The best 7 questions to judge your business model

1. The switching cost

What is the switching cost? Let’s say you have a product and your customers are switching to your competition. You know that people can move from you to your competitions very easily without any problem, so this is a very big problem for every business person. The person who is handling this kind of business, it is difficult for him because consumers always want to try new things, and if they are not satisfied with any feature of your service or product they will switch to your competitors. If you want to stop your customers to switch then you need to create a system in a place where it is not very easy for your clients to switch to your competition like you can ask for their feedback about your product or service so you can make changes to your product this will help your customers, and you. But sometimes the clients are not ready to give you feedback, and they don’t even give you a 2nd chance so, you must create a feedback column where your clients able to give feedback easily.

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Let’s understand this with 2 examples –

1.       CRM – in which all data saved inside the CRM, and you can download all your data but, you must pay some money.  Yes, you will easily download the data from CRM, and you can copy the data one by one, but they will charge you some money for a batch of complete data you downloaded because they understand why you are downloading, maybe you want to switch.
2.       Why is real estate people take security deposits? The real estate people take security deposit because when their client wants to leave, he or she must give them a one-month notice. Like the client give them one-month security deposit so he must give them a month notice to leave, and this one-month notice really helps them. They can solve the problem which their customer is facing, they can negotiate the deal, and at least they can find a new client to replace the existing client so, their business doesn’t go down.

Now you want to know why we are discussing this question. I give you a task like you have to give points to your business model, startup, company, or business idea from 0 to 10.

1. O being nothing holds my customer back from leaving
2. 10 being my customers are locked in for several years, maybe it is a contract they cannot leave.

This is what you have to understand in this question. What is the switching cost and how much points you will give yourself in the switching cost parameter?

2. The recurring revenue

You do effort and get one client then you give him/her service for some time but, one day suddenly the client goes away or maybe the book is over now. The client number is zero and zero is the point where either the work is finished and the client said I do not want to continue. Then suddenly you realize you do not have any client right now so, at this point you have to restart your marketing and sales process. This process is very tedious because in this particular time gap you don’t have a lot of revenue and that definitely hampers your company. This is the time when you have to spend money because you want to increase marketing and sales efforts. This is a very tough situation for a lot of people. But if you have one client and you have a strategy in which you have a recurring revenue so, you must work like that you keep on getting revenue from it. The revenue keeps on increasing even if your one client goes away and see you still have a lot of revenue with you. This will happen when you have a continuous revenue stream or any revenue stream which is continuous. Let’s see how can we develop a continuous revenue stream.

There are multiple ways of doing it –

Subscription model – In a subscription model you keep on getting a lot of revenue month after month because people keep on renewing their subscription. In real estate, you ever understand why people keep on getting rentals every month because to keep on getting recurring revenue people have started SAS as a subscription service.

People give out software’s like CRM or any other software like marketing software to keep a recurring revenue because all these services you can give on subscription month on month.

This also helps in one more thing-

Like you are lowering the risk of your client by not asking them for a full software payment up front like your software earlier Adobe. All the software’s where you had to buy them as a standalone version, so they were very expensive now you can get all the software’s through the creative cloud. It is very easy or cheap, plus you are promoting people to use genuine software, to use your product and do not go for the pirated versions. Through this, you are still making money because people are ready to pay that much amount of money which is less but, you are also getting recurring revenue, so it is good for your company also.

Now rate your business model, startup, company, or business idea from 0 to 10.

1. O is 100% of my sales are transactional means people come to buy and they go away, they don’t come back.
2. 10 being 100% of my sales leads to my automatic recurring revenue.

For example, you see Netflix it is a recurring revenue you go there they will give you a trial and then they would want you to renew the service all the time. Rate your startup in a recurring revenue question and then move to the next question.

3. Earning Vs. Spending

The earning vs spending mean that how much of the money you must spend in order to earn your first dollar?

Let’s take an example of McDonald’s-

What happens there when you go to the counter and order a burger? They always take the money then they pass on the order to the kitchen and then your order comes because McDonald’s in a way is earning first and then spending money. If they don’t earn, don’t spend.

This is very important for every industry but, it is especially for those who first give the complete service to the client and after giving the service run after the client to pay your invoices. At that time there is a lot of conflict like the client can say the service was not up to the mark, so I am going to detect some money. This is not only the problem of startups but a lot of companies. To build a successful startup or business you need to design a model in which you are earning first and then spending later because there is going to be a base cost which you are going to spend first. That is the initial cost to start up a business but for running the business you must earn first and then spend later so then you are able to run smoother operations.

To run smoother operations leads to positive cash flow and always remember cash flow is everything, cash is not everything, but the cash flow is everything.

Why you need to earn first and why without cash flow you are not able to do anything?

1. Without earning first and without cash flow you are not able to introduce your new product.
2. You cannot do any new innovation because you don’t have cash flow.
3. You are not able to introduce your new marketing tools and cannot do more marketing because you don’t have cash flow.

So you need to earn first and spend later if you want to do all this.

Now it is the time to rate your business model, startup, company, or business idea from 0 to 10.

1. 0 being I incur 100% of my cost of the COG a cost of goods before earning revenue.
2. 10 being I earned 100% of my revenue before incurring cost before the COG a cost of goods and services sold.

4. Game-changing cost structure

The game-changing structure means they left the market you know it set already, and you have a lot of competitors for your product or service?

When you can design a cost structure which is at least 30% less for the customers to see, it is a game changer. Now understand the trick – you do not reduce your cost, you just change your business model in order to show to the end customer that the cost has been reduced. But it is the model where you take less money upfront, and then you take the rest of the money later when the service is delivered.

You need to change the cost structure in such a way that it seems that the cost has been reduced but remember you don’t need to reduce the amount of money you are marketing. You can go for bank EMI like the cost of your good is Rs.50,000 now are you able to process a credit card and processor EMI due to which the customer says and thinks he only paid very less amount. Now he thinks he can pay rest of the amount later so this is called game-changing for the customers because other of your competitors do not have this.

This process will help you in acquiring the customer faster. Now rate your business model, startup, company, or business idea from 0 to 10.

1. 0 being my cost structure is at least 30% higher than my competition.
2. 10 being my cost structure is at least 30% lower than the competition.

5. Others who do the work

Others who do the work means a lot of large businesses like Red bull creating a product but do marketing through events. Like GoPro – Many people upload a lot of videos related to their products. What they have done using a GoPro? What they do to encourage the spirit of adventure that Red bull or promotes and why would they tag them.

Understand the process – In a way, they are helping GoPro and Red bull to do a lot of marketing for themselves. This can also happen when you have a lot of blogs, and you get a lot of engagement through comments or forum.   The general public is creating a lot of content for GoPro and Red bull so, it is easy for them to have a lot of content at one place now and the plus point is that they are even not working for it.

Let’s say you have a channel sales partner, and they are working for you but, you do not pay them until they make a sale so, that means they are on commission. When they are on 100% commission – you will pay them when they make a sale. It means others are working for you and you don’t have to incur any cost in order to make a sale right now. When the sales are done and you have the money so, it is easier to pay.

There are a lot of ways of getting work from other people. We just discussed the few of the marketing things and also the sales things so you can get other people to do a lot of marketing for you for free and you can also get some sales out of them. Now rate your business model, startup, company, or business idea from 0 to 10 on the question of how others can do work for you.  

1. 0 being I incur the cost for all the value created in my business model.
2. 10 is all the value created in my business model is created for free by external parties.

6. Scalability

A lot of people are confused on the word scalability, and a lot of startups use this word as a charger. But what does it mean- Let’s say you are standing at one right now, and you want to go to 10 so, you need to employ a lot of resources. These resources can be money, time, people, equipment, and a lot of other things, these are all but what resources so a lot of companies and mostly all the companies would be able to grow from 1 to 10 if they can employ resources from 10 to 10.

Which means if you increase the number of resources you are employing then you will be able to increase the revenue and the turnover of the company. This is what generally happens like you can grow the much exponentially without employing a lot of resources, but you are not increasing with the resources in the same arithmetic, the same proportion as you are growing. All this is called scalability. Now understand – Why is scalability is important in the business?

The life of the business is infinite people die but, business doesn’t die so you are not 1 to 10 but, 1 to infinity. You want to grow your business from 0 to infinity, and you know the highest amount which is possible but, you are not able to put in the resources which are infinite in nature. When you keep on putting resources the turnover will increase but, your revenue and the profit is not going to increase. When you are putting the same amount of proportion of resources, the input is the same and the output increases but, therefore the profit which is coming out is going to be very little, and it is going to be stagnant, it is not going to increase.

That way when we say scalability, we want a business model in which this thing happen when don’t have to put in the number of resources in the same proportion as there is a growth in the turnover so that whatever your matrices maybe just right now the number of clients.

You are selling when the amount the resources you are putting in is you know it’s almost the same it’s stagnant, and still, you are growing that is growth.

Now is the time to rate your business model, startup, company, or business idea from 0 to 10 on the question of scalability.

1. 0 being growing my business model requires substantial resources and efforts.
2. 10 being my business model has virtually no limits to growth.

7. Protection from the competition-

In a business model, there is a lot of things involved like key activities and key processes to involve the value proposition to your customer. Like you are marketing your product or service is there anything proprietary here like you have a patent, you have some intellectual property which you want to protect. There is some process which nobody else knows only you know then what is your protection that your competitors do not have or is it completely vulnerable to competition and copy.

If you have nothing unique which you need to protect, and other people cannot just see for 5 minutes and copy. It will be your big loss because what you will feel is always there is growing competition you are working but still, other people are also coming up with new startups similar as yours, and you are not able to capture the market. This is always going to happen.

Now rate your business model, startup, company, or business idea from 0 to 10-

1. 0 being my business model has no modes, and I am vulnerable to competition.
2. 10 being my business model provides substantial modes and are hard to overcome.

We just discuss seven points and conclude them

1. The switching cost
2. The recurring revenue
3. The earning vs. spending
4. The game-changing cost structure
5. The others who do work
6. The scalability
7. The protection from competition

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Just rate your current idea, future idea, startup, business and the idea you want to implement. Make it in a way that you have the highest amount of points. Maybe you have points here more or here less whatever it is but make sure you have more than 50% of the points, and it will be great if you have 70% of the marks because it means you have the chances of success are going to be very high so all best and keep hustling.