In part 1, of this series, we selected a problem that you could solve in a market that you would enjoy working for your new business.
Now we need to select a business model. The buzz word “business model” has been so abused that many people don’t even really know what it means anymore. But it is important to know an it is important to select a viable business model for your new business.
What is a business model? It is simply how you are going to conduct business and the method that you will profit from that business.
The simplest business model and the one that is easiest to understand is the model of creating a product and selling it to customers. It is easy to understand, but it also requires that you be capable of doing a lot of different things very well — and that is very unlikely for any entrepreneur.
It means that you must be an inventor, engineer, writer, production expert, manufacturer, shipping expert, packaging expert, excel in customer service, and be an expert in copywriting.
Now, it is common for entrepreneurs to be an expert in several areas, but it isn’t very common for single person or even a single company to be able to focus simultaneously at being excellent in every area.
To select the best business model for your new business, you should start by asking yourself if you and your team are best at innovation, efficiency or customer service. These three areas encompass the common ways that new businesses set themselves apart from the competition.
If your team is best at innovation, then you probably don’t want to focus on a business model where you manufacture products. You want to choose a business model where you innovate new solutions and have another company that focuses on efficiency manufacture those products.
That is all it means to select a business model. Your business isn’t going to do it all. It is going to fit in between a number of vendors and a number of customers in a unique network. That entire network of vendors along with your new company will be solving customer’s problems. Selecting a business model is simply the process of deciding where your business will fit in that network best.
What tasks will be performed outside your business? Since it is an Internet business, you won’t be able to accept cash directly from your customers. That means that you need to decide how your customers will pay and what company will be involved in accepting money from your customers.
You should also consider the possibility that the best business model for you may not actually entail you having customers directly at all. Maybe your customers will perceive that they are customers of another company and your actual customer is that company. This is called a B2B or “business to business” model. You are a business that is supplying products or services to other businesses who eventually help a final customer that you will never know.
Several business models have become very prominent and successful on the Internet. Others have become very popular, but they failed miserably. That was the cause of the dot com bust in the 90s.
A lot of businesses focused on solving the customer’s problems without charging them. Instead, they copied how television had worked before the Internet became popular. They thought they could earn their revenue from advertisers and provide the solutions directly to the customers for free. That didn’t work. It failed miserably for thousands of Internet businesses.
But it still does work for a select few Internet businesses. Consider it, but also know that many have failed with this business model.
Then study the business models of the most successful businesses on the entire Internet.
For instance, Google is still extremely successful by providing free services (their search engine being the most prominent) and earning their income from advertisers.
Yahoo does the same. Even Microsoft earns a significant amount of their income using this business model.
Ebay takes a different approach and they are very successful. They provide the marketplace, but do not innovate, manufacture, copywriter, ship, or do any of those other things associated with the traditional business model. They just focus on efficiently helping buyers find sellers.
Amazon has a similar business model although it isn’t as obvious to most people. The fact is that most of the products listed on Amazon are provided by manufacturers and distributors of those products just like eBay.
But Amazon does ship. In fact, they have really focused a lot on the methods to ship most efficiently and warehouse items in the best locations.
They also specialize in presenting information in the best way possible to increase sales. This is usually done with professional copywriters and ad agencies at many companies. Amazon uses ad copy provided by the distributors of products and the customers. Then it scientifically tests how to best present it to increase sales. They also scientifically test how to best introduce complimentary products in their vast catalog.
In every case of a very successful Internet business, the correct business model was chosen to really accent the strengths of the company.
Don’t skip this step. It is critical. Honestly study your own strengths and the strengths of your team if you already have a team. Choose the very best business model for solving the eventual customer’s problems and utilizing your strengths.
You don’t have to do it all and you shouldn’t. Amazon doesn’t invent new products. They don’t manufacture products. They just sell them and ship them very effectively.
Google doesn’t sell anything. They provide a free service and allow advertisers to sponsor it.
There are an unlimited number of possibilities for how to structure your new business. It is an important decision so don’t take it lightly.