: Conduct experiments to confirm or disconfirm each assumption.
- Document Results: Record the outcomes to refine the business model or pivot based on findings.
| Category | Assumption | Confirmed | Disconfirmed |
|---|---|---|---|
| Value Test | Customers want it | ||
| Customers will pay for it | |||
| Partners want it | |||
| Execution Test | We can produce the experience technically | ||
| We can operate the business as it grows | |||
| Scale Test | Addressable market is big enough | ||
| We can acquire customers affordably | |||
| Revenues exceed costs at scale | |||
| We can protect our intellectual property (IP) |
Step 3: Create the Test Plan & Prototypes #
The “Test Plan & Prototypes” template provides a structured approach to validating assumptions. Businesses can map the most critical and riskiest assumptions to specific prototypes and test plans. They can confirm or disconfirm these assumptions using measurable data. This step focuses on clarity and specificity in testing, ensuring that each assumption is addressed with actionable insights.
The template categorizes information into five columns to guide the testing process:
- Risk Level: Align assumptions based on their risk level (more risky to less risky).
- What we don’t know: List the critical assumption(s) to test.
- How can we test this? Specify prototyping methods for testing the assumptions.
- How will you know you’re right/wrong? Define success criteria and metrics.
- What do we need to test that? Identify necessary resources, timelines, and target users.
| Risk Level | What we don’t know | How can we test this? | How will you know you’re right/wrong? | What do we need to test that? |
|---|---|---|---|---|
| High | Assumption 1 (more risky) | Prototyping method for Assumption 1 | Metrics and success criteria for Assumption 1 | Resources (staff, skills, money); timeline; target users |
| Medium | Assumption 2 | Prototyping method for Assumption 2 | Metrics and success criteria for Assumption 2 | Resources (staff, skills, money); timeline; target users |
| Low | Assumption 3 (less risky) | Prototyping method for Assumption 3 | Metrics and success criteria for Assumption 3 | Resources (staff, skills, money); timeline; target users |
Peer Insight also warns against attempting to create a single “super test” for all assumptions. This “tempting” approach may obscure the clarity of results. Instead, they recommend isolating test variables. It ensures data accurately reflects the validity of each individual assumption.
Why Create A Prototype? #
Peer Insight emphasizes prototyping as a critical step in business model testing. It provides actionable behavioral data—referred to as “do-data.” Unlike verbal feedback or “say-data,” behavioral data offers a more reliable indicator of future actions.
Key benefits of prototyping include:
- Behavior Observation: Prototypes allow users to interact with a tangible representation of the product or service. It is better to observe actual behavior rather than relying solely on feedback.
- Cost Efficiency: Prototypes do not require extensive resources or large-scale pilots, making them an affordable way to test assumptions.
- Deeper Understanding: Prototyping fosters meaningful dialogue with users, uncovering insights about their needs, preferences, and willingness to pay.
Peer Insight categorizes prototypes into three fidelity levels to suit varying constraints:
- Low-Fidelity Prototypes (e.g., paper prototypes, pitch decks, pitch videos): Simple, visual tools to communicate the value proposition.
- Medium-Fidelity Prototypes (e.g., digital mockups, physical mockups, Adwords campaigns): Interactive experiences for users to engage with specific features.
- High-Fidelity Prototypes (e.g., functional prototypes, limited pilots): Nearly complete offerings that simulate real-world experiences.
By tailoring prototypes to specific constraints like time and budget, product team can efficiently validate assumptions and refine their offerings.
Step 4: Run the Test #
Executing the test plan is critical to validating your business model. Monitor the data and adapt as necessary.
Focus on Critical Assumptions #
Test only the essential components needed to validate your make-or-break assumptions. Avoid overcomplicating the testing process. A few tips and tricks from Peer Insight to keep in mind when testing a business model.
Move from “Say Data” to “Do Data” #
Gather behavioral data by placing users in realistic conditions. Measure actual behavior rather than relying on verbal feedback.
Bypass Systems Where Possible #
Simplify the process. Identify the scrappiest method to test the experience effectively without sacrificing valuable insights.
Be Nimble #
Adjust based on learnings from tests. Document changes and stay flexible to maximize insights without overcommitting to one approach.
It’s Just the First Dollar #
The first payment validates the revenue model. Beyond that, focus on adoption rates, customer acquisition costs, and churn rates.
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