Your business model unites the value you provide to a specific audience with a way of capturing revenue in return for that value – in other words its how you make a profit.
Although I don’t often use the term business model it is usually exactly what we discuss in my mentoring meetings with clients.
This is because developing a viable and sustainable business model is what ultimately determines whether a business is successful.
Too many good business ideas for a product or service for which there is a large audience fail to become successful businesses because their business model is flawed.
In times of economic upheaval such as that caused by the recent pandemic, the speed with which a business a can adapt its business model – such as pivoting to selling online rather than in person – can make the difference between success and failure.
The recent demise of Made.com is a prime example; floated on the stock market at £775 million eighteen months ago, last week it entered administration realising just £3.4million for its brand and website.
The cause of its downfall was directly attributable to its business model which relied on its negative working capital structure, much like supermarkets that rely on customers paying for their goods before the store has to pay its suppliers.
This model improves free cash flow, reduces capital employed and boosts cash returns on capital as the business can grow its revenue without having to use its own cash to invest in stock.
But the underlying business needs to be profitable; amazingly Made.com never reported an annual profit (not that investors were deterred in the IPO!) and probably would never have achieved the status of a highly profitable business.
Its gross margin, which was reportedly 46% in 2021, was in fact much lower when all its variable costs, such as its fulfilment costs of 20% and high marketing costs, were factored in.
I constantly emphasise the importance of knowing your true gross margin (I think some of my clients get fed up with hearing it) but it is the one metric every business owner should obsess over.
Another factor to take into account, particularly when a business has a negative working capital structure, is to monitor its net operating cash flow (another metric I tell my clients to measure religiously each month).
As sales began to decline, Made.com reported a negative net cash from operations of £64 million, which it exacerbated by investing in inventory rather than sticking to its traditional business model.
On a rational analysis it is unlikely that Made.com would ever have lived up to the expectations of the market and its investors as it lacked the underlying profitability in a competitive market. But its downfall was certainly accelerated by abandoning a business model that had differentiated it in the marketplace for one that every other furniture retailer adopted.
Establishing a viable, differentiated, and profitable business model is the foundation from which to build a successful business. Ignore it, or abandon it, at your peril.
PS Is your business model serving you well? Has it moves with the changing times? I use the Business Model Canvas in my coaching and consulting with clients to test and optimise their business models. If you like to find out more book a no obligation call with me here.