Start up Business Series: How to build the right business model
Date: 14/04/19 | Author: Sean Toomer
First question - what is a business model? It’s not just a word a lot of people in business use to try and look smart. A business model explains what you’re providing your customers (relieving a pain, making life easier, fulfilling a need etc), why your solution works better than competing ones, how and when they pay for it, and how to maximise profits. Basically it’s how the whole damn thing works.
Now I know this seems complicated, how you’re actually going to sell stuff, deliver it, how much for etc. but there are already many awesome business models out there that work, and if you chose the right one, will work incredibly well for you.
My first advice would be to stick to one of the examples from this list that we know already works, or at least a mixture of two. One of the worst mistakes a small business owner can make is trying to reinvent a business model, or create a new way of making money that “has never been done before”. To me, that sounds like “I am going to use an unproven way of making money for my business, and most likely not make any, get into a to a ton of debt, then revert back to a proven way once all the irreparable damage is done.”
Types of business model
Bringing supply and demand together. Simply create one place - usually online - where both customers and suppliers come together to buy and sell. This gives both the businesses and customers the most choice. Think eBay, Amazon & Trivago.
Person - to Person
One of the ever growing business models, made much easier with the internet. I’m guessing you thought renting rooms from random strangers was straight up weird too - but look at Airbnb who have made this model famous, and produce massive profits.
Not my favourite and one you will probably all know and in my experience, many small businesses fall into accidently - being the cheapest option.
Obviously, it can and does work. The idea being is that you need massive volume and then profit later. Customers like it as there is a large market looking to sacrifice quality/convenience for price.
Think opposite of eBay. Extremely price sensitive customers name their price for a service. If the business accepts the price, they do business.
A business can profit because there are plenty of customers that feel they’ve “won a great deal” here by essentially naming their price. However, profit would be volume based.
Would link well with Marketplace and Cheapest models.
Be the most expensive and offer a product at it’s highest price, often customized to be exactly what the customer wants - as the desire to buy is usually based on want and not need.
Being the most expensive can offer massive profit margins, but volume will be small.
Work out the best way to run a local/small operation and then turn this business knowledge into a system than can be sold and replicated 10,000 times across the world.
This is the simple idea behind McDonalds. The burgers may be crap, and the service received shocking, but it’s exactly the same, every time, no matter where in the world you are. And each individual McDonalds turns a healthy profit.
There are many other businesses who are franchises, such as Diverso Accountants (waheey!), Shakeaway, Domino's Pizza, to name a few.
Basically, buy something, maybe change it a little and then re-sell it. Like a supermarket, or sports shop or generally any other retail shop. They buy in bulk (with volume discounts) and resell to customers with a slightly higher price for convenience.
My favourite model! Take a service and rather than charge a big one-off, upfront fee, charge a smaller monthly (or weekly) fee. I like it because both the business benefits from better, more timely cash flow and so does the customer. It can make the service offering appear cheaper and also forces the business to focus on customer service - because if the customer doesn’t like it, they’ll stop paying and leave. Some examples would be Netflix, Diverso Accountants, Dollar Shave Club.
Which business model do I chose?
Ok, so those are the basic business models, now you need to chose one that best fits with your business, your offering and what your customers want.
Don’t be afraid to be creative here and think a little differently.
Consider Microsoft. It wasn’t too long ago, when buying a new Computer, you’d also need to buy Microsoft Office, which was a big upfront cost for a limited user license, that you know would only last you 3 years because a new version would be out by then and your version would be useless.
It’s only when companies like Netflix made the subscription model proven, and Google Docs came about that Microsoft was forced to adapt and offer Office 365. I know this because this was me when I started my business. By adopting a different business model and proving it worked, Netflix shook the technology industry. Now every app/bit of technology is subscription/pay monthly.
Test your marketplace. Just because accountants and solicitors have historically always charged by the hour, and followed a Cheapest/Premium business model didn’t mean we had to follow. Diverso is one of the only firms of accountants offering a pure subscription model - and we’ve made it work.
We didn’t just do this because it was different - it’s what our customers wanted. Customers hate not knowing how much something will cost - particularly if it’s a service - and they hate it even more when they get tied into a contract. Consider that - I’m going to provide you a service, I can’t prove to you how good it is until you’ve experienced it, I can’t tell you how much it’ll cost exactly, but I’m going to tie you in for a year. That’s ridiculous.
We’ve also seen it work with Web Design, Cleaners and other service firms you wouldn’t expect to see it happen.
Consider your USP’s
When choosing a business model, you need to consider your Unique Selling Points (USP’s) and the things that make you different. These will have a big impact on how you operate. For example, if your USP is to be the cheapest, you’re more likely to go with the Cheapest model. However, consider linking it with another model for a combination to make your offering even more attractive. Such as a Cheapest Subscription model, or even a Premium Subscription.
And finally, don’t be afraid to get it wrong - small businesses are agile - most I’ve seen will start cheap, then increase to be more towards premium for example. You can afford to make mistakes and learn from them
What to do now?
Get to work creating your business model and kick up a stink in your industry.
Also, look out for our next blog in the series - Creating your Vision which is here.
If you missed, our previous blog in the series, Market Research, can be found here.
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