YOUR BUSINESS MODEL IS MORE IMPORTANT THAN YOUR TECHNOLOGY
Entrepreneurs ignore the fact that tens of other entrepreneurs try to solve the same problem at the same time. Often, they share the same view on how to solve it. Technology rarely provides a moat or a guarantee of a successful business. Contrary to the much hailed first-mover advantage, it is the best business model that wins. Microsoft business model, involving an army of developers in a tight ecosystem, created a durable moat, making Apple almost irrelevant in the 90s, had not Bill Gates decided to save it from sure bankruptcy. It is how your customers (Business or Consumers) perceive the value they receive that matters.
Very successful technology companies are the ones who devised a business model highly differentiated from those common in their space. Think of Priceline vs. Expedia, catering to the same market, offering almost the same product, through a different approach. Very quickly Priceline was worth 5 times the value of Expedia. The “name your price” strategy made a big difference. Two years after its foundation, the company was worth $10 billion on NASDAQ. At the time of its IPO, 6 months after the Priceline IPO, 3-year old Expedia was worth $1.7 billion.
Too little time is dedicated to crafting a good, differentiated business model in tech startups. The obsession for the product seems to leave no time for it. Building a unique product is half the way to building your business, the easiest one, dare I say. A lasting business requires to also put a lot of innovation effort in the non-technical field.
Many people confuse business model and how revenue is generated. It is only part of the equation, the first layer. This layer encompassing licensing, outsourcing, selling direct and indirect, selling for free and taking revenue from advertising, has been around for more than a century, and well documented. The second layer is linked to the delivery of the product, for instance the over-pondered SaaS (and its declined siblings, PaaS, IaaS...), vs. the outright sale vs. the temporary rent. What more satisfying than dreaming a business where revenue keeps flowing thanks to customers/subscribers’ regular payments? The “…as a service” models require high upfront capital, with less marketing and sales operating expenses down the road. If your research and development costs are low, and if you succeed in enduringly reaching your market through the web, it is the way to go. The third layer involves the customers in the process (“the Product of One”, for instance). The fourth and ultimate level takes its strength from the direct and indirect contribution of a wide ecosystem, your business leveraging relationships and providing a win-win proposition to your partners.
Each model has its raison d’etre, depending upon the expertise your team masters, the type of capital you can put to work, the breadth of your business ecosystem and the market it addresses. Whatever generic model fits your preference, make sure it has the benefit of minimizing costs in the long run, and hopefully from day one. The higher the layer you reach, the higher the chances of delivering a great value differentiation.
Entrepreneurs need to spend a lot of time understanding their market to build the model that delivers the best value to customers and create the most value for their business. It could be simple or complex, as long as it creates a barrier against competitors. A great business model provides the unique identity to a business. It is worth spending half your time to develop.