Financial Clarity for Entrepreneurs

Rethinking Your Business Model

In my last post Why Does Your Company Exist, I introduced the concept of Transaction Costs and the impact they have on creating value for your customers.  Technological advances including Web 2.0, advanced search capabilities and broadband internet access have wreaked havoc with many establish business models over the past decade.  The recent rumors about a possible bankruptcy filing by Borders is just the most recent example.  Most of us understand intuitively that the internet has changed things, but a deeper understanding of the “why” is what will give us the tools to examine our own business models for dangers, and opportunities.

What Used To Be Barriers No Longer Are

It’s important to keep in mind that technology is just a tool – it has no magical properties.  An example from the pre-internet days will help illustrate how reducing transaction costs can lead to a disruptive business model.

Those of us of a certain age remember that when your car needed an oil change, you had two options: do it yourself, or make an appointment, drop your car off at the garage or car dealer, and pick it up at the end of the day.  Either get dirty or disrupt your whole day.  Jiffy Lube changed all that with its no appointment, drive in, drive out 15 minutes later oil change.  Consumers were willing to pay a reasonable price to avoid the hassles associated with oil changes because Jiffy Lube removed the non-financial (time and hassle) transaction costs.

And that, in a nutshell, is what technology is doing today to established business models.  What consumers and businesses used to do for themselves (or do without altogether) because the costs in time, hassle, risk, etc. were to too great can now be done by someone else.  And what they used to outsource because the cost of acquiring knowledge, finding suppliers and co-ordinating activity can now be done by themselves.

Finding New Ways Of Creating Value

Technology hasn’t rescinded the laws of economics, but it has changed the calculus.  So here are some questions to ask yourself about your business model and how you create value for your customers.

What are the things I’m doing that my customers can now do for themselves?  If you’re relying on time, hassle and knowledge transaction costs that are being eliminated, your customers will leave you eventually.  Just ask Blockbuster.

What are the things I’m doing that my competition can do faster, cheaper, better?  If your competition isn’t already using new technology tools to better serve your customers, they soon will.  Ask Borders how they feel about Amazon.

What are the things my customers do for themselves, or do without, that I could do for them?  Find out what transaction costs you can eliminate for your customers and that you can do for them profitably.

What are the things my competition does that I could do faster, cheaper, better?  Remember the Golden Rule of competition: Do Unto Others…First!

    Signs Of A Broken Business Model

If in the past you didn’t struggle with growth and profitability, but now are, you may be the victim of a broken business model.  You can’t fix the problem by working even harder at the same things you’ve always done.  Now is the time to stop running so hard and do a little thinking about the fundamentals of your business model.