Getting the Business Model Right

You need a business model so that the harder you work, the more money you make and also to keep yourself and your employees on track and on message and mission. Every time you think you have a great new idea, hold it up to the light of your business model. If it fits within this framework and makes sense, go with it. If it doesn't, it'll be nothing but a distraction and time waster and will act to prevent you from making money.

This area of research is relatively new and it is focused on developing a better understanding of the 'engine' of a business or organization. By following the way money flows occur and services or products are delivered-from clients and customers to the business or organization (and vice versa) and through the business or organization to its suppliers (and vice versa)-we discover the fundamentals that actually make the business or organization successful or not.

By improving business models, chances for success are increased. At the same time, each model can be tested with a view to moving the organization up the value chain-from standard products (or services) produced from standard processes (or custom products (or services) produced from custom processes and inputs) to custom products produced from standard processes and inputs. We can achieve business models today that are capable of producing custom outputs from standard inputs because of the advent of the Internet and the ability to harness it to reverse out the work to the client or customer. For example, Dell's web site allows its clients to design and customize their PCs for their individual needs. A home builder today can build a web site that allows a client to select a lot, a house plan, changes to the house plan, finishes and other details so that each home is semi-customized from standard offerings.

You can now generate Business Models online and test them online too. To compare your results with 'household names', go to: Business Model Scoring- A Discussion.

There is something 'magical' in most businesses that allows them to really make money. If you get the Business Model right, the harder you work, the more money you make. If you get it wrong, no matter how hard you work, you just end up losing more and more money. And the 'pixie dust' is what differentiates your business and gives you leverage in the marketplace. The Business Model is supplanting to some extent the Business Plan.

Defining the Business Model (see also Definition Addendum) is crucial-- it is the engine of the business-- it is where the rubber meets the road, viz:

1. where and how the business acquires cash from clients,

2. how it uses its cash (tracks cash streams from clients and customers to the business and throught the business to its suppliers),

3. how products and services flow from suppliers and the business to clients and customers in the reverse direction and, finally,

4. there is an orthogonal dimension that shows how the business connects (through sales and marketing channels) with its clients and customers.

(Note: practically nothing can sink a business faster than to find out that the cost to acquire new customers is too high. The marketing must be cost effective and there has to be a separate sales process that turns marketing leads into real sales. For most startups, it is far more convincing to find pre-launch clients who are willing to sign binding contracts (i.e., to have pre-sales) than to have any amount of market 'research'. If you find that your best marketing is direct selling, for example, and if you find that you need to make 30 calls to get 10 F2F meetings and that you can convert 10 F2F meetings into 4 actual sales, then you can determine how much it will cost you to generate a certain level of revenues...
This type of approach is more convincing than to do what many startups do-- they say there are 332 million consumers in N.A. and market research suggests that we will get 1% of those, so we will have 3.32 million customers and with an average sale of $x, this will generate 3.32 * $x million in annual sales. These types of calculations are usually not too helpful in predicting revenues or prescient.)

The Business Model should be one page; it should be, at least in part, diagramatic; it should summarize the technological, technical, marketing and other pixie dust advantages of the business. The Business Model should then form part of the core mission of the business-- if new initiatives don't fit the Business Model, well then, maybe they aren't such a good idea for you to undertake. Focus on a core mission is critical to successful new business formation.

The Business Model helps you decide whether this should be your next startup. Is the opportunity big enough? Can you create more value than if you just took a J.O.B.? Is the playing field level? Are the competition too big and too entrenched with too many home field advantages? Are you just creating gadgets and gizmos, really a hobby businessinstead of a real business?

There are trade secrets to every business. There are 'hidden' buttons to push and levers to pull that are the keys to success. From the outside, every other business looks easier to run and more successful than yours. People who are expert in their area often don't even know that there are these hiiden keys to success- they simply do those things, often without much thought, and they lead to success. If you went into their business and you didn't know these crucial pressure points, you will go out of business and you'll never understand why.

Startups are so preoccupied with staying alive that they often don't spend any time in deciding what their business model is. Many don't even know what business they are actually in.

A business model is not the same as a business plan but at the heart of every business plan there should be a business model that works. A business plan is much more formal; it includes financials, competitive analysis, market assessments and much more. A business model instead looks at the key aspects of how a business actually works; how it makes money; it answers the question- "What business are you really in?" It examines a typical 'walk through' of where the customer or client interacts with the company- it doesn't leave any gaps or uncertainties about how the company actually makes a sale; books it and gets paid. You might be surprised at how many startups don't actually know the process of making a sale and getting paid- asking for the deal and asking for the cash!

Assumptions

Who are your customers and clients?
Is this a prototype for a small, hobbyist-type business or is it going to create value beyond providing you with a job.
Ultimately, can this become a scalable business?
Initially, will it be a home-based business with low overheads?
Will customers and clients visit your home or a type of retail presence or an office?
How will customers and clients will learn about you? Will you use flyers distributed to neighborhood homes and businesses, word of mouth, your own web site, links with search engines, a retail presence, by trading links with other sites that can benefit from such reciprocal linkages?
Can you use other guerrilla marketing like 'ten cent' lawn signs that clients put up on their lawns advertising your telephone number and web site?
Will you have access to a VISA (or MC or Amex) merchant account?
What hardware technology will you have access to?
What software will you have access to?

Model
How The Company Makes Money

Will there be an hourly charge for your time?

Are you actually selling any products?

Are there any on going supplies that you can resell?

Are there any other value added services you can sell?

Is there something you can provide a free? Clients and customers love the word 'free'. Can you provide 'free qutoes' for example?

Are there any other corrollary services that you can hook your clients up with and take a.percentage of the fees?

Are there any updates or on going revenues to be had from providing an ASP-like service?

Can you reverse out some of the work to clients and customers through a self serve web site?

Can you get closer to producing Custom Results from Standard Inputs and Processes?

1. Don't get discouraged if your Biz Models are not perfect the first time out. Remember that knowing you should not do something is probably more important than the reverse. In hockey, they say the best trades you make are the ones you don't. If your biz model is not right for you, drop it and try something else. Don't waste your time. My father said it best: "Dump the losers and keep the winners..."

3. Have a look at this site: http://www.4q.cc/. Click on "Chuck Norris" and you will see http://www.4q.cc/chuck/. The 'facts' on Norris are in fact anything but facts; they are just silly jokes, 8,000 or so in all. The site got 18,000,000 hits last month (December 2005) and every time you rate one of the facts, you generate another page and another hit and MORE ADS! The site is a simple money generator for the owner of the site who resells ads. The reasons I want you to look at the site is that it demonstrates that the best money makers are usually REALLY SIMPLE. Take another look at the Google Home Page? Who would believe that this simple Home Page is now worth $132 BILLION dollars (January 2006)?

Here is a brief analysis of another new online business, I4's BILL ME LATER. Again, the idea is simple and not only appears to work well but is potentially a big help to online businesses:

I4 Commerce has created a new “online” payment system that is essentially made possible because they use a form of bootstrap financing; it is called BILL ME LATER. It is based on a simple business model, the best kind.

Remember, a business model shows the relationships between the business and its customers and suppliers (and sometimes, it goes at least one dimension further and includes the customers of its customers and the suppliers of its suppliers. The added dimension can sometimes reveal important relationships that can also be exploited in the business.) The model also has to reveal how the business acquires new clients and customers—i.e., how it can COST-EFFECTIVELY market its products and services.

Returning to I4’s business model, we learn that about one third of users don’t want to use their credit cards over the Internet. So I4’s potential customer base is easy to identify. But these people are really customers of I4’s customers, whose real clients are the online merchants like Walmart.com and others who use BILL ME LATER. This is handy since, in terms of marketing, I4 only has to reach a small number of website operators to become a viable business—its marketing is ‘one to a few’ as opposed to ‘one to many’. The latter has been the downfall of many Internet businesses since if you want to launch a B2C Internet business, the cost to acquire new customers can be prohibitive. Mass marketing/creating a consumer market is tough whether or not it is an Internet-based business or a brick and mortar business.

For I4, they have created a viable business with just 230 website operators (Business Week January 16, 2006) agreeing to use BILL ME LATER. I4 is now doing $1 billion worth of transactions. And getting 230 website operators to adopt BILL ME LATER is a matter of just making the calls. A good salesperson (in this case, it would probably be the CEO of I4, Gary Marino) can easily call 30 major operators a day and get at least 10 face-to-face meetings. Someone with a good track record like Mr. Marino (he has experience in the credit card industry) can probably get at least 4 customers to sign on out of every 10 F2F meetings he does. (A salesperson needs to have a longterm track record in the range of 4 out of 10, i.e., a .400 ‘batting’ average’, to make this kind of cold calling/warm calling marketing/selling work.) So the marketing dimension of this business is direct selling I would think.

Now who are the suppliers to a business like BILL ME LATER? It turns out the key supplier is a bank—JPMorgan Chase, who buys BILL ME LATER’s receivables. Without this support, the faster BILL ME LATER grows, the more capital it would consume, obviously an impossible model that would seize up.

BILL ME LATER works by asking consumers for three things—their name, DOB and the last four digits of their social security number. With this info, they can check the customer’s credit rating and approve/not approve the transaction in less than 4 seconds. The customer then gets a bill in the mail or by email.

From the customer’s POV, they have not had to disclose their credit card number and they get a paper record of their transaction (if they choose the option of a snail mailed invoice) and a grace period to pay for their purchase. One of the negatives I see in this is that every time someone pings your credit rating, your credit rating suffers a 2.7 point downgrade. So if you make a lot of online purchases using BILL ME LATER, your credit rating could suffer unless BILL ME LATER has made a deal with the credit agencies to avoid this. (The credit agencies, unfairly in my view, reduce your Beacon Score with every ping. Their reasoning, I suppose, is that you are looking for credit and the more credit you take on, the worse risk you are. But if, for example, you are shopping for a home mortgage and say five banks ping your credit rating, you could lose 13.5 points which is unfair. This is one of the reasons that Mortgage Brokers are taking more and more of the home mortgage pie—they ping your credit score just once and they shop it to 15 banks and lenders… I am guessing but you probably need a Beacon Score of at least 650 to use BILL ME LATER.)

I4 has a lot of ‘pixie dust’ or differentiated value in its business model that should create a sustainable business including: a) they undercut credit card issuers by charging their merchants 1.5% of transaction volume instead of the 2% to 4% charged by their competition, b) they give online customers a new way to pay that is exactly what they are used to in RL (Real Life as opposed to the Web)—an invoice either paper or email that they can pay by cheque or EFT, c) a form of bootstrap capital or bootstrap financing by selling their receivables instantly to a supplier (a bank), d) a one-to-a-few marketing dimension that can be easily handled by direct selling. Also, there probaly is some real first mover advantage for them. As consumers become used to seeing BILL ME LATER on websites, they will come to trust it.

Trust is the underpinning of all successful relationships (personal as well as business) and business ecosystems. People like to buy from people they like and TRUST. I think that by extending this trust to the consumer level of their bsuiness model, it will create a powerful dynamic that will ‘force’ their real customers (websites that market to the consumer) to turn to BILL ME LATER for another payment option for their customers. So while I don’t see any network effects operating here (where the network becomes more valuable the more people use it*), the trust factor could be a huge barrier to entry for potential competitors.

I am sure we are going to hear a lot more about BILL ME LATER; it’s clever. Now someone should start a Canadian or Euro or Indo or Chinese or Japanese version…

Some Examples of Getting the Business Model Right for Startups

GTBR-- creditcheck.ca

Twenty Five Steps to Business Success

Defining the Business Model

DramatisPersonae.org

A Walk Through- Here is an example taken from "Instant Web"

A family shows up at the IW market stall. IW rep says: “Hi.”
“Emmachisit?” says Elanor, mother of three.
“Right. We can fix you up with a basic web site in about an hour for 30 bucks. If you want to go live-to-the-web at the end of the hour, we’ll need to get you fixed up with a domain name and a web hosting service too. You’ll then be broadcasting to the web 24/7 in about 60 minutes! You can call the grandparent in Perth tonight and tell her the web address (URL) and she’ll see that nice photo of Suzie here winning the 100 metre dash on her computer this very evening! ”
“No way, mate. What’s the catch?”
“Let me show you a few sites we did for folks earlier today and last weekend.”
“Looks great. Are there any other costs?”
“Well, we can do the site up and I can copy it to a disc for you for an extra ten bucks. If you want to go live today, we’ll reserve a domain name for you- what’s your favourite nickname for Suzie?”
“Well, we call her ‘Sizzle’, for short.”
“Cool. Let’s look right now and see if we can reserve www.sizzle.com.au for your family. Hey, look over my shoulder for a sec. It’s available. How would you like to reserve it right now?”
“Emmachisit?”
I can reserve it for you for $40 for one year or $70 for two years then it’s all yours all over the world, no one else can use it. Anytime you want people to have a look, just send them to sizzle.com.au!”
“Alright. But what about someone seeing pictures of my family on the web?”
“Well, IW does not put any personal street addresses or personal phone numbers on these sites. We’ll set it up so that they can only email you and if you don’t want that we have another free service, which is that you can use our general mailbox at no charge so the emails come to Instant Web and are automatically forwarded on to you by IW. And no one at IW reads them either!”
“Is there anything else I need to know?”
“The only other thing is that if you want to go live to the Web today, no problem- I can set you up with our web hosting service for ten bucks a month. By the way, where do you work?”
“Actually, I am a teacher in the public school system and my husband is a house painter.”
“Does he run his own business?”
“Yea. But most of his clients are repeat customers.”
“Well, sure but while we’re at it why don’t we put a photo of him on the site and something like: ‘For your free quote, call William at …’ We could add a few photos of work that he has done- his portfolio, if you will. And let’s use his cell number so that we are not publishing any home numbers! He can put his web address on all his flyers and his business cards, everyone will be really impressed!”
“What happens if I want to update my site?”
“Well, you can do that in two ways. You can come back and see me anytime- I’ll charge you the same rate to add stuff or change stuff for you- 30 bucks for an hour of my time. Or we can give you a password and we can teach you how to update your site yourself! We run a six hour course on basic web design and after that course, we guarantee that you will be able to edit and change your web personal web site or your money refunded. You can even have Suzie take the course (it’s only $99) then she will be the family’s webmaster! Would you like that Suzie?”
“Yar.”
“May I have your credit card please, Elanor.”

Things to Remember About The Instant Web Example

Your most important requirement in any business is a steady monthly cashflow. And this comes from your web hosting service. When IW reaches a 500 client count, this amounts to al least $5,000 each month coming in with almost no costs and no work attached; and best yet, it recurs ‘forever’. People don’t change web hosts very often and don’t worry too much about a ten dollar monthly VISA debit.
Your other work (web mastering, domain name reservations, doing e-copy backups, etc.) is really a feeder for your web hosting business. So what business are you really in? The web hosting business for personal (and small business) web sites. By aligning IW with a basic web design courseware, you will get your clients to eventually do most of the web design work themselves!

Longer term, you can set up the IW web site so that clients can easily and simply be walked through the process so that they can: a) scan in their own photos, b) add clip art, music and sounds, c) reserve a domain name, d) add a recording, e) do some simple animation, f) add some text, g) get some web hosting from IW. This is called reversing out the work to your clients and it is one of the keys to making money in cyberspace- in simple terms, it means that eventually, IW becomes a scalable enterprise instead of a J.O.B. (short for Journey Of the Broke). Scalable means that IW makes money while you are lying on a beach somewhere relaxing. Scalable means that IW has a value that eventually becomes independent of its founder. The Web is all about automation, reversing the work to your clients, empowering your clients and giving them control over their own material, about building long term relationships with your clients and between your clients too.