On Business Models

I usually don’t rant about things like this… ok, I do just not on my blog…

I came across this article titled 8 Essential questions you need to ask about your business model. Being a fan of business models and evaluating where value exists in business models, I cracked open the article thinking that I would either see insight into known factors of business models or I would see innovation in thinking about business models. Of course I hadn’t really heard of the business leaders network before or the guest post blogger Alex Osterwalder, but both looked fairly credible. Alex has written a book on the topic of business models and was promoting a conference he was speaking at last year. The Business Leaders network seemed to have a big following of people looking to learn how to be business leaders so I assumed that they were also credible.

So I walked through the post, scanning the headlines and seeing how in-depth the post was. It looked reasonable so I took a deeper look, there was some good content in there about what kind of business you were going to build and what the landscape looked like, then the post jumped right into the 8 questions and of course not wanting to leave it up to the reader, Alex offered answers to all of the questions.

How do you keep your customers – answer “have a killer brand”

Good answer for some companies. Not all companies can have a killer brand as part of their business model, but this is definitely a good place to start. Certainly looking something like Coca-Cola or Wal-Mart there is a great brand there, but that is not the only reason companies have a moat around them. I think having a killer moat is more accurate than having a killer brand and that moat may be based on a brand or it may be based on the fact that everyone is there (e.g. facebook) or it may be based on the fact that you are the only one that can and will produce the goods that your customers like.

How do you scale – answer “be like facebook”

Well, not everyone can scale like that, in fact the business may be very profitable without scaling. This is part of the killer brand thing – I think it is wrong that we focus so much on hugely scalable businesses when there are a lot of great businesses that do not scale well. They take care of their customers and owners in a wonderful way – so why do we always recommend that these businesses are bad?

Do you make recurring revenue – answer “use licensing or a printer ink like model”

Now we’re really starting to have trouble, doesn’t a killer brand also generate a lot of revenue? The question is a good thought exercise, but the answers are pretty weak. Killer brands, licensing,

Do you make more than you spend – answer “you better”

Well, ok – this is a good answer. I think that all firms should make more than they spend. I once worked for a startup who did not make as much as they spend and let’s just say that after the 2000 dot com bubble burst no one worked there anymore.

Do you delegate to your customers – answer “be ikea”

Seriously? Be Ikea? If your customers come to you because of your “brand” it may be an ikea brand or it may be a Luis Vuitton “brand” – this answer is so stupid. You should only delegate to your customers if that is your business model – if it isn’t have them pay for everything you do and give them great products and services that are worth paying for – this seems pretty straight forward. If you have a Tiffany’s brand – DON’T delegate to your customer!

Do you have a moat between you and competitors – answer “have a business model like apple”

I think the author was getting tired, the answers are really degrading as the list goes on. I know how it is hard sometimes to come up with lists as a blog writer and author. I used to hate these numbered lists that do so well on search engines just because of this reason. Apple doesn’t have a great moat between itself and its competitors – Coca-Cola & Wal-Mart have moats between them and their competitors. Amazon has a moat between itself and its competitors. Apple has a moat around its customers, but any competitor can easily replicate their products and take marketshare. The Android has done a fabulous job at this and the only thing keeping customers loyal to Apple is their brand – not their patents, business models, etc. You do need a moat to be competitive; however, you need to determine what the moat is protecting you from and what it is not protecting you from and have a strategy to maintain the moat AND a strategy to protect you from all the other stuff.

Are you efficient – answer “you better”

This kind of counters the previous statement. If you have a moat like coca-cola why the hell do you need to be efficient? If you are Apple – what good does it do to be efficient? NONE!! You MUST maintain the moat. There is no reason to be efficient. If you have no moat, no brand recognition that guarantees you customers, then yes – you need to be more efficient than your competitors. Please don’t confuse these and try to build a moat and be the most efficient. Build one or the other, not both.

How do you stack up – answer “maybe you don’t”

What the hell does this mean? How is this part of a business model analysis. I guess if you have no competitive advantage and have no efficiency advantage you should look at gaining one of those two or get out of the business. But as an eighth question to ask yourself this is crap and it pisses me off that authors put these kind of crappy questions out there.

I can boil this down to three very simple decision points that you can use to determine if your business model is viable. If you can answer yes to either of the first two questions then your business model has a chance – if you can only answer yes to the third then you need to change…

1. Do you have a competitive advantage (a brand or product moat that is impenetrable)?
2. Are you incredibly more efficient than any competitor in the space (so much more efficient that no one can replicate your profits)?
3. Can someone else easily win your customers over or make more money on your customers than you?

 

That’s it – that is all that you need to think about when it comes to business models. You can read all the startup and business books you like – but if you are building or investing a business and it doesn’t fit into this set of questions correctly you are doing something wrong…