If your business generates fewer revenues than it incurs cost, then it will die. Unless it becomes profitable, start planning for it's demise.
In order to create a profitable business, you need to provide value for both your customers and your business(in order to sustain the value you create for your customer)
When starting a business, we decide on two important things, spelling out the value proposition and deciding the right business model. These two are very important as they go a long way in deciding if a business will succeed or not.
It is easier to craft and understand the value proposition than coming up with a business model that works. Coming up with the business model requires a lot of iterations until we hit the sweet spot where the business model has reduced risks with more positive outlooks. You are looking for the easiest way to to create value and maximize the potential upside.
I will be sharing key points you need to candidly address in order to help you come up with a strong business model that makes your business hard to copy and outperform the competition.
- Resistance To Competition
The more powerful your business model is, the more difficult it is for competitors to displace or affect it. You need to try as much as possible to build a moat that is very difficult to overcome. Apple (App Store) and Ikea (few imitators) both have very powerful moats. Own as much of your distribution as you can.
- Outsourcing Value Creation
Do you incur all the costs for the value you create? Most of the value in Google's business model comes from the content produced by people on many websites around the world. Payment processors like Stripe, Paystack, Flutterwave etc also get their value from merchants and online shoppers.
Your business model should try to as much as possible get others to do the work of creating value for free.
- Revenue vs Expenses
So...do you get all of your money before incurring costs or you incur costs before earning any revenues ?
A cake vendor on Instagram earns 70% or more of their revenue before going ahead to bake. Same thing goes to construction businesses, you earn before spending.
- Recurring Revenues
Are all your sales transactional or a lot of them convert to recurring purchases ?
The coffee industry used to be transactional, but we have seen a change in that with many coffee startups who offer a subscription model pulling in large amounts of money in funding. You want a business model where you don't have to always spend time or money on every single sale.
- Switching Costs
How easy is it for customers to move to an alternative? You will want to answer this question when working your business model. If there is nothing holding them back, figure something out. It's difficult to switch from app products once you are in. Changing your bank is easy. Find something to hold your customers, make switching expensive for them.
- How Scalable is your business model?
Let's say you have a thriving hair-selling business in Nigeria and you decide to move it to Ghana. How easy will it be for you to do that? Do you need to setup new shops, warehouses? new staff? How high are the limitations?
You need to critically look at this while designing your business model.
If you try the licensing or franchising route, this could be easily scalable as proven in the market by the likes of Facebook, Uber and co. Edtech platforms like Udemy and Coursera have also scaled to many countries with minimal effort.
- Pricing Structure
How does your pricing gives you an edge over the competition? Can you be like whatsapp/skype who disrupted the telecom industry by providing free calls ?
Can you leverage any infrastructure to build a new kind of pricing model that phases out the competition or gives you an edge?
How does a change in pricing affect your own offerings? You need to answer that question and prepare for it.
A great value proposition should be fused easily into a great business model, the stronger your business model is, the more likelihood your business will succeed.
Let me know if you have any extra things you feel a business model should incorporate or share some of your experiences doing this in the comments section.