So...how do you know a good business idea when you see it? It's really all about studying the business model. Most successful businesses have more in common than they have different and knowing the commonalities can save you a lot of headaches and make you a lot of money. Therefore, whether it's waste disposal or concrete mixing or baking, focus on building your business based on a proven model - it's structure - and you'll increase your chances of success.
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A business model is the way that costs and potential revenues interact. Put another way, a model is the structure that a particular business will use to get raw materials, add value, and sell the finished product to the market. Therefore, there are three main components to a business model:
(1) The markets and customers
(2) The services and products to be offered
(3) The distribution method
There are five rules of good business models according to Seth Godin, author of The Bootstrapper’s Bible: How to Start and Build a Business with a Great Idea and (almost) No Money (along with many, many other thought-leading books). According to Godin, one of the best business and marketing minds of the last couple of decades, a good model should be as follows:
1. Profitable – You should be certain that the revenues from sales exceed the costs of obtaining raw materials (supplies and labor) and adding your value by developing the finished product.
2. Protectible – It should be relatively difficult for a competitor to enter your market. You should at least be able to see competitors coming so that you can account for them.
3. Self-priming – Not only should your model be profitable, but each sale should generate enough profit to allow you to develop a new finished product and retain some earnings.
4. Adjustable – What happens when your competitors prove to be more formidable than you once thought? You have got to be able to change the way you do business to survive.
5. Exitable – There should be an exit strategy for your partners, investors, and for yourself. This means that even though your business might revolve around you at the onset, you should be able to build it to a point of being able to function without you.
Once you decide the specific business that you are most interested in pursuing, you should follow these guidelines of business modeling in order to increase your chances of lasting success.
Does a market exist? After all, you will need customers, right? For example, let’s say that you are the world’s foremost expert on asbestos. Asbestos is your life and you think about it all the time. Then, let’s say that you have developed a way to sell asbestos products via the Internet and have representatives local to the customer deliver them. Do you think that you will have an adequate market to allow you to reach your business revenue goals? Probably not. Asbestos sales aren’t exactly peaking right now.
I acknowledge that the example sounds silly. However, I can assure you that many people commit similar errors everyday. You must be fairly certain through observation or study that a market exists for your product. Furthermore, the market must be large enough to maintain your business. Finally, people should find it easy to understand the benefit that they receive from buying your service. People spend money to solve their problems. Are there a lot of people with the problem that you want to solve? Are they willing to pay you what you are asking to do so?
Here are a few more elements of a good business model to consider from my study, research and face-to-face interviews with successful entrepreneurs. I went back through my notes from reading books like "Good to Great" by Jim Collins and Michael Dell's writings about his successes with Dell Computers. I also poured through The Great Game of Business by Jack Stack, Rich Dad, Poor Dad by Robert Kiyosaki and The E-Myth Revisited by Michael Gerber...and dozens more. I also went through my notes from meetings with many of the most successful businessmen I've met over the years.
I blogged on some other books that I like a while back! Here are other things to look for and/or incorporate into your business model:
6. Large potential market that is (hopefully) unorganized and disjointed. One of the things Michael Dell most appreciated about the personal computing market was that many people wanted their own devices, but no one company had stepped forward to dedicate their efforts to solving that one single problem. In fact, people wanted a product so much that they were making their own computers. Dell did the same, as we know, starting off in his dorm room at The University of Texas. Soon he was in demand to make computers for other people and the rest is history. These days, there are a lot of problems out there to be solved. Can you find one begging for a solution?
7. Recurring revenue. Ideally, you want to be involved in a business that incorporates recurring revenue streams as much as possible. When you have that, once you've covered your customer acquisition costs, you'll be in the position to realize profits for the remaining life of that customer. I believe recurring revenues may be the most important element to consider when you're looking at a business idea. If you don't have recurring revenues, you need to be sure to have a way of capturing new customers and servicing them in a very cost-effective manner to be profitable.
8. Breakage. Warranties are a great example of "breakage" in action. It's a simple concept: people pay for services they may not fully consume. Another great example are health club memberships. There are sometimes ethical challenges to incorporating breakage into your business model. Here's the key: you MUST be set up to provide services if and when demanded every single time. In the case of a warranty, if people need service on their appliance, you MUST provide it. It's not an acceptable excuse that you never planned on providing service! On the other hand, if a business is able to sell a warranty, it normally turns into profit instantly. That's why Best Buy pushes them so hard!
9. Reasonably low barriers to entry (skills, capital, legal/regulatory). Whether in terms of the legal and regulatory environment or other factors, for most people it's best to enter a business without barriers set up to hinder them. Infrastructure can be another substantial hindrance. If you want to build a competitive railroad line, you need access to railways. That might be difficult to obtain. It might be easier to provide services within societal infrastructures already existing.
10. Scalable. The best businesses are easy to expand from a small operation to a large or much larger one. "Easy" is a relative term. I understand that. However - and Kiyosaki talks about this a lot - if your business requires rebuilding every time orders increase, you have to reexamine your structure and finds one that scales better. Solopreneurs struggle with this. Let's say you're offering personal chef services? You might be okay with ten clients, but what if you get 100 calls tomorrow? Can you even take 100 calls? It's best to build for scale from the very beginning. I call this "planning to succeed" because you should account for an idea really taking off as well as planning for challenging times.
11. Duplicatable. The best businesses can be duplicated. Once it works, you can take it from market to market to market or set up people to operate your business in other locations. If you're providing a specific product, in what ways can you repeat the process over and over and lowering your production costs? This is where the great Henry Ford changed the American economy. He popularized the assembly line.
12. Leverages current resources. Most entrepreneurs are going to be better off starting where they are and using the skills, resources, capital and people available to them already. Acres of Diamonds, the famous speech turned book by Russell Conwell, talks eloquently about how much most people already have available to us as we're out searching for riches elsewhere or bemoaning their lack. You can download a free copy of Acres of Diamonds here: LINK
Now that you have determined your specific business and you have done some thinking about how you will organize your company, and you are pretty sure that there are customers in the market, you are ready to start planning. If you need a simple, basic business plan to start working through your ideas, use this one: The One-Page Business Plan.
If you have other questions, get in touch with me. Entrepreneurship as a sole source of income or as part of a strategy to build multiple sources of income is going to be increasingly important in the coming months and years...more than it has ever been before!
Side Note: If you're looking for other resources, visit here: LINK