Quirky Fact & Business models

It costs the soft drink Industry over $100 million a year for thefts committed involving vending machines.

Actual Coke vending machine robots!

*actual Coke vending robots!

Yet vending machines still exist for one simple reason. This is still a profitable business regardless of the theft.

So often in startup land we here people pointing out the gaps and potential issues in any business model we propose. The fact is no business model is perfect. Every business has gaps and potential issues which will impact profitability. There is always leakage, there is always some evaporation. What we need to focus on is the net result and understand if we can still make a profit regardless of the model imperfections.

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Don’t be this person.

I had this discussion yesterday. I walked past a hole in the wall cafe. (Tiny cafe which serves take away and stand up coffee in inner city area)

Friend: Wasn’t Joey going to open a business like that?

Me: Yeh, I remember him talking about it before I had even seen one of these in the city.

Friend: What happened to it?

Me: I don’t know, I guess he just didn’t get around to it in the end. Got distracted.

Friend: That’s a shame, looks like a good little business model. What’s he doing now?

Me: He’s in the same job.

Friend: Oh. Ok.

We keep walking …

hole in the wall cafe

Don’t be Joey. It at least try and fail. The old job will be waiting for you if you have to return.

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the 5% rule

5% of our customers wont pay on time

5% of our customers wont pay at all

5% of our employees wont deliver what they are paid to

5% of our employees will steal and or damage company property

5% of business partners will break contracts and even worse, not keep their word

5% the people we meet will be genuinly dishonest and painful to deal with

It’s the 5% rule. In fact quite often business discussion are too often focused on the 5% of times the business model will break down and we will get cheated in some way. The amount of strategy, board room and agency discussions I’ve had about the 5% of people who make business models and ideas imperfect are countless. The point for startups, no less any business, is to accept the fact that all models have gaps. And more often than not these gaps the doing of the 5% rule.

the 5% rule

The problems with trying to remove the 5% is that we build gates and protections which often stuff up the 95% which is working. We create unnecessary friction. What we are better off doing is thinking about the problem like water evaporation. It’s going to happening, no matter what we try. But we must remember that the very large majority of people are good.

My advice is simple. Know that it exists, and forge ahead anyway.

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Delayed Revenue Model vs Free (DRM)

I know I am being a bit of a dog with a bone here. But we really need to put this ‘Free’ stupidity to rest once and for all. Sure it’s semantics, but this is what the Free model really is:

Delayed Revenue Model

If we have a so called ‘Free’ model, we are simply providing resources (at out cost) in order to extract revenue through alternative means later, or via a trade sale to incumbents who see value in what we have created. In both cases the ultimate goal is Revenue.

delayed

In many ways it’s riskier to go down the free track, simple because time and money are inextricably linked. If we don’t end up ‘Monetizing’ (another word I hate) then we are simply in the wealth transfer business.

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Free – is not a business model

Firstly – I’ll start by saying I think Chris Anderson is an incredibly clever guy. I thought his book ‘The Long Tail’ was and is the future of business. But when it come to ‘free’ he has got it wrong this time. As has Seth Godin and all the other ‘free’ converts.

As Malcolm Gladwell correctly points out, they are forgetting many of the fundamentals in business, by getting caught up in the stale newspaper argument, which in the new digital economy, is the easy and soft target of who will disappear. The irony of this ‘newspaper’ argument is certainly lost in the broader economy. The non digital economies are a lot bigger than newspapers and other beleaguered digital industries.

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So why is it that ‘Free’ is not a business model. Quite simply, any business without a revenue generation model wont exist over time. We only need look at the the dot com bust of the late 1990’s to see this reality. It’s also much too easy to get caught up in the success of Google and others which ‘started free’ to build demand. But many of the subsequent ‘Free’ offers like Youtube, Facebook, Myspace, Flickr may have been successful for the owners, only because they sold to a business with a large chequebook – not because the business itself was financially successful. The Google business model is not too dissimilar to that of Network TV – generate eyeballs, sell advertising….. Nothing new here.

The real question in the so called ‘Freeconomy’ is how many businesses can be supported by the advertising sales model? So why the idea of ‘Free’ is being touted as new is beyond us here at Startupblog.

Here’s what ‘Free’ really is – it’s part of the marketing mix. It’s the 4th P – Promotion. It always has been and always will be. Anything a company gives away for free is a promotional tool to sell something. If these businesses who use the so called ‘free model’ fail to sell something there are only two options for them as time passes:

  1. Go broke & run out of cash
  2. Get bought by large company who values what they have created, albeit ‘non-financial’

Whether it be Proctor & Gamble, giving free shampoo in letter boxes in 1957 or Google giving free search and maps in 2009. It’s part of the mix to attract potential customers, who will be converted into on going revenue. It isn’t free. Free is not a business model, moreover it’s sampling & promotion for associated revenue generating activities. So to call it the future of business as ‘free’ is absolute folly.

Sure Anderson can argue that digital stuff is becoming so cheap it may as well be free – as per the transistor example he uses. But the thing that really costs money is building demand and infrastructure – the kind of stuff that’s really expensive. The other point to consider is the example of some things which previously cost money (a newspaper) is now available free on line, doesn’t mean everything is heading down the free path. Rather it means that certain industries are dying – not that ‘paying’ will be a thing of the past. In fact there are just as many examples of items which were once free, consumers are now being charged for Education, Toll roads, Water, Seeds.

The advice I’m giving here is simple.

No business can survive without revenue. Free, isn’t free, but a promotional expense, the 4th P. If your industry is getting flooded with free – it’s on it’s deathbed – look elsewhere. Industries die all the time when the revenue dries up just like those trying to cope with the current digital conversion. Don’t assume you can build something awesome and give it away with the ability to sell it (the business) or something associated later – chances are you’ll run out of money before that.

The future of business isn’t Free, and the idea isn’t new, it’s part of a complex marketing mix. And if you want to own a startup to thrive, my advice is simple. Have a price which isn’t all zeros.

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The strategy is fine

Today I had a discussion with a fellow entrepreneur who was wondering whether to reduce his pricing on a new business. His point was related to the fact that his very new business hadn’t achieved a great deal of sales volume just yet.

Then I asked him if he had implemented any of the sales generating activities we had discussed last week – to which the answer was no. My response was straight and simple:

If you haven’t been out knocking on doors selling your product to the potential target market, then how is it possible to know if the marketing mix is wrong?

It was at that time he knew he had some boot strapping work to do and get out there and sell.

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The point for entrepreneurs is that it is easy to get tempted to constantly revisit the strategy. To go back to the plans when things are not automatically falling into place. Instead of doing the really hard stuff – we look for a simple revision of ideas, the plan and all that shiny stuff. The thing we often avoid is the hard effort of selling and facing rejection. But until we go out into the market and try to generate revenue, it’s impossible to have real market feedback of what needs revised.

So before we re-design our plans and process, we have to test the current one in market. We do this by trying to sell what we already have at every possible distribution point. Until we have done that, strategy revision is just an excuse for not putting in the effort required.

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