The time spent on value creation is usually much larger than the time spent on how we capture value from the value that we create. How do we capture revenue from the value that we create? This is what the business model is about; how to design business model.
Let us look at some design factors on how you generate revenue for the value that you provide.
1) Customer
Who is your customer and how does your customer purchase the product or the solution that you’re offering? The business model that you use needs to align with the way that the customer spends money. Do they spend it on cash?
Do they spend it with a credit card? Do they spend it by the month, do they spend it by the year, how are their budgets set up? If you’re selling business to business, and they pay by the month, but you charge by the year, or you charge by the month and they pay by the year; if you’re not aligned with the way your customer purchases, you’re going to lose sales.
The first thing in your business model is how your customers spend money; how to design business model. You have to review your customer journey map, decision making unit and decision making process and gain this information.
2) Competition
We can also look at the competition; we want to understand what the customers’ alternatives are. We also want to understand if there any disruptive business models coming out; a disruptive business model can create significant competitive advantage and determine how to design business model.
You may or may not remember the concept of micro gaming transactions, where people that play online games created a business model where they could get answers or power up or get something for a very minimum amount of money, like in the range of under $1. Of course, at the end of the month, they’d get a $40 bill because that new innovative business model was so significant.
You don’t want to just pick the same business model that everybody else is using. That’s why it’s important to spend time thinking through what’s a way to gain revenue from the value that you provide. In order to have a disruptive model, one of the things about your customers and your competitors is how locked in they are to the current way they spend money. Your customer may have a desire for a different model.
At the same time, you want to ensure that your competition cannot quickly change and mirror a new model that you may be using. How entrenched are they in their current process and business model? You want to be thinking about options and alternatives?
3) Internet
Is your model good on the internet, not just in real life sales? How does your model work on the internet? Are you thinking about using distributors or channels, which is a different model? Does the model that you’re picking enable you to receive value, revenue from the value provider, does it work for the distributors as well as you if you’re going to use a distributor model? This determines how to design business model.
4) Sustainable operations
How you charge can make a difference in how fast your organization is sustainable. For example, if you charge for a service, and you have 30, 60 or 90-day payment period, there’s no money coming in when you launch your business, still 30, 60, 90 days out.
If you provide introductory offers or some kind of discounts to pay up front half or the whole fee, you create rapid income to your organization, and you become more sustainable. Think about how you can have people pay as part of how sustainable your operations are.
5) Company valuation
Company valuation is a huge issue since all income is not the same. $120 one-time sale, versus $120 annual sale, versus $10 a month for 12 months equal $120 are not the same to your company valuation, even though they’re all $120. The one-time fee is the least valuable, an annual fee is better, but a monthly fee that even equates to the annual is even better. Why? This is because it’s more predictable.
A regular, recurring monthly revenue stream is more predictable than an annual stream. Reoccurring revenue is more predictable than one-off revenue stream and changes the valuation of your company. Your company is actually worth more when you have reoccurring revenue and the shorter the time period of reoccurring revenues, the better.
Additional Thoughts
- Self Service is not a good business model.
If you have to work to make money, that’s not a good business model because if you stop working, there isn’t any money. You want to be thinking about ways to create revenue, even when you’re not working, whether it’s scalable revenue, passive income generation, but self-service is not a great business model.
- Once you choose your business model, it’s difficult to change.
Choose wisely. Take some time to think through your business model before you select it because once you start implementing it, it will be hard to change.
Examples of business models to capture value
- One time upfront charge like a car, you sell it one time.
What have cars done in mid-car dealerships to make more money, create reoccurring revenue? They have maintenance plans, selling you the warranty. Actually, they make more money on the warranty than they do on the car.
They’re looking for ways to up-sell that one and done situation. Similar to a house, you buy it at once and you’re done. How can you add on other fees and services?
- Cost plus
- Hourly rates are ways that people bid for contracts.
- Subscription and leasing services in the licensing services are all different kinds of business models.
- Consumables – It is about selling the hardware as a Trojan horse to then get you on the reoccurring revenue. That is what printers do. They give you the printer because they want you to buy the reoccurring revenue, and it makes their company worth more money and a great company valuation by selling you all the printer cartridges.
- Up-selling high-margin add-ons like vacations. The basic package may be a pretty good price, but then they add on a ton of stuff as an up-sell;
- Advertising and a third party having access to your lists.
- Re-selling (data mining)
- Transaction fees like credit cards, there’s a lot of different business models that can be done with that;
- Usage fees like Dropbox, power meter or others. How much you use will determine what your pricing is.
- Low initial prices like cell phone plans, you start off low and then just keep adding more charges.
- Penalty charges for cancellation or late fees.
- Shared Savings – If you’re going to work with somebody in a business model where you both share the costs and the savings, you better have a very detailed contract relationship because in those details there can be a lot of problems.
- Franchise models.
- Operation and maintenance – There are people that do operation and maintenance business models like consulting that will run your business for you.
- Self-service (a poor business model)
- Freemium is not a business model. Why? This is because the first requirement to say you have a business is not a product or service but is defined as a paying customer. Freemium is not a business model until you monetize it. The same thing is true when you look at ad networks. Having a big network is not a business model until it is monetized.
Different ways to drive your revenue growth
- Scalable pricing – Where you can have different kinds of pricing levels, the bronze, silver, gold package.
- Recurring revenue
- Product line expansion – How do we expand our product line? Remember, though, you start with a minimum viable business product you want to have a whole product solution. How do you expand that product line to have the whole product solution?
- Cross selling to adjacent markets, those are things that you can do to drive revenue growth.
- Lead generation for third parties – You’ve got a great mailing list, you’ve got a great audience, great distribution channels; if you have value-added services and products to your market, and you’re allowing other people to sell through you almost like a distributor or a channel, you can make money doing that.
- More effective sales and marketing/marketing strategies are going to improve your revenue.
- Low churn and high retention of existing high net dollar customers. If you get really high-end customers, low churn and high retention are going to be really important. The existing customer is the best customer. Don’t lose them, keep them coming back.
Summary
How to design a business model involves looking at several factors. The key among them is aligning your model with the way that customer spends money. There are various business models that you can adopt depending on your industry and stage of your business; technology, service, wholesale or retail, manufacturing.