⚡ Get All Content for 20% Off ⚡

Developing a Great Business Model Determine whether your business will succeed by evaluating these six aspects.

By Don Debelak

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Great business models depend on developing three "green lights," or qualities that help the business succeed: finding high-value customers, offering significant value to customers, and delivering significant margins. Great business models also avoid three "red lights" that can derail a business: difficulties in satisfying customers, trouble maintaining market position, and problems generating funding for growth. The list below outlines key factors in determining whether your model meets each green light and avoids the red lights. Examine your own business to see if you meet the criteria for success and, more importantly, to correct any weaknesses you might have.

Green Lights
1. Acquire high-value customers.
High-value customers doesn't mean rich customers, but customers who meet the following requirements:

  • Are easy to locate
  • Allow you to charge a profitable price
  • Are willing to try your product after minimal marketing expenses
  • Can generate enough business to meet your sales and profit objectives

Customers don't necessarily need to be the end users of your product or service. They could be retailers, distributors, catalogs or whomever you sell your product or service to. If your end users or distributors don't fit this profile, you can still meet this requirement by attracting high-value customers through partnerships or alliances with companies in the market.

2. Offer significant value to customers.
There are a number of ways you can create significant value and competitive advantage, including the following:

  • Unique advantages in features and benefits
  • Better distribution through retail or distribution
  • More complete customer solutions through alliances with other companies
  • Lower pricing due to manufacturing efficiencies or pricing options
  • Faster delivery, broader product line or more customization options

The rise of the internet, outsourcing and, most of all, the increased willingness of companies to partner in creative ways to serve customers has resulted in every industry creating innovation in business strategy. This gives you opportunities, but also makes it imperative that you stay on the creative edge to fend off competition.

3. Deliver products or services with high margins.
Better manufacturing costs due to overseas manufacturing is typically not the clear way to higher margins, as competitors will typically match your costs in the end. Higher margins come from having a product that can be made from an improved process or by having features that provide significant value and allow you to charge more. You can achieve high margins with other tactics, including the following:

  • Use a more efficient distribution channel.
  • Require less sales support and sales effort.
  • Have an industry-leading lean manufacturing process.
  • Offer more auxiliary products or other opportunities for revenue without increasing cost.

If you aren't sure of your industry's standard ratios, check out www.valuationresources.com where you can purchase industry reports, or contact your local Small Business Development Center, which you can find at www.sba.gov.

Red Lights
1. Provide for customer satisfaction.
Consider whether it will be difficult--and therefore expensive--to satisfy customers once they buy. Some of the aspects of a business that create high customer satisfaction costs include:

  • High warranty costs
  • Extensive technical support
  • Extensive installation requirement
  • Extensive customer service
  • Interface problems with other equipment

Customer satisfaction costs, which occur after the sale, are red flags because the costs are typically high and don't produce revenue or profits. If your type of product might have high customer service costs, you need to configure your business to put these costs on someone else, either with partnerships or alliances or by restricting your sales to an aspect of the business that doesn't require customer satisfaction costs.

2. Maintain market position.
A good business model uses its resources to improve its market position, adding new products, features and customers or expanding into new applications. The red flags that indicate it will be difficult to maintain market position include:

  • Two or three major customers buy most of your product.
  • Major potential competitors control the distribution network.
  • Technology changes rapidly and requires high-risk product development.
  • There are alternative technologies being developed to meet the same need.
  • You have well-funded potential competitors who could quickly move into your market.

Long term, your ability to hold market position is determined by the characteristics of the overall market. For example, a company involved in the semiconductor manufacturing business must adjust and guess right on constant changes in technology to hold market position. Sooner or later they will guess wrong and fail.

3. Fund the business.
Startup costs, operating capital, personnel costs and overhead costs are just a small percentage of the funding requirements for any business. The question is whether the investments will have a high return and whether the business can grow without substantial new investments. Red flags for a business model regarding investments include:

  • ROI is less than 25 percent in the first three years.
  • Incremental production of products or services requires substantial additional investments.
  • Fewer than 50 percent of the investment required will be used in revenue producing areas, such as sales and production.
  • Investments have to be made prior to sales commitments.
  • Industry as a whole has a poor ROI or poor profitability.

Money is available for the right plan and the right model. You'll find money available if your ROI is right and if you have financial leverage, which means your initial investment will allow you to double or triple sales without requiring any more funding.

Don Debelak is the author of Business Models Made Easy (Entrepreneur Press 2006) and Successful Business Models, (Entrepreneur Press 2003). For more information, visit his website, www.dondebelak.com.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Side Hustle

The Remote Side Hustle a 43-Year-Old Musician Works on for 1 Hour a Day Earns Nearly $3,000 a Month: 'All From the Comfort of Home'

Sam Ziegler wanted to supplement his income as a professional drummer — then his tech skills and desire to help people came together.

Business News

Costco CFO Reveals Uncertain Fate of $1.50 Hot Dog and Soda Combo

CFO Richard Galanti reveals that the price will stay the same — but only "for a while."

Business News

The Most Unexpectedly Popular Side Hustle of the Decade Has Low Startup Costs and High Markups

A new report shows that vending machines are a popular investment — and the industry is set to grow up to $3 billion by 2031.

Marketing

Ever Wonder Why Certain Websites Rank Higher Than Yours? This SEO Expert Reveals The Secret to Dominating Search Results

It's often the smart use of SEO, now supercharged with AI, particularly in keyword optimization.

Business News

AI Is Impacting Jobs. Here Are the Gigs Affected the Most, According to an Analysis of 5 Million Upwork Postings

The researcher said in the report that freelance jobs were analyzed first because that market will likely see AI's immediate impact.

Leadership

Former Interrogator Shares 5 Behaviors Liars Exhibit and How to Handle Them

Five deceptive behaviors to look for and how to respond to those behaviors when you encounter them.