So you want to start a company, but you aren’t sure about a viable business model. How might you create something that people would be willing to pay for from which you could earn a profit?
Before diving deep into potential strategies, it’s important to understand what exactly a business is and does. It’s surprising how many people work for businesses, but don’t actually know what they do.
A successful business creates something of value. The world is filled with opportunities to fulfill people’s wants and needs and your job as a potential entrepreneur is to find some way to capitalize on these opportunities. A viable business model is one that allows a business to charge a price for the value that it’s creating, such that the business brings in enough money to make it worthwhile to continue operating over time. Whatever the business is offering must also satisfy the customer’s needs and anticipations of quality.
Admittedly, value is quite a subjective term. What’s valuable to one person may be far less valuable to another. Moreover, the concept of value excludes any moral judgments about the intrinsic worth of an offering. For example, while most would agree that human life is more valuable than sports, Pablo Sandoval still makes far more playing baseball than the average brain surgeon does in the operating room.
Nonetheless, the concept of value provides a useful bedrock upon which to begin building your business model. In particular, one should first think about what form(s) of value that people would be willing to pay for. Here are three classic forms of value along with some pros and cons for each to get you started.
Product
A product is a tangible item of value. To run a successful product-focused business, you ideally want to produce the item for as low of a cost as possible, while maintaining a passable level of quality. Once the item is produced, your objective should be to sell as many units as you can for as high a price as people are willing to pay to maximize profits. Products are all around us. From laptops to books to HBX courses (products don’t have to be physical), products are a classic form of value with high upside if you can get them right.- Pros: Many products can be easily duplicated. Thus, firms can achieve economies of scale after bearing some upfront costs of production.
- Cons: Physical products need to be stored as inventory, which can increase costs. They can also be damaged or lost more easily than, say, a….
Service
A service involves offering your assistance to someone else for a fee. To make money from your service, you ideally want to provide some skill to others that they either can’t or won’t do themselves. And you want to keep providing this benefit to them at a high quality over and over again. Like products, services are in abundance, especially in the knowledge economy. From hairdressers to construction workers to consultants to teachers, people with lucrative skills can earn good money for their time.- Pros: If you have a skill in high demand or a skill that very few others have, you can get paid a lot!
- Cons: If you don’t charge enough for your services, or many people have your skill, you will have to work a lot for not very much money.
Shared Assets
A shared asset is a resource that can be used by many people. Such resources allow the owner to create or purchase the good once and then charge customers for its use. To run a profitable business around shared assets, you need to balance the tradeoff of serving as many customers as you can without affecting the overall quality of the experience too much. Think of a fitness center: a gym typically buys treadmills, ellipticals, free weights, bikes and other equipment and then charges customers for monthly memberships for access to all these shared assets. The key then for Golds Gym or 24 Hour Fitness is to charge their customers enough to maintain and, if needed, replace their assets over time. Finding the right range of customers is the key to making a shared asset model work.- Pros: This model provides people access to a lot of assets that they would not have access to otherwise. In addition, many people are willing to pay a lot for access to trendy social spaces.
- Cons: Because they don’t own the assets, customers have little incentive to treat your resources well. Make sure you have enough cash on hand for quick fixes if necessary.
These are just three forms of value possible to the aspiring business owner. Stay tuned for my next post which will discuss five more.
Click here to see part 2!
