Why you ought to change your business model

Time to shred that old business plan? Photo via Yoppy

No matter how prepared you are for the future, how satisfied you are with your customers or how well you are positioned in the market, you may not always be on target with your business strategy, especially if the business landscape changes, which we all know will eventually happen.

This means that your plans need to change and you need to be able to recognize when those changes need to happen. Two ways to help you recognize when your business model needs to change is break technologies and when a competitor changes their business model.

Let’s explore both.

What is a break technology?

In a nutshell, a break technology is something that is created that will make certain parts of an industry’s value chain no longer needed.

For instance, the automobile eliminated the need for manufacturers to put their products in corner grocery stores in the early part of the 20th century since people could afford to drive to supermarkets where cost of distribution was cheaper.

Another example: We previously depended upon paper and paper mills for the distribution of information. Well, the Internet has made that obsolete.

And then there is the elimination of landlines in the last twenty years by cellular technology. Those landlines were part of the telecommunication industry’s value chain.

All these are examples of break technology.

Think about your own value chain

It’s designed based upon satisfying customers in the current technology environment — an environment we all know can change from year to year or even month to month — as the emergence of technologies like the mobile internet and cloud storage have proven.

Neil Patel

Will these technologies disrupt your value chain, forcing you to change your business model? You can only know if you ask questions like these:

  • Understand your business model – With one billon dollars as the payout for creating a free photo-sharing app, Instagram truly won because they understood their business strategy…making sharing photos drop-dead easy. But Hipstimatic has been winning since their second week in operation. And seeing Instagram’s success didn’t phase Hipstimatic who also knew their business model…and stuck to it.
  • Understand your value chain – If you haven’t done so already, create an outline of how you build and deliver your products to your customers. Groupon, for example, saw that affiliates would be the best way to distribute their product. What are all the steps of getting your product into their hands? Then think about how that chain may have to change in the future.
  • Look out for break technologies – Scan all kinds of headlines in sectors like transportation, space, science, production and information technologies. Create some Google Alerts on terms related to your industry or do weekly searches in Google Insights. While these probably won’t make parts of your value chain obsolete overnight, the sooner you can get on top of them and thinking about how they will affect you the better.
  • Disrupt your own business – Some of the best innovators don’t wait around for someone else to destroy parts of their value chain…they do it themselves. Never rest on your past accomplishments. Create a skunk works and be the break technology that destroys parts of your competitor’s value chain.

Of course this is just one of many ways in which you may be forced to change your business model. Another common way is when a competitor changes their business model and starts giving away their product for free.

When your competitor gives away their product

It’s hard to compare Instagram and Hipstimatic as competitors since both founders admire each other. Part of that is they both understand what the other one is doing.

Hipstamitic has been around since 2009 so it saw the skyrocketing growth of Instagram, but never changed its business model.

You may be in a situation where your competitor is giving away their product. Should you? Here are some questions to think about.

  • How big is the market for your product? If you are involved in a very small market made up of say 6,000 or 7,000 customers, then it simply doesn’t make sense to change your business model. But if you are in a market of over 1,000,000, then you may be able to benefit from changing your business model by picking up some of that market share.
  • How much market share do you own? Now, if you dominate the space it may be easy to justify giving away your product…sort of like how Google did when they acquired Urchin analytics software. That strategy could allow them to pick up even more users across the board. But if you have to double your market share in order to make up for the losses in revenue, it may not make sense.
  • How much revenue will drop if you go this new model? This is probably the most important question…so, if you decide to give away your product and make up what you lost in some post-transaction fee. Sure it’s possible to make more money going with the free route, but it will take time to maximize your ROI off of your free users as it can take while to learn what causes them to upgrade into premium accounts (if any exists). With the recent acquisition of Instagram by Facebook some people may point to the photo-sharing app Hipstimatic as the loser. However, Hipstamitic had a lucrative business model from the start
  • Will customers change products? As long as customers believe that what they are using is good enough, they won’t change…if even you have the superior product. Google could do it with Gmail simply because they had the financial war chest to not only outlast other competitors but the money to constantly pay the best talent to update it.
  • Can you offer a free trial? The hybrid solution to a competitor giving away their product is to give your product away, too, but on a trial period. Maybe its six weeks or six months.

How do you know if your new business model will even work?

So let’s say you’ve decided that you probably need to change your business model. Here’s what you need to do.

  • Get feedback from customers – Bring in or visit some of your best customers and get their feedback. You need to stop relying on assumptions and rely on what’s working and what’s not working. You can then survey your remaining customers through email.
  • Study your metrics – From your website to your sales funnel, analyze every bit of data you can. What are your repeat purchases and conversion rates looking like? By looking at your numbers you may be able to spot reasons why you may need to change your business model.
  • Perform tests – If you create a small proof-of-concept test of your new business model, go ahead and launch it to see if it will actually succeed.
  • Get flexible  - the best entrepreneurs are not stubborn and relentless of their pursuit of a single idea. They are actually very flexible and constantly tweaking their business model to make it succeed.

Conclusion

Change is constant in the business world and with so much attention to innovation and new start ups the chances of your business model getting overturned are high…so you need to be ready.

Hopefully what I’ve shared above from my own experiences will help you to prepare to succeed as an entrepreneur.

How else can business models be upset, and what can entrepreneurs do about it?

Neil Patel is the co-founder of KISSmetrics, an analytics provider that helps companies make better business decisions. More from Neil Patel on GeekWireSeven signs that you might just be an entrepreneur Eleven things every entrepreneur should know about innovation… 17 things I wish I’d known when starting my first business

[Sign photo via Bigstock]

  • aaronbrethorst

    Hipstamatic.