Business Models
The engine of your business. You won’t go anywhere for long if the business model is faulty.
“Startups can do anything. Companies can only do what’s legal.”
- Steve Blank
Tendayi Viki points out in his great book for innovators within large companies that having no reputation to defend and no preconceived expectations makes startups formidable competitors. In the US at least, many of these startups are also better funded than their established rivals.
“It’s more fun to be a pirate than to join the navy" - Steve Jobs.
Whilst wannabe startup founders and entrepreneurs obsess about the quality of their idea. Innovation is not about the idea, it’s not about the technology, it’s not even about doing something new.
For innovation (turning ideas into commercial successes) to work, you need one thing only…
A Great Business Model.
Four Pillars of Innovation:
Desirability
Should this be done? Making sure that you are delivering value to your customers. Is it something they genuinely want and need?
Feasibility
Can this be done? Are these customer problems possible to solve and do you have the capabilities to do it?
Viability
Can this be done profitably? Are the costs associated with creating this solution less than the income you can generate from the customers?
Adaptability
When should this be done? Does this wonderful ‘idea’ of a business model work in the current business environment? Is the market timing right?
Fashionable not to have one?
“It’s not how much you earn, it’s how much you’re worth”. This is a joke! Please don’t take it seriously. From the satirical but lifelike hit TV show “Silicon Valley”.
Let’s address this “Elephant in the room” right away. If you’ve shown any interest in new businesses or start-ups in the last 15 years you’ll definitely have read stories about Facebook or some other Silicon Valley wonder companies that didn’t have a functioning business model (or even one at all) for many years.
Snap has 3 years left before it runs out of money but this is after the CEO in 2017 said Snap will never make any profit. What an interesting world we live in that a “business” like this could still valued at $24billion at the time.
So whilst having no business model at all may be the case for Snap, applying this to your own thinking and planning is a bit like taking financial advice from a lottery winner. Just because they have achieved some success (of sorts), doesn’t mean it makes sense to copy their example. So lets stick with the tried and tested method that’s worked since the Roman times and think about how our business will be financially self-sufficient. How to make a working business model.
The car analogy still works here, without an engine you won’t get anywhere. But the engine of a business has one exciting unique difference to the engine of a car. When you put fuel in you’ll make forward progress, but a successful business model can also get out more fuel than you put in!
The dream scenario is to only need a little fuel to get started and then to have such a well running business model that it will continue to fuel your business by itself for years to come. If you start your journey before the model is fully developed, or it stops working or becomes faulty, you will need a topping up with new fuel, new loans, new donations, new investors etc… but the expectation is always that it will start making more than you put in. Otherwise it will stop making sense to keep adding fuel and your business will grind to a halt.
We’ll come to financing your business in a later section, but if you want to skip ahead it’s here.
I don’t see a functional difference between companies and charities (or not-for-profits), they should all be trying to achieve good work and solving important problems. The business model of most charities however relies on people’s good will to keep putting money in but there is no reason why they could not become self-sufficient. So whilst many companies appear to only be interested in making money and many charities are financial black holes, there is no reason why companies can’t be more focused on doing good, and charities can’t be financially self-sufficient. It would be in everyone’s best interests if they were.
The basic elements
A business model has a lot of different components, lots of things need to work, lots of things need to be in place, and much of the details won’t be known until you’ve tried, tested, failed, reflected, changed something and tried again. But it’s important to think about it early on and to plan accordingly. Even if you are just copying what someone else has done it still needs validation, it still needs testing. Perhaps they are not as successful as you think, perhaps the town or street in which your version of their business will operate is slightly different to the others, perhaps times have changed and not as many people want that anymore. The only certainty is that things will need testing.
But you can boil down every business model into three boxes…
(If you listen to business interviews with older founders, you’ll often hear them talk about advice and stories from their parents who would summarise all business by putting bills, receipts and cash into 3 different shoe boxes, if you get that right then you’ll be fine, so lets start there):
Box 1: What you’ve spent today. Costs
Box 2: What you earn’t today. Income / Revenue
Box 3: What you have left over. Profit (or not)
It sounds obvious but lots of people don’t start at the basics and so obvious holes appear in their complicated and elaborate plans. If at the end of the day you are spending more than you are earning then when box 3 is empty the game is over.
Now some people have larger boxes than others, so again be careful about copying someone else’s business model if you don’t fully understand how large their box 3 is.
The concept of the 3 boxes is also the key message behind business cashflow. You might have a really profitable business, but if you have a bill to pay today and no money in box 3 to pay for it then you’re in trouble. An example might be a property developer who is building a house. When they sell the house they might have lots of money coming in, but until that point it’s all flowing in the wrong way and if they run out of money before they are able to finish and sell it, then the game is over.
I heard a story years ago on the radio about a fish and chip shop run by an old couple. The husband did the fish and the wife served the chips. So the story went, every time the wife would serve a customer a big pile of chips, she’d take one and put it back. Saying “this one is for the pension”. Selling chips was her source of income and her source of costs so by taking a single chip back at the end of each day she could sell a portion of chips that had already been paid for, meaning it was 100% profit and went straight into her savings for when they retired. A tiny amount, but over time it would add up to something meaningful. Could she have served slightly fewer chips each time, yes, could she have put her prices up a little, yes. But this was a frequent daily reminder to her about the importance of box number 3, having something left over from every transaction.
Engineering Businesses
Now all this might seem a bit stupid and obvious. But you’d be amazed how easy it is for, in particular engineering and product based, businesses to make a mess of it.
The story usually goes something like this…
You’re working hard on a new product, you’ve got most of it worked out but there’s just a few small details left.
Your sales team (or maybe just the back of your mind) are really pushing, keen to make a sale to prove this has all been worth it, lets close a deal, lets get a customer. Lets make this happen!
So you agree a price with a new customer and boom success is just around the corner. But wait, those small little details left over might be surprisingly expensive. Maybe it takes you 6 months longer (6 months of extra salary) to finish, maybe you forgot to factor in taxes and VAT to your price, maybe some of your suppliers have just changed their prices, maybe you’re buying everything from China in US dollars and suddenly Brexit causes the value of the pound to drop 30%.
Whatever the reason it’s very easy to find yourself in a situation where the profit you thought you were going to make just isn’t there anymore.
This happens to large and small companies so just be careful with jumping to a sales price and closing the deal too early.
So as a business founder, make sure you can articulate how your business will work in it’s most basic three elements. Also for anyone looking to get involved with a business, if they can’t clearly articulate what their costs are and how they make money. Beware!
The Business
Model Canvas
The Business Model Canvas (BMC) was somewhat of a revelation when it came out. Before this simple framework there was no universal way to think about or evaluate business models. Bank managers would ask for full and detailed business plans that might take months to create (I used to write business plans for people professionally as part of small team). These were often large unwieldy documents that I think only the person who wrote it and the bank manager ever read.
Instead the BMC gave businesses a simple way to think about business models and most importantly to reveal all the hidden assumptions they were making so that they could be tested.
The BMC is designed to be a working, living document, a template for you to test and explore. Write down your assumptions, test and validate them. If it doesn’t work as you thought it might, go back and rewrite your canvas with your new assumptions.
It is not a business plan (we’ll cover this later) nor is necessarily a good way of describing a business. But it’s a great (and importantly quick) tool to help you test if your intended business model will work.
It’s comprised of 9 different windows, some might be more important than others, some might be the secret differentiater between you and your competition.
The canvas explained
Steve Blank is a bit of a start-up founders legend, he’s done lots of things himself but is also a lecturer on innovation and new businesses at Stanford in the heart of Silicon Valley and Eric Reis the author the Lean Startup was one of his students.
A summary of Steve’s fascinating insights in the Harvard Business Review can be read here.
But in the mean time, he does a great job at explaining the Business Model Canvas in this short video. Enjoy.
Some of the most common business models in use today
(in no particular order)
The most common business models in operation today are often foundational to many industries. They are prevalent because they are adaptable, scalable, and work across various industries. They provide companies with different pathways to profitability depending on their product, target audience and market conditions. Many successful companies combine elements of these models, creating hybrid approaches that suit their specific needs.
Retailer/Reseller
How it Works: A company buys products from manufacturers or wholesalers and sells them to consumers at a markup.
Examples: Walmart, Target, Best Buy, Tesco, Argos.
Why It’s Common: Retailers simplify the purchasing process for consumers by aggregating products from various suppliers, offering convenience and selection in one place.
Direct Sales
How it Works: Companies sell products or services directly to consumers, either online, in physical stores, or through catalogues, bypassing intermediaries.
Examples: Apple, Tesla, Warby Parker (eyewear).
Why It’s Common: Companies maintain control over the customer experience and margins, often leading to higher profitability and a direct relationship with customers.
Subscription
How it Works: Customers pay a recurring fee (monthly, yearly) to access a product or service.
Examples: Netflix (streaming), Spotify (music), Microsoft Office 365 (software), Amazon Prime (bundled services).
Why It’s Common: Provides a predictable revenue stream and encourages long-term customer relationships. It’s popular for services where consistent access or regular updates are essential.
Freemium
How it Works: Offers a basic product or service for free, but charges for premium features, additional functionality, or enhanced experiences.
Examples: LinkedIn, Dropbox, Zoom, Spotify.
Why It’s Common: Attracts a large user base quickly, while allowing companies to monetize a smaller, highly engaged segment willing to pay for premium features.
Advertising
How it Works: Provides free content or services to users, while generating revenue by selling advertising space or data to third parties.
Examples: Google (search), Facebook, YouTube.
Why It’s Common: Free access attracts a vast audience, while advertisers pay to reach that audience. This model is especially dominant in tech and media.
Marketplace
How it Works: Acts as a platform to connect buyers and sellers, typically taking a commission or transaction fee for facilitating sales.
Examples: eBay, Etsy, Uber, Airbnb.
Why It’s Common: This model can scale quickly without the need for inventory or physical assets. It benefits from network effects, where the value of the platform increases as more users join.
On-Demand
How it Works: Offers products or services that are available immediately upon customer request, often leveraging technology to enable fast delivery or access.
Examples: Uber (transport), DoorDash (food delivery), TaskRabbit (gig services).
Why It’s Common: It meets the growing consumer expectation for convenience and instant gratification, fueled by advancements in mobile technology and logistics.
Franchise
How it Works: A business (the franchisor) licenses its business model, brand, and operational processes to third-party franchisees, who pay fees or royalties.
Examples: McDonald's, Subway, 7-Eleven.
Why It’s Common: Allows rapid geographic expansion with less capital investment by the parent company, while providing franchisees with a proven business model.
Product (or Software) as a Service
How it Works: Companies provide access to products as a service rather than selling them outright. Customers pay to use the product for a specific period instead of owning it.
Examples: Zipcar (car sharing), Rent the Runway (clothing rental), Spotify (music streaming as a service).
Why It’s Common: It appeals to customers who value access over ownership, especially for expensive products. It also allows businesses to generate recurring revenue from physical goods.
Low-Cost
How it Works: Companies offer products or services at lower prices by streamlining operations, reducing overhead, and focusing on high volume.
Examples: Walmart, Ryanair, Dollar Tree.
Why It’s Common: This model captures price-sensitive consumers by offering essential services or products at lower costs, leveraging economies of scale and operational efficiency.
Brokerage
How it Works: Brokers connect buyers and sellers, facilitating transactions in exchange for a fee or commission.
Examples: Real estate brokers, stockbrokers, Upwork (freelance marketplace).
Why It’s Common: Brokers help reduce the friction of transactions, providing expertise, or facilitating deals between parties that might not otherwise connect.
Affiliate Marketing
How it Works: Businesses reward affiliates (individuals or other companies) for driving traffic or sales through their marketing efforts, typically earning a commission for each sale.
Examples: Amazon Associates, Rakuten, influencers on YouTube or Instagram.
Why It’s Common: It’s a performance-based model where businesses pay only for actual results (sales or leads), making it a cost-effective way to scale marketing.
Crowdsourcing/Crowdfunding Model
How it Works: Companies leverage a large group of people (the crowd) to provide funding, ideas, or labor, often in exchange for rewards or equity.
Examples: Kickstarter (crowdfunding), GoFundMe (fundraising), Wikipedia (crowdsourced content).
Why It’s Common: Crowdsourcing allows companies to tap into the collective power of many, while crowdfunding provides access to capital without traditional financing.
Pay-Per-Use Model
How it Works: Customers pay only when they use a product or service, rather than paying a flat fee or owning the product.
Examples: AWS (Amazon Web Services), utilities (electricity, water), Lime (bike/scooter sharing).
Why It’s Common: It offers flexibility to customers who prefer to pay only for what they use, making it attractive for both consumers and businesses that need scalable solutions.
Agency Model
How it Works: The agent sells products on behalf of a principal (a business) and earns a commission on each sale. Agents do not own the products they sell.
Examples: Travel agencies, real estate agents, talent agents.
Why It’s Common: It allows businesses to leverage third-party agents to reach a wider market while incentivizing sales.
“Unlike in physics, in business and marketing the opposite of a good idea could be another good idea.”
Rory Sutherland
Just because people have always done something the same way, or just because someone is seeing great success in one thing, it doesn’t mean that doing the opposite thing is a bad idea. It could be equally effective, equally successful, just perhaps for a different audience.
Normal models, clever twists
A single clever twist can make a very conventional business model a very exciting business. With so many new businesses (and new business models) trying to grab your attention these days, there are some common themes that you’ll see happening and noticing them may help give you ideas for things that could work. Here are a few I’ve noticed:
Reveal what’s Hidden (and make it work for you)
Dyson was probably one of the most famous product pioneers of this idea. His vacuum cleaner showed everyone how dirty your home was. Understandably since the birth of the vacuum cleaner the entire industry thought this was a dumb idea… and it was, if your vacuum cleaner wasn’t very good. His on the other hand was much better than the rest, so showing the dirt convinced customers of the merit and made them show it to all their friends.
Another more recent example, and one where nothing about the product is functionally better than the competition is WGAC (Who Gives A Crap) toilet paper.
It’s toilet paper like everyone else’s toilet paper… but(t) they put it in a colourful quirky designed wrapper, with a recycled eco-message and deliver to your door via a subscription model. The model is sort of irrelevant, the genius here is that now rather than hiding the paper away under the sink, I show it off. It’s stacked on display in my bathroom so everyone can see… and by seeing it they think I am super environmentally conscientious and have cool graphic design vibes.
Scare away bad customers
In most countries and industries it’s illegal to discriminate against people. Men are statistically more likely to crash their cars than women. But I’m not allowed to only sell car insurance to women, that would be discriminatory against men. So what I can do (hello Sheila’s Wheels) is make my advertising so aggressively horrible to watch for men that they would never think of using the company. As a result the percentage of male customers is lower than normal and therefore they can charge lower premiums to their customers. Because their customers are having fewer crashes.
Set the Scene
Charity shops are a mess. They look like some old person just dumped a load of donated bric-a-brac onto some other donated bric-a-brac and called it a day. It’s not a shop, it’s a jumble sale… and all on purpose. Research has shown that smartening up charity shops to make them look like nice modern stores actually harms sales. Customers expect to find bargains hidden in the mess. That’s part of the game and ingrained into our culture.
Ryanair does a similar thing… it used to be every 6 months or so the boss would be in the news saying something ridiculous like you’d have to pay to use the toilets, or standing only flights etc… It didn’t matter if this was all bollocks, it reinforced a notion in people’s heads that Ryanair was cheap. No need to shop around, Ryanair will surely always be the cheapest right? Well, it’s worked so well that on some routes they are actually more expensive than BA and no one thinks to compare.
Solve it without changing it
Can you turn your situation around by simply looking at it differently?
In the 1960s the car rental company Avis was always behind the leader Hertz. Nothing they did seemed to close the gap. So an Ad agency came up with a catchy slogan for them… “When you’re only No. 2, you try harder”. It was a hit and Avis went from losing money to making it, turning the game completely around on Hertz and finally closing the gap.
That’s the power of a good advert. It can change everything without you having to.
Win through a related niche
The founder of Gü puts his success not down to the tasty puddings he created but to the fact that they were sold in plain unbranded glass ramekins. The ramekins were a stroke of genius because it enabled consumers to pretend they had made the deserts themselves, an ideal dinner party time saver.
People also started collecting the ramekins to reuse. It even became a Meme.
Fake Foreign Heritage
A common assumption is that Häagen-Dazs is Danish (it can’t be, there is no ä in Danish) and SUPERDRY®︎冒険魂 is Japanese, but these fake foreign sounding names serve an important psychological function of providing comfort to unsure consumers that although the brand is new (to them) it has a trick pedigree, heritage and status… “oh this brand must be popular in [whichever is the name sake brand country] to have launched here! It must be good, I’ll try it.”
The pseudo European nature of Gü desserts’ name was another classic example of a new British brand that attracted attention when it launched.
Find an Untouched Insight
The Microlino car is a wonderful example of a fresh twist on car transport rooted in the observation that often people own two cars. Their goal is to be the “first second car”.
A great way of setting the context for purchase straight away and changing the established expectation of how you judge the capabilities of this car. Unapologetically inferior and not for every use case.
Guess the model…
Next time you go out and interact with a business, any business, try to guess their model. Sitting in a cafe, how many coffees do they sell in an hour? How many also order a food or a cake? How many staff are there here, any in the back room / kitchen? Is all the food made on site? What might the rent be for a place like this? Apart from the cost of making the coffee, what other costs might there be?
If you were running this place, what would you do differently? Who is this place attracting, are they all similar? What attracted you to this place? Etc…
I love sitting in coffee shops and cafes so have built up quite an interest in comparing how different places seem to operate. If they are having a quiet moment, why not ask them? They are often very happy to discuss how things work and how they started up. It’s often a fascinating conversation.
The more you practise the quicker you’ll see things that are different or unusual next time.