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.
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
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.
4 Types Of Business Models
There are four main types of business models, see which one suits your business concept.
Different types of business models suit different types of businesses. A business model is the way that a company sells products to its customers. It describes how a business creates, delivers, and captures value.
What type of business model should you adopt?
A business model defines how the enterprise delivers value to customers, gets them to pay for that value, and converts those payments to profit.
There are four basic types of business model that any for-profit business will fall into:
A manufacturer takes raw materials and creates a product, or assembles pre-made components into a product (E.g car manufacturers). A manufacturer may sell its products directly to its customers, or it can outsource sales to another company.
Portia Molefe shared her thoughts about small enterprises and their growth into Africa after interviewing the finalists who stood in line to win the ‘Think Big’ prize of R 1 million to back into their business.
A distributor is any business that purchases products directly from a manufacturer for resale either to retail outlets, or directly to the public. For example, a car dealership would purchase vehicles directly from the manufacturer and sell them to the general public.
A retailer purchases product from a distributor or wholesaler, and then sells those products to the public. A retailer usually has a physical location, but may also be an online retailer such as Amazon or Kalahari.
The new smartphone-centric status quo isn’t such a bad thing for retailers, especially those willing to adapt their strategy. Find out how retailers can accommodate the mobile-obsessed customer.
A franchise can be a manufacturer, distributor or retailer, depending on what type of franchise you purchase. Here the franchisee adopts the business model of that franchise.
Under these four types of business, there are various other ways of structuring your business model.
- A company that integrates a physical and an online presence. An example would be a retailer who allows customers to order products online, but lets them pick up their order at their nearest store.
- A company that deals with customers directly via the internet without engaging an intermediary.
- Direct selling to consumers making use of product demonstrations in the person’s home, for example. There are several cosmetic and jewellery companies that use this model in SA.
- The Freemium business model works by offering a basic Web service or product, for free, while charging a premium for advanced or special features.
- Online auctions, which are held over the internet.
How To Pick The Business Model That Works For You
So, you’ve picked your lane. You’ve decided what you want to do and why you want to do it. You’ve picked something you’re good at. You’re convinced the world needs and values it. You now need to decide how to make money. That’s where business model design comes in.
There are plenty of business model options for the same idea. For example, let’s say your idea is to offer historic tours of Cape Town. You could either do it yourself or hire professional guides to do it. Or you could use mobile technology to provide DIY walking tours. You could charge per tour or you could charge a membership fee. There are so many options. How do you pick the model that works for you?
The Lean Canvas is a great tool for entrepreneurs who are faced with this question. Adapted from The Business Model Canvas, it provides a simple, one page framework for brainstorming possible business models, prioritising where to start, and tracking ongoing learning. It walks the entrepreneur through the business model process logically and ensures the key elements of a successful business are considered.
My co-founders and I have used the Canvas extensively at Simply – for designing our business model, and for communicating it to partners and investors. The only thing you know with certainty when you start a business is that it’s not going to turn out as you expect it to. The Canvas evolves as you go – it was, and continues to be, a very useful guide in our journey.
Recognising an opportunity for disruption
We figured there was an opportunity to do something disruptive in the SA life insurance space. It was clear to us that lots of people were either not covered or getting a rough deal. Guided by the Canvas, we defined our first Customer Segment as adult South Africans, aged between 25 and 45 and earning between R5k and R30k monthly.
We then identified the 3 big Problems – specific to that segment – that needed solving:
- Most of the people in our segment have some form of funeral cover, but very few have life or disability cover.
- The cover they do have is often expensive relative to the benefits provided (i.e. a very small % of the premium goes towards the risk costs).
- There is no simple, intuitive way to buy good value life, disability and funeral cover online.
Developing a value proposition
Next came the Value Proposition. We believed we could use technology, digital marketing and human-centred product design to deliver simple, online life, disability and funeral insurance at a great price. We felt we could be for life insurance in South Africa what Takealot has been for retail.
We thought the world was moving far faster than incumbents realised; that millennials were ready to buy life insurance online; that we could build for the digital world and be in the right place at the right time.
And the rest flowed from there. I don’t have the time or the space to walk you through the other elements of the Canvas here, but you can probably fill in the blanks. Suffice to say, the process was invaluable and enabled us to build our business around a clearly considered business model. It’s early days, but the signs are good – we’re making a positive impact, having fun and keeping our investors happy.
Creating a Lean Canvas
So, how should you go about sketching your own Lean Canvas? The team at www.leanstack.com suggest the following approach:
- Sketch a canvas in one sitting. While a business plan can take weeks or months to write, your initial canvas should be sketched quickly.
- It’s okay to leave sections blank. Rather than trying to research or debate the “right” answers, put something down quickly or leave it blank and come back to it later.
- Think in the present. Business plans try too hard to predict the future which is impossible. Instead, write your canvas with a ‘getting things done’ attitude.
- Use a customer-centric approach. You may need to sketch one Canvas per customer segment. Start with the Customer Segment and go in sequence.
The Canvas has brought clarity and a common language to our business model design process. It’s enabled us to agree upon and communicate our business model effectively – both internally and externally. It’s also allowed us to tune and adjust our model as our story has unfolded – an inevitability for entrepreneurs. I highly recommend the Lean Canvas as a tool for designing your business model. Give it a try – I think you’ll like it.
Want To Change Your Business Model? Answer These 3 Questions
Here are a few pointers on figuring out the best way to grow your business and keep it sustainable for years to come.
To grow sustainably, is it better to take on projects that are frequent and reliable, or sparse but lucrative?
Q: I own a film and production company, and I shot 100 videos last year – 70 weddings and 30 corporate, totaling $330,000 in revenue. The corporate videos are more profitable, but weddings are always happening. I don’t want to turn off a constant source of revenue, but should I spend more time pursuing corporate events to grow my business? – Trevor R.
Welcome, Trevor, to the entrepreneur’s struggle! You build a great product or service, make good money and the next thing you know, you feel like you have to change your model. It’s the age-old question of scale: What’s the best way for your business to grow, and does that mean making less revenue now in order to have more sustainable growth for years to come?
Related: 4 Types Of Business Models
With the bulk of your time being spent on wedding videos, you probably feel stuck in the slow lane, watching better profits pass you by. But remember that scale is not just about margins.
Numbers can be deceiving, and you control what you charge for your services. While your corporate videos are more profitable right now, going all-in might not be the long-term answer.
To figure out the best route for your business, start with a clear vision of your ideal final destination. How much money – and profit – do you want to make per year? It might sound like a frivolous question (who doesn’t always want to make more?), but it will allow you to reverse-engineer your business model and help determine a practical answer.
Let’s say you want $1 million in gross revenue per year. At this time, it sounds like you charge about $5,500 per corporate video and about $2,400 per wedding video. That means you’d need to sell either 182 corporate videos or 417 wedding videos. (That’s a lot of videos!) Use those numbers to guide your vision. Next, consider scale, which depends on a number of growth factors.
First, creating value: Make sure you’re charging the appropriate amount for your services in order to reach your goals.
Second, anticipating growth: Where is the greatest opportunity, not just at the moment, but in the future?
And third, limiting expenses: How can you keep costs down so spending doesn’t outpace revenue?
Related: 3 Types Of Ecommerce Business Models
Answering honestly will help you create several business models. For you, Trevor, those models are (a) weddings and corporate, (b) weddings only or (c) corporate only. As a case study, let’s consider “weddings only.”
Last year, you worked 70 nuptials. Before you consider hitting pause on that side of your business, revisit those growth factors to figure out if you can make it more profitable.
- Should you charge more for each video?
- How many clients did you turn down last year?
- Could you have taken them on if you had extra help?
Weigh the costs, and consider adding another videographer to the staff. If that seems financially impossible, look for ways to at least maintain your current output while trimming production costs.
For a small business, profitability is a mad science of focus, projections, and getting out of your own way. What makes the most money on a per-item basis is not necessarily what will make you the most profit in the long run.
Consider Amazon: It created scale by focusing on smaller margins. It’s a helpful reminder that there are different ways to succeed.
Understand what you can charge, how you should save and who is most likely to buy from you in the future. By simplifying the complicated challenge, you can jump on the fast track to growth.
This article was originally posted here on Entrepreneur.com.
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