Tag Archives: owning a business

Business Models Morphing

Working business models live and thrive all around us in the marketplace. In the world of business—manufacturers, wholesalers, distributors, retailers, and services—there are many tried and true business models. With the mass adoption of technology and the internet, old business models are morphing and new business models are emerging.

A business model is a brief explanation of how a business concept makes money. It describes who buys the products or services, how much they pay, and how often they purchase. It is the logic of a business.

Unfortunately, not all businesses are logical. A poorly conceived business model quickly becomes a liability and unless it’s fixed, can bring a business down.

The same products and services can be marketed through several different business models. For example, the transportation of people can be achieved through different means. You can buy and own a vehicle, you can lease a vehicle for a specific term, or you can rent a vehicle for short-term use. Car dealerships, leasing companies, and rental agencies are three different proven business models that connect cars with customers and enable people to get where they’re going.

Another business model, the razor and blade model, gives away razor handles and earns its revenue by selling the user blades or refills. A different model sells electric razors to customers at a much higher initial cost, but without the ongoing costs for refills. These two business models serve the same market through different strategies.

The artisan business model describes how artists, musicians, and writers market their wares. Many artisans simply create their works and sell them to local shops. Some set up as vendors on busy streets or at space rented at a farmer’s market, while others become part of a marketing cooperative. These are all variations on the artisan business model.

Franchising is the practice of using another firm’s successful business model. For the franchisor, the franchise is an alternative to building chain stores to distribute goods and avoid the investment and liability that comes with owning a chain. The franchisees benefit from the franchisor’s success and pay royalties for that benefit. Franchisees are thought to have a greater incentive than direct employees because they are invested in the business.

The freemium business model works by offering basic web services, or a basic downloadable digital product, for free, while charging a premium for advanced or special services or features. This model is made possible in part by the fact that there is little or no cost of costs for the products, once created.

The online auction is a prime example of a business model that didn’t exist a few short years ago. Customers bid online for products and services. Buying and selling in the auction format is made possible through auction software which handles the various processes involved.

A number of new business models are emerging in the e-business realm. E-businesses earn revenue through strategies such as subscriptions, sale of advertising, and transaction commissions. Search engines, for example, provide their services to the end user for free—rumour has it that they manage to make ends meet through the sale of advertising.

The business model of choice must serve the owner’s needs, enable the business to stay competitive, and meet the needs of customers.

Business is More Than a Crap Shoot

Those who haven’t owned a business tend to think businesses are built on mystical gut feelings that readily morph into bulging bank accounts, hot cars and holidays. Sure, Mark Zuckerberg and Bill Gates did just fine by following their hunches, but the hype overshadows the massive amount of work it took to make Facebook and Microsoft successful.

Statistics on the failure rate of small businesses can be sobering. Conventional wisdom suggests that about half of small businesses (those with revenues under $30,000) survive after three years, while approximately a third survive after five years. To be sure, this category of business activity, also referred to as micro-enterprise, includes a lot of businesses that are simple to start and easy to jettison when something better comes up. The statistics deal with the most developmental business arena, where a lot of newbies cut their entrepreneurial teeth. It also includes a lot of drive-bys who jump in long enough to check out the self-employment scene, and bail out once they realize they’re earning less than minimum wage.

Whatever else the high failure rate of new business tells us, it hints that success is more than blind luck. Some would characterize entrepreneurs as risk takers. While there’s a bit of truth to this, successful business owners are not so much gamblers as they are effective risk managers.

One of the cornerstones to becoming an effective risk manager is to find a healthy balance between intuition and due diligence. Due diligence is the research needed to validate your hunches and clarify your business case. A business case is built on more than notions and dreams; it has to have a solid indication of demand for your goods, customers that are willing to pay the right prices, and a bulletproof plan for getting in front of customers.

New business owners can increase their chances of survival by doing due diligence in the following three ways.

  1. Validate the Demand. To confirm demand for products or services, business owners will learn all they can about their customer’s wants and needs. This education can come through a combination of reading, working in the target industry, conducting surveys, and most importantly, talking to customers.
  2. Validate the Prices. When it comes to setting prices, there’s no confidence builder quite as convincing as making sales. However, prior to making sales, entrepreneurs can learn about pricing by knowing what it costs to produce their goods, and by learning everything they can about the industry and in particular, the competitors. The Internet is by far the easiest source of information on prices.
  3. Develop a Marketing Plan. Think of marketing as everything you will do to communicate to potential customers. Your marketing plan will detail how you’ll get your goods in front of customers, including costs each marketing campaign or activity.

Business success is much more than a crap shoot, and much riskier than buying a lottery ticket. It’s also true that business, managed effectively, is a surer path to success than gambling. And if you enjoy the work you do, it can also be fun getting there.

Gates and Zuckerberg are inspirations for us all, but don’t be blinded by the hype. If you’re feeling intuitive and lucky, buy a lottery ticket. If you want to build a successful business, by all means follow your instincts, but do your homework by validating your hunches before putting any significant investment on the line.

How Debt Can Become a Small Business Nightmare

It starts out innocently enough, usually with a small loan or a couple trade accounts, but by the time the bailiff puts a lock on the door, the amount of debt has become one of the nails in the failing business’ coffin. Here’s how easily it can happen.

Imagine that you’re starting a venture with limited funds and eager to get the doors open and succeed.

A startling number of new businesses fail in the first five years. Lenders know new business is risky, and manage their loan portfolios accordingly. However, with the right security, such as equity in the family residence or a willing co-signer or guarantor, it’s entirely feasible to nail down a start-up loan for a risk-laden small enterprise.

So, congratulations are in order; you’ve got the loan and started your business. Let’s say the borrowed funds pay for leasehold improvements and enough operating money to see you through the start-up period.

Life is good, but you still need supplies. In the early days of business, suppliers can be an uncooperative lot—nobody wants to extend credit until they develop a relationship with you. So, following “Supplier Development Rules Of The Road”, you proceed to build relationships and apply to establish a couple trade accounts with enough headroom to enable you to order a month’s supply, as long as you pay within 30 days.

Because the business isn’t yet churning out enough margin to provide you with a paycheque, you might find yourself nicking the corporate credit card to buy a few groceries. Every new business owner knows this is evil, but most do it anyway. After all, you’ve got to eat. You intend to pay the card to zero at the end of each month, but as you bang it up with personal knick knacks, and the money just isn’t there to pay it down, the carryover gets higher each month.

You discover that you need a couple more trade accounts and use your newly-honed skills to set up a few more accounts. In the meantime, your responses to pre-approved credit card marketing campaigns procure you a couple more credit cards.

With trade accounts and other random sources of debt like credit cards, the trap is that none of them know what the others are up to, they rely on your diligence and integrity, and also hedge their bets on their expertise at extracting payment from you like bad teeth, regardless of how you’re managing your other debts. So, by cherry picking and presenting a small part of your financial picture to the disparate players, it’s entirely possible for a clever operator to outsmart the entire bunch, including yourself, and tilt the financial chariot so far off centre that you wake up one day with no hope of ever getting your business back into the black, and no possibility of ever repaying the amount you owe.

All it takes from there is a small disaster to tilt the financial house of cards into pandemonium. Perhaps one morning as you’re about to head off to work, your aging vehicle coughs and refuses to take you anywhere. A flurry of repairs and a yelling match later, you owe a mechanic $900, and the corporate credit card takes yet another hit.

That’s how debt can destroy a business. Credit can be evil. Just because you can borrow, doesn’t mean you should. Treat debt with respect.

Burning Business Plans is Sexy LOL

Last week I was compelled to click on an article that dissed business plans… again.

Why, when the Internet is cluttered with articles that extol the benefits of writing a business plan, would I invest time reading anti-business plan rhetoric?

It is fear? Fear that some guru has figured out a way to bypass the business plan and transformed business start-up into a safe, clean, effortless experience. Not really.  Nor have I discovered any such gem—in fact, it seems to get more and more complicated to own a business, not easier.

Perhaps it’s a fascination with the idea that people are generally more easily attracted to negative news than positive. So, it rather makes sense that a headline that slags business planning would attract more reads than a positive title might. Maybe.

Perhaps I resent just a bit that people are drawn to articles telling them to take the lazy approach. It’s plain sexy to imagine that you can create the next Facebook without lifting a finger or getting your hands dirty.

Invariably, once I read the article bearing the business plan dissing title, I find it’s either a blatant marketing campaign for a slightly different product or someone advising entrepreneurs not to bother with writing a business plan. It’s easy to negate the benefit of a business plan when it’s not your investment or risk on the line.

And now, I have shamelessly used a negative title to get you to read this blog. Guilty. Oh well. If you read this, perhaps the end justified the means.

So, while you’re here and I’m shamelessly marketing, I invite you to check out the Online Business Planner’s RoadMap at http://www.riskbuster.com/online-business-planners-roadmap-description/