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4 How to Choose the Right Business Model for Your Start-up

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business model

photo credit: guilhembertholet via photopin cc

Lots of people talk about business models these days, but what does it really mean? When it comes to starting or planning for business success your model is essentially your decision about how you intend to add value – which is another way of saying – how you intend to make money.

Business is a pretty simple thing really, but I think people planning to start one or even those engaged in running one can over think it.

Every business does basically four things:

  • Make stuff – This might mean an actual product, but it also includes making a determination about what markets to enter and how to innovate.
  • Market stuff – Whatever the business is meant to do it can’t survive long unless people know about, understand it and are motivated to buy from it.
  • Deliver stuff – This is where the real value exchange happens. No matter if this is a product or a result, the business must exchange what has been promised.
  • Count stuff – This is what most would call finance, but to me it also includes measuring and analyzing all manner of data, both tangible and intangible.

The basic business models to consider:

Product/service – A business can make and sell its own products and services. This is probably the most common approach. Evernote makes a great software product and distributes it through a free to upgrade approach. A marketing consultant sells a consulting engagement for a monthly retainer fee.

Products and services can be packaged and distributed through a multitude of channels and delivered in physical form, digital form and as one time purchases or ongoing subscriptions.

Reseller – Resellers don’t necessarily make or even warehouse what they sell. They find products or represent brands and generally make profit based on the difference between the price they sell a product for and the price they must pay to acquire or sell the product.

Affiliate marketers fall into this category as do what are commonly referred to as value added resellers (VARs). Microsoft partners, for example, sell and install Microsoft products and add services, such as customization and training, to enhance the basic product.

Many straight up eCommerce companies, such as JustBats.com, fall into this category as do many eBay and Amazon sellers. Most retail establishments also fit this model.

Broker – The broker essentially brings buyer and seller together and takes a transaction fee. They may also provided services that make a transaction happen more smoothly, such as the case of a real estate agent.

This category has exploded with the growth of online platforms that make bringing buyers and sellers together from anywhere in the world much easier. In many cases this business model includes the creation of a marketplace, handling transactions and ensuring security. Clarity.fm is a great example of the new breed of broker as they bring experts and those seeking advice together.

PayPal is another example of brokering services between a buyer and seller. In this case, it’s the actual exchange of money.

Aggregator – An aggregator builds a community and then charges for access to the community. In many ways publications and news sites fit this model as they build a subscriber base and then charge advertisers a fee to gain access, by way of a positioned ad, to their community.

Comparison shopping sites, like Shopzilla, and daily deal sites, like Woot are prime examples of how the Internet has grown this category.

So, how does an entrepreneur decide what business model to adopt?

If you have an idea for a business then you should consider the following elements to help determine your best approach

  • Market Potential – It’s probably a good idea to determine how big the market could be for your idea. There’s nothing wrong with going into a very narrow niche, but you might build a different business than if there is a greater potential.
  • Competitive Landscape – You must understand who else is already doing what you want to do and get a real feel for what their value proposition is. Having competitors who forge and prove demand for your idea is not a bad thing.
  • Ideal Customer – In startup mode this may be a hypothesis, but you need to narrowly define the characteristics and qualities of the customer you intend to serve. From here you can begin to get a better view of the size of the market and how to best access it.
  • Value Proposition – There’s one question you must be able answer in a compelling way – why you? Every entrepreneur falls in love with their concept, but it you can’t very simply explain why a market is going to choose your idea over another you’re destined to wobble around trying to grow.
  • Distribution Channels – There are many, many ways to get your product, service or idea to market. Direct sales force, distributors, eCommerce site, retail store, sales reps, and marketplaces like Newegg. In some cases you might even choose a combination of several. This is a crucial decision as profit and expenses can very greatly depending upon the model that fits.
  • Revenue Streams – Your business should have a core way to make money. But, a strong business model should also consider additional ways to add value and make money. This can be through the sale of related products – Map My Fitness sells a premium upgrade for their core app but also creates a marketplace for 3rd party addons such as heart rate monitors and bike computers. It can also come from the convergence of several assets – a consultant creates blog traffic and notoriety for their point of view and adds advertising, speaking and books as revenue streams while enhancing their core consulting business.
  • Strategic Relationships – Many business models hinge on developing partnerships with companies that have products or services that are central to the model – a software company may need relationships with key software makers in order to build a business. This might also include key competencies – an electrical contractor may find that they must find technicians or partners with low voltage expertise in order to service the growing demand for data and entertainment related installations.

So, the process for determining a business model is really an exercise in understanding the classic models and determining the best fit for your idea through a process of elimination.

3 Books for startups – each of these books come at this idea from different angles and make great reading for startups and season owners alike.

 

8 Bake a Referral Engine Into Your Business Model

This post is a special Make a Referral Week guest post featuring education on the subject of referrals and word of mouth marketing and making 1000 referrals to 1000 small businesses – check it out at Make a Referral Week 2010

Have you ever squirmed when a seasoned businessperson asked you “what sets you apart from your competition?” or “what are you truly great at, that no one else in your market can do better than you?”

You are not alone.

Many new entrepreneurs get uncomfortable with the notion that they have to be an expert in their field to have a successful business. This is because they think that they have to know every last thing about the market in order to be considered an expert.

Here is the good news: one of your unique differentiators can be your ability to refer your clients to fantastic people who compliment your work. You don’t have to know everything. You just have to know people who do.

I have designed my business this way. I feel exceptionally competent helping corporate employees figure out which business to start. I can wrestle their snarling fears with confidence. I can help them with branding and marketing plans, and teach them how to grow their network using social media.
But if they ask what kind of business structure will protect their assets, I draw a blank. That is why I have tax attorney and business process guru Kyle Durand on speed dial. If they are creating a new software product and want to know how to wade through IP laws and trademarks, I send them to Jill Hubbard Bowman.

If they have no idea which shopping cart to use on their website, I send them to research maven Crystal Williams, otherwise known as Big Bright Bulb.

If they want killer branding design with great copy, I send them to Reese and Kelly Parkinson.

If they know what to do but get paralyzed by procrastination, overwhelm and creative blocks, I send them to Charlie Gilkey.

If they decide they don’t want to start a business after all and want to get a job, I send them to the best career coach I know, Michele Woodward.

And if they are incredibly difficult to work with, I send them to John Jantsch. (Just kidding John! J)

Knowing I have world-class business partners who will not only deliver excellent service to my clients but will also be fun and easy to work with allows me sell my strengths and refer the rest. My clients are happy, I am happy, and my circle of partners is happy. Our combined networks generate lots of new business, and many opportunities to collaborate on programs, products and services.

How can you bake a great referral network into your business model?

  • Define the problem your clients are trying to solve. Are they trying to start a business? Make more money? Simplify their life? Build a product?
    Break down all the knowledge and support they will need to solve the problem. Think about which tools they may need, which decisions they have to make and what skills and competencies they require.
  • Identify your strengths. As you examine all that’s needed to solve their problem, think about what you love to do, what interests you, and where people say you excel.
  • Structure your services around your strengths. If you love doing big picture strategy and get bored with implementation, don’t offer that service. By focusing only on what you do best, you will set yourself apart from so many others who struggle to provide everything to everyone.
  • Identify ethical, competent people who are great at solving the rest of the problem. Use your personal networks, social networks and research to find excellent referral partners. Watch closely the first few times you send a client their way. Make sure they deliver great results and make your clients happy. After awhile, you will send them business with your eyes closed. And they will do the same for you.

Baking referrals into your business model will not only grow your business, it will make your brand shine. As Miguel de Cervantes said in Don Quixote:
“Tell me what company you keep and I’ll tell you what you are.”

Pamela Slim is a business coach and author of the award-winning book Escape from Cubicle Nation. Find her at www.escapefromcubiclenation.com and follow her on Twitter @pamslim

18 When Highly Networked Meets Highly Engaged

networkedengaged

The graphics above represent the two dominate marketing business models that I am starting to see more and more of these days (click on each to get a better view)

The one on the left I like to call the Highly Networked Business – In this model the business takes full advantage of the use of multi-media, education based content as a driving marketing strategy, taps online automation and search for leads, and utilizes the full suite of social networking and bookmarking tools to create the greatest web presence possible. This is certainly a newer model and one that has been fostered by the tremendous growth of the Internet. This is a powerful business building strategy for Internet based services as well as offline, brick and mortar local businesses.

The graphic on the right represents another kind of business, something I call the Highly Engaged Business. The Highly Engaged Business represents the use of some of the more traditional business building skill sets such as relationship building, strategic partnering, viewing staff as customers, and generally engaging prospects and customers alike in ways that foster deeper connection, context, and community.

A lot of successful businesses are very good at one of these models or that other. In fact, every business should adopt the tools, tactics and habits of one of these models or the other in order to succeed in today’s business environment. However, as I’ve been interviewing dozens of successful companies as part of the research for my new book on referrals, I’ve discovered that companies that generate a significant portion of their business by way of referral have something in common with regard to these two models.

Companies that generate lots of referrals tap the convergence of the Highly Networked Business and the Highly Engaged Business to create something I’ve begun to call the Highly Preferred Business.

The Highly Preferred Business uses every advance in technology combined with what one of my referral success stories calls hugs and handshakes to build trust, generate inbound leads, create fulfilling customer experiences, increase customer loyalty, shorten sales cycles, charge premium pricing, create a culture of buzz, and grow to expect referrals from every single customer relationship. These businesses have developed habits the make them both preferred and referred.

I believe these habits of preferral can be learned, instilled and installed in any business, online or off.

I would love to hear your take on the theory of preferral.

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