3.05 – How To Find Success With Your New Business Model
Finding Success with a Business Model
In its simplest form, a business model is your profit formula. It’s how you acquire customers, serve them, and make money doing so.
Every business has a business model, even if it’s never written down. This model forms the basic structure of the business – defining the services provided or the products created and sold for profit.
Business models generally focus on creating profitable revenue and the delivery required to keep it flowing. While operational, finance, and human resource issues are important, they are often peripheral to the core aim of generating profitable revenue. Here are some examples of business models in action:
- Domino’s focuses on inexpensive pizza, delivered fast. Jimmy John’s uses a similar model in the sandwich business.
- Toyota pioneered lean manufacturing to produce better quality cars at a lower cost. This model was later adopted by many other companies.
- Walmart strives to lower purchasing and operating costs, passing the savings on to consumers. This model attracted customers away from established retailers, prompting imitation by others.
- Zappos.com transformed online shoe retail by allowing customers to try multiple pairs at home and return any or all for free, setting a new standard in customer service.
- Dollar Shave Club popularised the monthly club business model, expanding it to products like socks, T-shirts, and baby clothes.
- Zipcar rents cars by the hour in busy metropolitan areas, offering a convenient alternative to traditional car rental companies.
- Crowdspring.com uses crowdsourcing for graphic design, where vendors complete designs for a posted price and the buyer chooses a winner from submitted samples.
Making Money with Your Own Secret Sauce
At its core, your business model is the formula that allows you to make money. It’s the combination of everything you do – your secret sauce – to provide customers with value and make a profit. The more unique and proprietary your combination, the more profitable you’ll be.
Setting Yourself Apart Through Differentiation
Differentiated business models offer customers products, services, or value that stands out from the competition. Consider the following examples:
- Bigbelly doesn’t just make trash containers; they use solar power to compact trash, allowing cities to reduce collection frequency and save on fuel and manpower.
- Camp Bow Wow offers more than kenneling; dogs play together, providing a premium experience compared to traditional dog-sitting services.
- The Huffington Post operates as an Internet-only news outlet.
- Walk-In Lab provides low-cost medical testing to the uninsured by not accepting insurance.
Making Your Model Difficult to Copy
A proprietary business model is differentiated and difficult for competitors to emulate. Typically, proprietary models create methods to:
- Deliver products and services better, cheaper, or faster through unique business processes. For example:
- Toyota’s lean manufacturing process.
- Walmart’s investment in technology for logistical efficiency.
- Create a closed ecosystem where ongoing use of your product is highly desirable or required, such as:
- The iTunes ecosystem (iPhone, iCloud, and iTunes) for Apple.
- Amazon’s Kindle with its proprietary book library.
- Serve customers others thought were unprofitable, like:
- Vistaprint’s approach to the microbusiness printing market.
- SafeAuto’s minimum coverage for drivers deemed too risky by big insurers.
- Operate in ways competitors thought unprofitable or impractical. Examples include:
- FedEx’s successful overnight package delivery, initially seen as impractical.
- Apple’s iPad launch, defying the belief that tablet computers were a niche product.
- Create a product or service that's patented, trademarked, or difficult to duplicate, such as:
- Xerox’s rental model for their 914 copiers.
- Nochar’s unpatented but proprietary polymer for solidifying liquid spills.
Example: Duraflame Burns the Competition
Most proprietary business models are a series of excellent business practices well executed. In the late 1960s, California Cedar Company turned pencil shavings into the Duraflame log, a product generating millions in annual revenue. By securing sawdust waste from sawmills at a lower cost, they created a profitable business model where they were paid to accept their primary raw material.
Examining Different Business Models in the Same Industry
McDonald’s, Wendy’s, and Burger King all sell fast-food hamburgers but have different business models. McDonald’s focuses on acquiring valuable real estate in addition to selling burgers. Wendy’s targets freshness and upscale customers, while Burger King has struggled with its business model and place in the market.
Setting Yourself Apart from the Competition
Your business model is central to your ability to make a profit. Walmart and Target, for instance, sell similar products to similar customers but have very different business models.
- Walmart’s business model is based on always low prices, achieved through low-cost employees, health insurance, real estate, purchasing, and logistical efficiencies.
- Target’s model, described as cheap chic, focuses on hip yet inexpensive products, allowing for higher margins on items that aren’t necessarily the lowest cost.
The stronger your business model, the better your ability to achieve outstanding profits.
Considering Your Competitive Advantage
Competitive advantage allows a firm to perform at a higher level than others in the same industry or market. It enables you to outsell, outprofit, and outperform your competitors.
Competitive advantage is a portion of your business model, but not all of it. For instance, you can have an excellent competitive advantage but still have a weak business model.
Obtaining Your Competitive Advantage
According to Michael Porter, competitive advantage is obtained through cost leadership, differentiation, and/or focus.
Cost Leadership
Cost leadership means delivering similar goods or services as competitors at a lower cost. This doesn’t necessarily mean a lower sales price but a lower cost of goods sold. Here are some ways to achieve cost leadership:
- Access to natural resources: Middle Eastern oil or Chinese cheap labour.
- Scale: Walmart’s ability to buy Pampers cheaper than anyone else.
- Vertical integration: Intel’s design, fabrication, and marketing of chips.
- Technological leverage: Walmart’s logistical superiority in the 1980s.
- Proprietary processes: Rolls-Royce’s secret metallurgy process for jet engine blades.
Differentiation
Differentiation means customers perceive your product as superior and different from competitors’. This can allow you to charge extra for these attributes, creating additional margin. Tactics for creating differentiation include:
- Superior branding (Coach, Tiffany’s, Rolex)
- Unique supplier relationships (Eddie Bauer Edition Ford Explorer)
- First mover advantage (iPad, Walkman, Crest toothpaste)
- Location (prime retail locations)
- Scale (companies that can build aeroplanes or skyscrapers)
- Intellectual property (Hemi engines, Intel Inside)
Focus
Competitive advantage can also be gained through intense focus on a market, niche, or attribute. Examples include:
- Taiwan Semiconductor’s focus on fabrication
- Amgen’s focus on biopharmaceuticals
- Starbucks’s focus on coffee
- Rally’s focus on drive-through hamburgers
- A doctor’s focus on heart surgery
Enhancing Your Competitive Advantage
To fully leverage a strong competitive advantage, ensure other aspects of your business model are robust. Consider the following factors:
Innovation
Your company’s ability to innovate is crucial. Without innovation, your competitive advantage will weaken or disappear. For example, Apple must continue to innovate to maintain its dominance in the tablet market.
Customer Segments
Targeting the right customer or market segment is essential. For example, Motorola’s Iridium satellite phone failed in the consumer market but could have succeeded with a military focus.
Pricing
Pricing affects the business model significantly. For example, Amazon’s competitive advantage is in distribution convenience and efficiency, but its pricing strategy must support this advantage.
Capability to Sell
A proven and repeatable sales process is crucial for success. Marketing efforts must lead to actual sales for the business model to succeed.
Potential Pitfalls
Be aware of potential pitfalls. For example, Taser’s competitive advantage is strong, but frequent lawsuits present significant challenges.
Continuity
Ensure the business can operate without the owner’s day-to-day input. This is a common issue for mid-sized and small businesses. A business model must ensure continuity to be strong.
By understanding and optimising these aspects, you can create a business model that stands out, attracts customers, and ensures long-term profitability.
