I retired from personal blogging in July 2008.
But you can find me over at http://blog.xero.com.
Reflecting on last weeks Morgo and some strategy work I’ve been involved with this year I think it’s really important for technology companies that they, quite deliberately, pick a business model. Then put plans in place that are completely consistent with that model.
That may sound obvious but a lot of start ups I see operate with an inconsistent model. An example of this is product companies that sell a low cost product with a direct sales model.
I mentioned Atlassian last week because they had complete clarity of model.
Having selected a model this then drives a number of decisions. For example …
- What is my sales model
- What is my price
- What is my support model
- What does the organisation look like
- Where do I need to be
- Who is my target customer
- What can I spend to get those customers
- What customers/deals do we avoid
- What brand do I need
- Who would be best for the board
So a lot of big decisions get easier to make once you have locked down your model. For new companies the model might be their competitive advantage. Doing what’s done before is not an option. Atalassian is an example of that. Products that aren’t necessarily unique but a sales and support model that is.
Not many company CEO’s would say …We don’t sell our products, we make it compelling for our customers to buy them. We therefore have 25% of our headcount in customer care.
They live their model.
blog
Rod, forgive my ignorance but why is a low cost product & direct sales inconsistent?
cheers
Greg
Well, there is always exceptions but if you have a high cost sales model with a low cost product you are likely to be running on a very low margin and less likely to have a wildly profitable business. I suspect that there are some examples of companies that do have this model and dominate, but in general it should be better to match you model.
So:
high cost/ high value … fine - normal enterprise software
low cost / low value … fine - atlassian
low cost / high value … awesome - oakley sunglasses
Great post Rod, probably one of your best pieces of advice for aspiring entrepreneurs.
Often in my experience when sweat equity is being put into a venture, this discussion is often missed and it leaves a messy and inconsistent environment all too early in the piece as you mentioned.
I think even in the early stages of any start up there should at least be a clearly articulated vision around the business model - even if there is detail to be worked out later.
Very good post, Rod. Tried to trackback to it from one of mine http://jimdonovan.net.nz/2007/08/01/get-your-business-model-right/, but either it’s in moderation or your new security system is blocking it.
Make that http://jimdonovan.net.nz/2007/08/01/get-your-business-model-right/
About 30 seconds after I read this post, I read the following on Marc Andreessen’s blog:
The Pmarca Guide to Startups, part 7: Why a startup’s initial business plan doesn’t matter that much
from blog.pmarca.com by Marc Andreessen
See http://feeds.feedburner.com/~r/pmarca/~3/139384906/why-a-startups-.html
Thanks for the reply Rod.
Could I ask another newbie question? I have a ‘business’ (not making much money, web-based etc), that is dependent on building a community and getting mindshare. Our business model is not proven, in that we havent had people jump through all the hoops (and I suspect that there are a few too many hoops).
The problem I have is: should we concentrate on building the community, and leave the money making part out until the community is self-sustaining? (since maybe our money making idea is wrong and the site makes money through advertising or something). Or is it fundamental to understand how it will make money first?
I guess writing this has clarified my problem to me at least! I don’t really understand what a business model is.
is it
a) The model that shows how the business will make money
b) The model that shows how the business will operate
c) both
I see how this makes sense with a bricks-and-mortar store, but am struggling to apply it to a small internet business with dreams of grandeur!
Regards
Greg
Good questions Greg - at the end of the day you need to be confident that you can fulfil both those requirements
- making money
- building a viable product
Don’t confuse making money sometime with making money now. Xero doesn’t make any money - it bleeds it - but this is all part of the plan. Their strategy is to invest in the product and derive some revenue in a few years time. So they never expected to make money short term, however you can bet they did a business plan that projected when they would start making money.
Similarly for the community thing - Xero has minimal uptake at the moment but this, I guess, is intentional. They want to build the systems before they build the community.
Don’t build expectation before you can build the delivery model.
So - to answer you…. the business model includes both of the thing you mentioned, with realistic expectations for when they will reach “break even point”, (and you plan should have a measure of breakeven for all of the core attributes, community numbers, profitability and systems design and implementation.
It’s an interesting area and one which a number of organisation can help you with.
Flick me an email if you want to talk more…
Sorry everyone for the abysmal grammar in that last comment - I’m still sick and my brain is a little fuzzy
Patrick that was good. I think the distinction to add is that the business model is a subset of the business plan.
Getting the model right earlier I think is more important that the full business plan which may evolves quickly in the early stages.