Business models are usually a one page diagrammatic depiction of the engine of your business. On the left hand side (LHS), you have your suppliers. In the middle is your business. On the right hand side (RHS) are your clients and customers. Information and products and services flow from your suppliers to you, you add some value (hopefully) and then they flow from you to your customers and clients. In the reverse direction, money and information flow from your clients and customers to you and from you to your suppliers.
There is also an orthogonal (3rd) dimension—your marketing. You need to have a way of connecting with your clients and customers that is cost-effective. If you need to run a Super Bowl commercial before you get your first client, your new enterprise is probably doomed.
Sam Palmisano, CEO of IBM, has said he spends more time on IBM’s business models than practically anything else. Why? Because, according to Mr. Palmisano, any new products or services that IBM comes up with are very likely to be reverse engineered in a hurry and competition won’t be far behind. Knocking off a product or service is relatively easy, but knocking off a b. model is not.
When former CEO, Lou Gerstner, turned IBM into a services company as much as a products company, he understood this—when IBM manages a network for a large client, like, say, a Bank, they can and do spec equipment that is non-IBM. This makes IBM a trusted consultant who is effectively sitting on the same side of the table as the Bank. They are making recommendations to the Bank—use this HP product or this Cisco product—and if the Bank doesn’t like either option, IBM can spec a third or fourth. In any event, IBM doesn’t get fired if the Bank doesn’t like any of the options, the supplier does.
So the change in the business model (to emphasize services) has served IBM well and has sustained them in the on-going economic downturn while Nortel is on the verge of going oob (out of business). The latter focused on Six Sigma in their processes and getting their financial ratios right. It wasn’t even a problem with a focus on cool new products that caused Nortel to go off a cliff. That would have been an improvement over what they actually did. If NT had focused, half a dozen years ago, on their biz model instead, they might not be in the shape they are in now.
Now we have found it is useful to also add a fourth dimension to most biz models: by adding another column on the RHS and a second one on the LHS. These are, respectively, the clients of your clients and your suppliers’ suppliers. (You can, of course, continue this ecology in as many dimensions as you think are needed to properly describe your business model.)
Let’s take the simple example of a spa. A typical spa’s clients are mostly female. Who are your clients’ clients then? Well, it would most likely be their boyfriends and husbands who are ‘consuming’ (appreciating) the results of spa treatments on their female partners.
If the spa looks at their hairstylists, manicurists, pedicurists, massage therapists, etc. as part of their supply chain (as indeed they should), then who are your suppliers’ suppliers? That would be the colleges and institutes who train these folks and the manufacturers of the products that they use—hair coloring dyes, shampoos, creams, oils, equipment and tools and so on.
Now you are starting to view your business as part of an overall ecology. What might clients (the males) of your clients be interested in? The guys might, for example, buy gift certificates from the spa at Xmas time. So now you have a whole new line of (very profitable) products to sell, which you discovered simply by studying your business model.
This happened to a client of mine, several years back, who by studying their ecology, reluctantly (change can be difficult in such a mature industry) introduced spa gift certificates about six weeks before Christmas. They found out that about 30% of their gift certificates were never redeemed (they had a rider in the form of a one-year best before date). They now sell about $250,000 worth of gift certificates every year and $75,000 of that (the never-redeemed certificates) goes straight to their bottom line with a near infinite gross margin.
What can you learn from viewing your employees as part of the supply chain? You could visualize that your real business is matching up suppliers (your hairstylists or manicurists, for example) with your clients. So now your service business becomes a match making business (like eHarmony) and, through the power of the Internet, you can at least partly automate the scheduling process by reversing out the work to your clients (who log on and book an appointment or call your ‘call centre’ for one) and to your suppliers who can go online and see when they are needed or they can schedule their time themselves and take on new and existing client appointments.
You might also be interested in developing closer relationships with training colleges so you can get a line on the best new hires.
There is also the opportunity to reverse the direction of money on the supply side—Grade A Techs, for example, requires their techies to take and pay for a Grade A Techs certification program.
Returning to the spa model, suppliers of tools and equipment, lotions and potions might also be induced to pay you, in the form of volume bonuses or nice trips overseas to special events, learning opportunities and conferences for top performing employees and owners.
Even on the client side, there is the opportunity to reverse the flow of money. You might, for example, pay a celebrity to visit your spa and experience some of its services. Their endorsement might help you more effectively connect with (market to) other clients…
Once, you have positioned yourself as part of a business ecosystem, your business almost can’t fail.
When Power Rings were being introduced to indoor arenas in North America in the last few years, the provider could show arena owners that the roughly $2 million initial cost could be recouped in about 18 months in a typical marketplace. (Power rings are those animated signs that circle an arena, usually, under the first balcony. Many of them are low enough to show up on TV… an irresistible proposition for potential advertisers: a relatively inexpensive way to get on TV.)
Thus, they could say that to arena owners that the cost of buying a Power Ring is a negative $11,333,333! (This assumes a ten year life for the installation. See below.)
Power Rings
Time
0 ($2,000,000) ($1,333,333.33) 18 month payback
1 $1,333,333.33
2 $1,333,333.33
3 $1,333,333.33
4 $1,333,333.33
5 $1,333,333.33
6 $1,333,333.33
7 $1,333,333.33
8 $1,333,333.33
9 $1,333,333.33
10 $1,333,333.33
$11,333,333
IRR 66% p.a.
Put another way, if the arena owner spends $2 million on the installation and nets $1.333 million per year for the next ten years after taking into account the cost of selling time on the Power Ring to sponsors plus the annual cost to have the supplier maintain and upgrade the Power Ring, they will see a 66% p.a. return on their investment (as measured by their IRR, Internal Rate of Return). Not too shabby.
Arena operators always want to keep up with the Jones’ so once there a few installs, many of the rest will soon follow. It doesn’t hurt to have a good value proposition too.
This is what I call negative cost selling and it is one of the keys to making the sales process easier. It always amazes me that so many organizations never look at what their products or services really do for their customers (let alone extend that to their customers’ customers.)
If the Power Ring allows the arena owner to become a more important part of their advertisers’ marketing campaigns, something they can’t do without, that means that the Power Ring provider has successfully become part of the overall arena-experience ecosystem. Their $2 million installs and their annual maintenance and support fees can help to make their business a lasting success with a sustainable business model and competitive advantage.
You should always have a spreadsheet handy that shows your client (or your client’s client) that the cost of buying your product or service is negative. You have to be able to walk a mile (or two) in your client’s shoes.
Prof Bruce