In 2002, Joan Magretta published a fascinating article in the Harvard Business Review (HBR) titled “Why Business Models Matter.”
For years prior, the talk of “business models” was considered sheer poppycock by people in the tech world, but 2002 was right when the internet bubble burst. Investors were keen to stay away from anything and everything that had to do with tech. It was time to discuss business models.
Magretta made an excellent observation; it was that “good business models begin with the insight into human motivations” – basically a foundational element of what we today call human-centered design.
In 2002 however, this was “Wow.” And so, the process of implementing design thinking, customer experience design, and services design eventually began. Human motivation tied to purchase behavior and behavior was to be studied, analyzed, and findings implemented into the digital product – ever-increasing engagement.
Business Model & Services Design
If a business is to be profitable, it needs to be designed to be it. Unit economics, margins, and general market knowledge of budgeting cash flows and profit and loss statements are pivotal.
So is marketing. What’s your go-to-market, is it content, is it word of mouth, cold email outreach?
And most importantly, it needs to solve a problem and provide value to your intended audience. What you’re selling should have alignment with the market and the timing. For example, today, April 2020, solutions that help companies save money are probably on the up and up, Microsoft announced an open data play, so players that facilitate open data, or open data consumption are positioned to do well as the movement gains steam.
How do I know my business is going to do well? Get feedback early.
Pitch the story. If you’re pitching people an uber for chairs, chances are they’re telling you not to invest your life savings into it. If you spot a market need and tell a few people and they seem excited, tell a few more.
Telling a Good Story
Take J.C. Fargo, the president of AmEx, who, in 1982 during a European vacation, identified the need for the traveler’s cheque. His story went like this. For a small fee, you could buy a cash-like product that was secured against theft and widely accepted. AmEx was a trusted name, and companies happily accepted the cheques. As more businesses took the checks, more people bought them. AmEx got the equivalent of an interest-free short term loan from the checks. Easy for customers to grasp, great for AmEx.
Getting the unit economics right.
When it comes to your model, the numbers have to add up. The equation is incredibly simple. Make more than you spend, but like anything, the devil’s in the details.
Businesses fundamentally control these earnings with sales and operating costs. Increase sales, make more money. Scale your ops with those sales, and you make even more money. The first one is pretty straight forward.
I sell 10 apples for $1, and I make $10 in revenue, I sell 100 apples for $1, I make $100.
But it costs me $0.10 per apple, it costs me $5 for my apple booth a day, and I have to pay my sister $1.50 not to tell my mom I’m running an apple game, and $0.50 for my marketing collateral (a sign).
1 + 5 + 1.50 + 0.5 = 8, so $10 (Revenue) – $8 (Expenses ) = $2 or my earnings. I made $0.20 per apple here.
For a 100 apples, however, $100 (Revenue) – $10 – $5 – $1.50 – $0.50 = $72 earnings. I made $0.72 per apple. But what if I can get apples for less, or get my sister off my back, or pay less for my booth.
My earnings will increase as well, and I’ll make more money, and that’s simple unit economics. Direct revenues and costs associated with a particular business model, explicitly expressed on per-unit bases.
Unit economics are the fundamental financial building blocks of a business, and they have to make sense. Without them, you will never win.
Business models should be representative of a better way of doing business.
Business models should be representative of a better way of doing business, giving customers better value for the dollar, and doing it in a way that is scalable and economically viable. But as with everything, know-how is key, if you’re considering thinking about starting a new business – consider hiring a consultant to help with this, a business in a box product may make sense for you.