If you are a small business, you rarely think of your business as having a business model. But it does. It does because the moment you have a single paying customer, she is paying for the value you create. It is another matter, if your business makes a profit consistently over the long term. Sustainable profit is why it is important to understand the business model concept.Here is a definition based on the highly cited article by David Teece.
A business model is the manner in which you provide value to your customer that is paid for (by whom – is considered in the questions below ). You cover your costs and make a profit on a sustainable basis.
If you are wondering what is my business model, answering the following 7 questions will help:
- What customer problem are you trying to solve? The customer tries to solve a problem when she uses any product or service. Key to this idea is that there are different segments of customers who think of problems differently. For example, car buying is highly stressful for some segments of customers while some others seem to enjoy the process. A famous marketing example is that customers don’t buy drill bits, they need to drill holes! So if you are a drill bit manufacturer you need to take the time to understand all about what kind of surfaces (wood, baseboard,metal) that the customer might be working on.This understanding will go into the kind of material used in the drill bit and its design.
- Who will pay you? Traditionally the user was the customer who paid you, the supplier. With the Internet things have changed radically in many industries. We search Google for free and Google sees the searching people as their primary customers. The money comes from businesses who pay Google for AdWords to put out their message right when someone is searching. In Airbnb and Uber a small percentage is taken from the transaction cost as revenue. A popular joke about Silicon valley business models is about the bar that has a million people coming in who do not buy anything and leave. Yet the bar’s valuation is sky high as the business hopes to gain advertising revenue from bar visitors!
- How large is the target market? Whether you are a new or existing business the target market is the multiplier. The narrower you define it the better is your marketing focus. If you are a real estate agent, specializing in a few towns in one county is better than trying to do the entire state.
- What is the customer doing now? Who are the competitors? The customer is doing something. If you supply lawn mowing services – homeowners in your target market must have lawns and apartment homes are naturally excluded. The target market homeowners might be a) mowing their own lawns or b) having competitors doing the work. Each of these markets will need a different value offering and marketing approach.
- What will it cost to deliver? If you are a new business it pays to be conservative in estimating costs. Assume that it’ll cost more than you imagine. If you are already in business carefully accounting for your own time will surprise you. You don’t get paid even minimum wage– many business owners tell us. Remember (Sales – Costs)= Profits and is a great way to think about costs. You find that reducing costs (via technology, outsourcing) or increasing a) sales price or b) adding customers are the only ways to get the profit equation to work.
- What is your marketing message? What you say to customers at least initially has to be carefully crafted to encourage a response. Your marketing message needs to be just right. If you think about it, in developed markets deodorants are rarely marketed with the message that you stink. In contrast, in emerging markets that is the message that works as the market is in the early stages.
- How easy is it for you to stop imitators from snatching market share? No matter what your business model or market share if your business model can be easily copied – you do not have a sustainable business. Constantly refining “what’s special” about your offering is the key here. Imitators can be disrupters that are new business models based on technology. The neighborhood travel agent has disappeared to online travel sites like Expedia and the average tax preparer has tough disruptive competition from TurboTax.
Business models are never static and need constant refining to keep up with changes. Asking these seven questions on a regular basis and working on better answers can help a business stay ahead.