Model effort makes running a business easy

Doug May
Doug May

At lunch with a client I always wished had become a mentor I learned business is easy. Or at least it ought to be.

If completing your daily tasks is too hard, you’ll make mistakes and disappoint customers. A business should be a systematic enterprise designed to please customers who need what you have and that operates in a fiscally sound way so customers and staff know the business will be around a long time. A business model helps entrepreneurs understand critical drivers that deliver value to customers and profitability to the organization.

The classic example of a business model is that followed by Gillette, which sells inexpensive razors but then makes money selling blades. Hewlett Packard uses this same approach, selling inexpensive printers but making a lot of money selling ink to its customers.

Small companies can focus on serving smaller customer bases or markets industry leaders are willing to ignore if it can be a stepping stone that will enable them to grow and developing a track record that eventually position them to compete against industry goliaths. Wal-Mart got its start serving underserved small towns. It build its infrastructure to serve these areas efficiently and competed on price. Sam Walton was so successful he eventually created the biggest retailer in the world. He got his start, however, by focusing on rural niches across the country. He made key decisions that enabled him to compete in that particular segment. His business model determined who he hired and how he allocated resources.

Understanding your business model means knowing your customers, what drives their purchase decisions and what you can sell profitably. The business model focuses the business on selling products or services that deliver the most bang for the buck, which drives profits higher.

Gillette knew customers shopped for razors, but bought blades and aren’t particularly price sensitive. By giving up profits on the sale of razors, Gillette ensured a steady stream of revenue from the sale of blades.

Wal-Mart knew shoppers in small towns often had little choice in where they shopped and tended to pay more for merchandise. By designing a transportation and fulfillment infrastructure oriented to small town America, Wal-Mart delivered value, profitably, to shoppers in rural areas. Wal-Mart got its start by being a price leader and having the lowest cost structure in its markets. Wal-Mart since has had to reinvent itself many times, and its business model has evolved. But at the beginning, its business model was pretty straightforward and guided the growth and allocation of capital during the early, lean years.

The first business model I saw was the real estate firm where my father worked. The company built homes and shopping centers in Denver. After building its first shopping center in the late 1960s, the firm saw how surrounding landowners reaped the benefits of being close to the mall without having invested anything in building the mall. The mall developer’s risk and hard work made a lot of nearby property more valuable, but most of it was owned by other people. The next time around, the firm took on the risk of buying acreage around the new mall.  In later years, when the area developed into a regional center, the firm owned much of the surrounding land, which allowed it to capture more of the value. In essence, the firm created demand for this land by building something of value at its core.

These are only a few examples of business models.  Ideally, they aren’t complex. In fact, the simpler the better. Business models help to focus attention and resources on key elements that drive profitability.

So, what drives profitability for your business? It’s not exactly a matter of what you do best. You might be the absolute best counselor of homeless people in the world, but it might be tough selling your counseling services profitably to that niche. No, what do you do that’s relatively easy and profitable because your customers love what you do or sell? That’s your value driver. Next, look for the best way to reach those particular customers. Meditate on that niche. Know it better than anyone else. In there, somewhere, is probably your business model.

Define it simply. Deliver it as easily as possible. Make it systematic and replicate it to achieve growth. Even if it’s delivering personalized, caring service, which is the culture of companies like Dutch Brothers Coffee, learn how to repeatedly deliver the profitable product or service that customers love most.

That’s your model. That’s how you make it easy.