Business Model Alarm Bells

This blog was written by Isaac Jeffries, an associate of TDi.

Filling in a business model canvas is a means to an end – creating a company that is desirable, feasible and viable.

If there are any issues with the idea, let’s get them out on the table now – in an environment where they are easy to address, or we can convince ourselves to steer clear of a potential disaster.

Alarm bells create panic. They also save lives.

By understanding the issue early, we give ourselves the best chance of survival. Sometimes it’s a false alarm, like when your hot shower sets off your smoke detector. That’s why we approach these alarm bells with optimism and curiosity – either there’s no issue, or we get to find our weaknesses and fix them.

Here are some examples of Alarm Bells and Red Flags that should prompt further exploration.

 

“We only have one customer”

The issue here is that you have all of your eggs in one basket. One huge customer can kickstart a business, but they can’t be relied upon. The model needs to be appealing to a deeper market of customers, so that one customer doesn’t have unfair leverage over prices and contract terms.

If the idea is only appealing to one customer, maybe it’s not a strong idea?

 

“We are dependent on one staff member”

Bootstrapping is the art of improvising with limited resources, and it’s the best way to start a new business.

Over time, bootstrapping creates bottlenecks – if only one person can deliver your value proposition, then they become irreplaceable. That means the business can’t grow quickly, and there’s a great deal of risk around that person leaving.

You either need to be able to afford to recruit specialised staff, or become great at training new people in your methodologies.

Otherwise your founders can never step back from day-to-day operations, and you’ve created a job instead of a business.

 

“We operate a lot of channels”

It’s easy to engage with your customers on a number of fronts – email, web, shopfront, social media, package delivery, etc.

However, it is challenging to do these well.

Can you dedicate enough energy and attention to master each of your channels? If not, it’s time to start making cuts, getting back to the essential elements and over-delivering on each interaction.

 

“We have lots of key activities”

As above, it’s hard to be truly great at thirteen different things. Too many activities divide your energy and attention, leading to mediocrity across the board.

Ask yourself: what business are we really in?

Which activities are best done by our team, and how do we handball the others to a key partner?

 

“We can’t articulate why customers will choose us over our competitors”

Your value proposition needs to be more appealing than your competitor’s. If you can’t explain why your offer is better for your customers, how on earth will they reach that conclusion on their own?

Don’t forget your hidden, dangerous competitor; it’s called “Doing Nothing” and it’s both cheap and easy.

People don’t care for 10% improvements – your idea needs to be significantly better than what’s currently on offer, or else people will stick with what’s comfortable.

 

 

“We are all things to all people”

You can’t please everybody. It’s better to have a smaller, loyal customer base who love you than to try and be generally liked by the entire market.

Kevin Kelly talks about the need to have “1,000 true fans” who will be your core customer base and act as your evangelists. Find your niche and delight them.

As Seth Godin said – nobody gets a Suzuki tattoo.

 

 

“Our customers aren’t paying anything”

It’s worth remembering in life – if you use a service and don’t pay for it, you’re not the customer, you’re the product.

Yes, we need to engage and delight the end user, but we also need to thoroughly understand the motives of the person who is paying our invoice. What are they looking for? How do they make decisions? How do they measure success?

 

“Customers only make one purchase”

Repeat customers are efficient – by winning them once we can enjoy a stream of sales. It’s much cheaper to retain a customer than it is to bring on somebody new.

If our model doesn’t allow for repeat business, then we need to constantly engage new prospects. It also means that our customer base may dry up over time – meaning we may exhaust our market just as we approach our breakeven point.

 

“We can’t find enough customers to do much testing”

If you can’t find enough people for a test, then there’s either an insufficient market or you’re looking in the wrong places. Your model should respond to a real pain point – one that is shared by a large enough niche.

“We need to push uphill to make sales”

People need to want what you sell. Sure, you might need some momentum, but things should get easier over time as you find your tribe and build a base of happy customers.

If you’re always twisting arms, maybe it’s time to adjust. Seth Godin said it best – find a business you can push downhill.

“Our model relies on generosity/altruism”

Generosity is fleeting; a brief and refreshing experience for your customer, not the main basis of their decision making.

We want to pair social good with something that solves a problem for our customer. Charity is quickly exhausted, whereas self-interest stays motivated forever.

If this is our main value proposition, then we either need to dominate at customer acquisition or customer retention, preferably both.

 

“We have a high breakeven volume”

Life becomes stressful when it takes a lot of sales to break even. The danger is that you find a heap of customers who love you and yet you still go bankrupt.

By structuring the model so that it takes fewer sales to break even, we give ourselves the best chance of survival. It might be time to explore a switch to variable costs, renting rather than buying, and forming clever partnerships.

 

“Our model requires large upfront investment”

As Robert Herjavec says, you want to invest to support the sales, not to create the sales. That is, make something popular then invest to decrease your production costs. If you invest before you’re popular, you take a huge risk that you can’t afford to get wrong.

If you can’t avoid the upfront costs, at least do some serious testing to validate that there is a strong market who are delighted by your price points.

 

 

If any of those sounds all too familiar, it’s time to experiment some new business model designs. Grab a canvas or a whiteboard, and dream up something slightly mad – new customers, new value propositions, new ways of delivering your service, new price points.

Isaac was TDi’s first ever employee, and has worked with over 180 impactful businesses around the world. He’s currently designing and building social enterprises in India, Papua New Guinea and Indonesia. He writes at isaacjeffries.com

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