How to Make Your Business Model Sustainable
5 min read
Hi I’m Jeffrey the founder of business innovation design. I’ll be talking about a subject that I like to talk about. Business model.
If you’re building new ventures or helping your customers build business model, it’s important to understand what makes a business model sustainable..
Let’s define what it is first. A business model is how a company creates, deliver, capture and scale value.
Value is created from your product or services.
It gets delivered in certain channels.
How you charge, which is the revenue model, to which type of customers at what price. This is what capturing the market is about.
Scaling value means optimizing and repeating execution to scale value.
Essentially how companies execute is based on the business model that has been decided.
Business model can make or break a company.
What makes a business model sustainable?
There are three factors that determine the sustainability of a business model that allows a company to scale effectively and profitably.
Number one. Develop the right business model that is unique to your business.
Just because you apply a proven business model, it does not mean that it will work on your business.
It’s more complicated than applying Uber for X.
And you need to develop a business model that is unique for your business, unique to your offerings, unique to your customers in your industry.
Number two. The cost of customer acquisition must be lower than your lifetime value of customers.
How much does it cost you to gain one customer?
How much money can you earn from a customer over their lifetime of your value?
Ads, salespeople, rent, discounts are a few examples of cost of customer acquisition.
It is not justified to have a sales team to sell $100 item because the cost of acquiring customers involves hiring sales people and you only get $100.
The cheaper your price, the more you need to self-serve or automate your customer acquisition approach.
The more expensive your price, there is a likelihood that you need that the sales cycle is longer.
Remember, the cost of customer acquisition have to be lower than your lifetime value of customers in order for a business model to sustain.
Number three. Your bottom line or EBITDA or profitability.
It’s important to figure out the capital expenditure and operating expenditure.
Your cost of production and cost of running the business must be lower than your price and revenue.
You need to make sure that it’s as low as it can be that makes sense to your the company and customers.
Therefore your price and revenue need to be at the number that allows profitability that caters to all probable negative scenario such as discounts, or wholesale price or even pandemic.
If you remember Homejoy, an online home cleaning startup that used Uber’s business model to charge $85 for 2.5 hours house cleaning, but to acquire as many new customers possible, they offered promotional price of $19.
What happens when the deal is used up is that only about a quarter of its customers continued to use the service after the first month.
Homejoy failed spectacularly because they spent so much to acquire news customers by giving discounts, but not doing much to retain them, and that caused them to operate on losses.
These are the three factors that determine if your business model is sustainable.
1. Develop the right business model that is unique to your business.
2. The cost of customer acquisition must be lower than your lifetime value of customers.
3. Your revenue and sales must be higher than CAPEX and OPEX.
Tell me what you think, if there are other factors that impact the sustainability of a business model. I hope this piece of insight useful to you.
At Business Innovation Design we help companies to innovate and develop sustainable business model for their ventures. See you next time.