Business Models Gone Wrong

February 20, 2011 at 7:20 pm Leave a comment

Joan Magretta from Harvard Business Review states “a good business model remains essential to every successful organization, whether it’s a new venture or an established player” (2002, p. 86-87). How do we make sure we aren’t creating a “bad” business model? There are some guidelines to follow which can help prevent your model from running into a “dead end.”

1.       Could your model be eliminated?

This happened to Franklin Covey and Day Runner. These companies had a simple model of selling day planners. Once a day planner was sold, customers would have to come back to get the refills. However, this model turned sour after companies such as Palm and other Personal Digital Assistants became popular. Although there was a high initial cost with a PDA, there was little or no reoccurring cost, unlike the day planners (Marino-Nachison, 2004).

2.       Does it pass the narrative test?

Does your story (business) make sense? One example of a business that failed the narrative test is Priceline Webhouse Club. This company was a sibling to Priceline.com, famous for naming your own price for airline tickets. Priceline Webhouse Club held the same principle, except applying it towards groceries and gasoline. These industries didn’t have the same response compared to the airlines. This model assumed grocery and gasoline companies would want to play the game of “name your own price.” However, companies such as Exxon, Jiffy, P&G, and so on spend billions of dollars and time building their brand loyalty, to prevent consumers from shopping based on price. Shopping by price would destroy the branding of these companies, therefore they refused to participate in such a model (Magretta, 2002, p. 90).

(Den Dulk, 2009)

3.       Can your model pass the numbers test?

Before you go any further with your business idea, make sure it can pass the numbers test. Spend a few minutes and create a spreadsheet with estimations of your revenue and cost to see if the business can make a profit. Your business idea may not already exist in the industry because it doesn’t have a strong business model. An example of this is the online grocery model. The grocery industry has a thin-margin on its products and an online grocery store has additional expenses for technology and delivery that make the cost of the products too high. Therefore, customers aren’t willing to pay more for groceries that can be bought for less in the store (Magretta, 2002, p. 90).

Even if your business model passes these tests, you must make sure that your model creates value for your customer. A new business model can be the key to doing well in a large existing industry, but it is important to make sure that it doesn’t have any major flaws that could leave you at a “dead end.”

Nick

References

Dne Dulk, J. (2009, June 19). New Business Model: Seats2meet.com. In Flickr. Retrieved February 20, 2011, from http://www.flickr.com/photos/11527081@N05/3641176618/ (Originally photographed 2009, June 19)

Magretta, J. (2002). Why Business Models Matter. Harvard Business Review, 86-92. Retrieved February 20, 2011, from http://info.psu.edu.sa/psu/fnm/asalleh/WhyBusModelMatter.pdf

Marino-Nachison, D. (2004, November 30). Business Models Gone Bad. The Motley Fool: To Educate, Amuse & Enrich. Retrieved February 20, 2011, from http://www.fool.com/investing/small-cap/2004/11/30/business-models-gone-bad.aspx

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