Developing a Stable Business Model

Developing a Stable Business Model

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Great business models depend on developing three ‘green lights’, or qualities that help the business succeed, as well as avoiding three ‘red lights’ that can derail a business. Examine your own business to see if you meet the criteria for success or to correct any weaknesses you might have.

Green Lights

1. Acquire high-value customers

High-value customers doesn’t mean rich customers, but customers who meet the following requirements:

  • Are easy to locate
  • Allow you to charge a profitable price
  • Are willing to try your product after minimal marketing expenses
  • Can generate enough business to meet your sales and profit objectives

If your end users or distributors don’t fit this profile, you can attract high-value customers through partnerships or alliances with companies in the market.

2. Offer significant value to customers

Create significant value and competitive advantage by including the following:

  • Unique advantages in features and benefits
  • Better distribution through retail or distribution
  • More complete customer solutions through alliances with other companies
  • Lower pricing due to manufacturing efficiencies or pricing options
  • Faster delivery, broader product line or more customisation options

Modern industries have become innovative in business strategy. This makes it imperative that you stay on the creative edge to fend off competition.

3. Deliver products or services with high margins

Higher margins come from having a product that can be made from an improved process or by having features that provide significant value and allow you to charge more. You can achieve this through:

  • Using a more efficient distribution channel
  • Requiring less sales support and sales effort
  • Lean manufacturing processes
  • Offering more auxiliary products or other opportunities for revenue without increasing cost

If you aren’t sure of your industry’s standard ratios, check out Who Owns-Whom (www.whoownswhom.co.za) where you can purchase industry reports, or contact Stats SA (www.statssa.co.za).

Red FLAGS

1. Provide for customer satisfaction

Consider whether it will be difficult or expensive to satisfy customers once they buy. High customer satisfaction costs can be created by:

  • High warranty costs
  • Extensive technical support
  • Extensive installation requirement
  • Extensive customer service
  • Interface problems with other equipment

Customer satisfaction costs, which occur after the sale, are red flags because the costs are typically high and don’t produce revenue or profits. If your type of product might have high customer service costs, you need to configure your business to put these costs on someone else.

2. Maintain market position

A good business model uses its resources to improve its market position, adding new products, features and customers or expanding into new applications. It will be difficult to maintain market position if:

  • Two or three major customers buy most of your product
  • Major potential competitors control the distribution network
  • Technology changes rapidly and requires high-risk product development
  • There are alternative technologies being developed to meet the same need
  • You have well funded potential competitors who could quickly move into your market

3. Fund the business

Start-up costs, operating capital, personnel costs and overhead costs are just a small percentage of the funding requirements for any business. The question is whether the investments will have a high return and whether the business can grow without substantial new investments. Red flags include:

  • ROI is less than 25% in the first three years
  • Incremental production of products or services requires substantial additional investments
  • Less than 50% of the investment required will be used in revenue producing areas
  • Investments have to be made prior to sales commitments
  • Industry as a whole has a poor ROI or poor profitability

Money is available for the right plan and the right model. You’ll find money available if your ROI is right and you have financial leverage, which means your initial investment will allow you to double or triple sales without requiring any more funding.

Don Debelak
Don Debelak is a well-known invention expert who has worked with new products and inventions for over 30 years and is the author of four of the best-known invention books of the last 15 years. He also was the Entrepreneur Magazine’s Bright Idea columnist on inventions for over seven years. As of 2013, Don is also a registered patent agent, #71,743.
  • Bafana Vumasi

    I find this column very interesting, I am at a stage where it is very dificult to get funding from the financial institutions for my business.

  • Lucky Sibanda Supreme Educator

    Interesting indeed, wow !!!!!!!!!