Jim Muehlhausen

Cheat Sheet / Updated 03-27-2016

Designing or updating your business model becomes easier when you think through your offering, monetization, and sustainability. As you work on your business model, keep important tips in mind, ask questions to stay on track, and browse different pricing models to determine what's best for your business.

Article / Updated 03-26-2016

Great business models command better margins than the competition. Sometimes, a business model can be improved simply by clever pricing strategies. The list below offers some methods to potentially raise prices and corresponding margins. Premium pricing: You can't help but think that expensive products are better. Tiffany's, Starbucks, Rolls-Royce, and high-end New York restaurants have used premium pricing to create a perception of luxury to generate high margins. Penetration pricing: Using artificially low pricing to gain distribution makes sense if you're trying to establish a beachhead or build economies of scale. Economy pricing: This model uses the perception of thrift. However, just because the product is priced lower than other offerings doesn't mean that margins must be lower. Generic brands earn more for grocery stores than name brands earn. In other instances, economy pricing is necessary to drive the initial sale and thereby secure add-on sales. Low gasoline pricing is needed to secure cigarette and soda sales for instance. Price skimming: Charging a high price when an item is new or has little competition. As demand and competition increase, prices are lowered. For instance, when DVD players were new to market, they cost around $800. As demand increased, pricing decreased in kind. Psychological pricing: Human beings can't help but feel that $499 is cheaper than $500. Walmart uses sevens instead of nines because consumers have become savvier. Product line pricing: For decades, General Motors used the same body style and components to brand the same vehicle under more profitable lines. The Chevy Cavalier, Buick Skyhawk, Pontiac Sunbird, Olds Firenza, and Cadillac Cimarron were virtually the same automobile with differing emblems on the hood. Optional product-pricing: The base-model or initial purchase is sold at lower margin but related items are sold at much higher margins. Mobile phones have low margins but adaptors and cases have very high margins. A plain cup of Starbucks coffee isn't particularly expensive, but start adding milk, spices, and some froth and it doubles in price. Captive product pricing: Movie theaters, amusement parks, resorts, and airlines have customers trapped and can charge much higher pricing as a result. Product-bundle pricing: Microsoft increased overall margins by bundling all its Office software. Southwest is attempting to bundle all the costs of airline travel while other airlines nickel and dime customers. Another example is highly profitable service agreements bundled with copiers and other equipment. Geographical pricing: If you have a geographic advantage, such as remote markets with little competition, you may be able to charge a premium. Examples include "last gas for 100 miles," and "prices higher in Alaska and Hawaii."

Article / Updated 03-26-2016

If your current business model is no longer effective, it's time to make some changes. When you're designing or re-designing your business model, keep these questions in mind: Does the model generate margins superior to the competition? How easily can your idea be copied? What can you do to slow down the competition? What happens if a larger competitor copies your idea? Are you aiming for non-consumers or to have existing customers of a competitor switch to your brand? A is easier than B. How will you get the product into consumer's hands, and how easy will it be to get consumers to pay for it? Think about Twitter and other great products that couldn't monetize the offering. How will changes in buying habits, trends, interest rates, increasing competition, and the general economy affect your model?

Article / Updated 03-26-2016

When designing a business model, you have a lot to remember. Refer to this handy list of business-model reminders to make sure you stay on track: Different is always better than better. The better mousetrap plan rarely works. No margin, no mission. Great business models have great margins. If it's not easy to sell, it's not worth doing. A surfer doesn't see the wave, and then catch it; she has to guess where the wave will be and paddle in front of it. Many times, getting lucky means guessing early. Wayne Gretzky called this "skating to where the puck is going to be." Only the market decides which ideas are good. Most great ideas aren't appreciated by the mainstream until they work. Don't worry about what everyone thinks about your ideas. Think about your exit strategy as you're building your business model. There's no point building a job.

Article / Updated 03-26-2016

When you're ready to create and analyze your own business model, jot down your ideas while using the business model wheel. This practical tool is also useful when you revisit the ideas you come up with during your annual planning process. The business model wheel focuses on the following areas: Offering Market attractiveness: The industry, niche, and customer segment you will sell to. Unique value proposition: The significance of the opportunity to stand out in the marketplace and how strongly your offering does so. Monetization Profit model: The streams of income created by the offering and the associated margin generated. Sales performance model: Converting the marketing expectations into actual paying customers. Sustainability Ongoing competitive advantage: Creating meaningful differentiation and advantage today and tomorrow. Innovation factor: Balancing the need to innovate to keep up with competition with your ability to do so. Pitfall avoidance: Making sure a good model doesn't succumb to regulation, litigation, fads, or excess reliance. Graceful exit: Creating a model that allows the owner to sell the business for a large sum of money or run it as a CEO Emeritus.

Article / Updated 03-26-2016

All business models erode and grow weaker over time. Your job is to assess the model and make changes before it’s too late. If your profit isn’t what it once was, consider raising your prices — without raising your prices. The following list includes ideas you may want to try: Revise the discount structure Change the minimum order size Charge for delivery and special services Invoice for repairs on serviced equipment Charge for engineering or installation Charge for overtime on rushed orders Collect interest on overdue accounts Produce less of the lower margin models in the line Write penalty clauses into contracts Change the physical characteristics of the product

Article / Updated 03-26-2016

Business model innovation is a necessity. The constant march of competition and time causes all business models to erode eventually — you can’t stand still and expect to get ahead. Regularly spend time updating your business model to get the most from your business. If you need innovation inspiration, look at other businesses. Although you always want to keep an eye on your competition, don’t overlook completely unrelated businesses — sometimes the best ideas come from taking a piece of their business model and using it to improve your own. Consider the following checklist when trying to leverage business model ideas from other businesses: Is their idea one that extends their existing model or changes it? Extensions are typically not as powerful as outright changes. Use the daring moves of unrelated businesses to inspire dramatic changes of your own. Does their idea upsell additional customers or add new ones? It may be more profitable to upsell existing customers, but it’s harder to add new ones. Be on the lookout for creative ways to add new customers. For instance, the Dodge Dart Registry borrowed from the wedding industry to attempt to create new first-time car buyers. Is the margin generated by this idea high or low? Borrow only the ideas that generate excellent margins. Not all sales are good sales. How proprietary is the concept? When one car manufacturer has a terrific idea, if it works well then every other car company will copy it. Better to imitate ideas that have protection or are hard to emulate. How much intellectual property and organizational learning would be required to copy the concept? Every day you see great ideas that you simply don’t have the resources to copy. Your business is unlikely to successfully borrow business ideas from Google and genome sequencing, so be realistic in your search. If they would sell me this idea, how much would I pay? If you wouldn’t pay a lot for the idea, move on to one you would pay a lot for. How faddish is the idea? By the time you emulate the idea, will the trend be over? Use your “crystal ball” to guess how long the trend will last. Looking in the rearview mirror isn’t that useful in this case. What portions of their idea need to be ignored and what portions can be repurposed into my business? One hundred percent of an idea is never swipable. It takes only one percent of an idea working to make an impact in some cases. However, if too much of the concept needs to be repurposed, you may be better to find a different inspiration.

Article / Updated 03-26-2016

They’re called innovations for a reason. Great ideas rarely are in the mainstream or are conformist. Some of the best ways to innovate a business model come from unusual or counterintuitive means. Here are ten ways you can buck convention and innovate your business model. Engage in activities your competitors won’t It’s easy to have competitive advantage when you have no competitors. If everyone else is afraid to try something, it could be a valuable opportunity. Examples include extreme guarantees, customer self-service, and freemiums (a product or service that is free, but users pay for advanced features). Hire the buyer as an exit strategy Can’t find a viable exit strategy? Don’t worry; hire a talented person with the raw talent to run your business and teach her the rest. While she’s learning the business, you get a trial run to see whether she’s capable of being the boss. Throw the vendor into the shark tank Many industries have vendors clamoring for customers. This supply-and-demand imbalance gives the buyer (you) the upper hand. Create transparency in the buying process by making everything public. Let each vendor know the pricing and terms of its competition. Expose the details of each bid on the Internet. Send a mass quote request to all vendors with a listing of all companies who are invited to bid. Make any major purchase like a reverse eBay auction and you’ll lower your cost basis and improve your business model. Hire two salespeople at once in a competition Fact: Most salespeople interview well. Fact: Many salespeople interview better than they sell. By hiring the wrong salesperson, you waste time, money, and effort until you get the right one in place. Speed up the process by hiring two salespeople for one job. Pro football has training camp to see who makes the team; why can’t you? Be transparent and let the candidates know it’s a competition. If they aren’t up for the fight, they aren’t really salespeople. Shift costs to vendors Grocery stores make vendors like Frito-Lay stock their shelves. Automotive warehouses make vendors take annual inventories. Toyota’s lean manufacturing makes Toyota more efficient and reduces their inventory. However, the inventory doesn’t disappear; it gets pushed down the vendor channel and gains for Toyota created by vendor inefficiencies. Walmart gives vendors a tiny three-minute window to deliver truckloads of goods. This saves time, money, and planning resources for Walmart but forces trucking companies to waste resources parked in bullpens awaiting their slotted time. Fire your low-margin customers All business isn’t good business. Sales volume doesn’t drive the costs of a business — transactions do. Some customers have the knack of making your transaction costs high and your margins low. Consider running a full customer analysis that considers all the costs of doing business with a particular customer versus the margin generated, and then fire the ones who cost more than they generate. Change to flat-rate pricing when no one else is Ask a plumber whether he can make more charging by the hour or charging a flat rate. He’ll tell you, “I can make twice as much charging a flat rate.” Flat-rate billing incorporates a business model innovation — selling “insurance” — into pricing. The vendor accepts certain risks in exchange for money — lots of money. Flat-rate pricing includes fixed-cost bids, flat-rate hourly billing, “all you can eat” plans, and simplified pricing such as the post office’s flat rate envelopes that cost the same whether you’re shipping to Alaska or down the street. Turn waste into cash One man’s trash is another man’s treasure. The Duraflame log was created from waste wood shavings. Crystal Clean successfully took on industry giant Safety Kleen by disposing of used mineral spirits from customers by selling them to shingle manufacturers who discovered that dirty spirits worked better in their manufacturing process than new spirits. Do business in a way that makes you more profitable If your business model relies on a low-cost structure, force (don’t ask) your customers to help you keep costs low. Henry Ford lowered costs by producing only black Model Ts. Aldi supermarkets charge for bags and to rent carts. Southwest Airlines doesn’t allow seat assignments or have first-class seating. Doctors make sick patients come to their offices, schedule appointments to fit the doctor’s needs, wait in a room full of sick people, and then wait until the doctor is available for the privilege of being a customer. Make your customers do your work It costs UPS more than $2 to handle a customer service telephone call. If customers service themselves on the web, it costs UPS a quarter. Many restaurants hand you a cup for your soda instead of filling it for you. Banks get you to be your own teller online or at an ATM. In the late 1960s more than 750,000 Americans held jobs as service station attendants — filling the gas tanks of car owners for them. Today, only customers in Oregon and New Jersey enjoy someone else filling their tank for them. Customers are willing to perform the work traditionally done by employees if the work is at least one of the following: Easy to do (fill your own soda) Faster than waiting on someone to do it for you (looking up your own UPS tracking number) More efficient and reflected in the store’s pricing (Aldi’s bag-your-own groceries) Saves the customer money (post office online stamp printing, online banking) Leverage this dynamic and enhance your competitive cost advantage and your business model.

Article / Updated 03-26-2016

Gas stations don’t make money from the sale of gasoline. They make their profit from the sale of higher-margin items like cigarettes and soda. While creating your winning business model, think about which products or services get the customer in the door and which ones keep your business profitable. The secret to the gasoline, cigarettes, and soda formula lies within buyer psychology. Consumers can’t help but pay more attention to and be more price sensitive toward some items over others. Plenty of people will drive across the street to save two cents on a gallon of gas but have no idea the cost difference of the Snickers bars inside the station. To capitalize on this dynamic, give consumers the psychological “victory” of winning the pricing game only on the items they pay close attention to. The human mind can only manage so much information, and customers can’t know the best deals on all your offerings. These “cigarette and soda” items offer the best opportunities for high margins. Other companies using this concept provide a good source of ideas for your business. The following table shows you examples of a few of them. Type of Business Main product Higher margin products or services Ad agency Cool idea #1 15% printing markup Ad specialty company Price of T-shirts Everything but T-shirts Alarms Bid work Annual inspections, repairs, monitoring Association property manager $/house/month Mowing, maintenance, legal fees, collection fees Auto parts Availability, delivery speed Add-on parts, sundries Brake calipers Cost for top-moving 50 SKU’s Expensive imports, rear calipers Bridal shop Dress Alterations, hats, tuxedos Coffee service Delivery frequency and cost/lb Sugar packets, water coolers, fees Private investigator Background checks Add-on work, equipment intensive work Software/staffing Low-margin grunt work Shelved code, offshoring

Article / Updated 03-26-2016

Many businesspeople mistakenly believe that a business plan and a business model are one and the same. Your business model is the core concept upon which you build your business plan. Therefore, your business model should be a significant portion of your business plan. Many business plans gloss over the business model in favor of lengthy financial projections and operational details that go along with business plans. Without a solid business model, these projections and details are premature. This table lists the components of a traditional business plan and describes their purpose. Without incorporating the aspects of the business model into a business plan, traditional business plans are incomplete. Elements of a Business Plan Section Purpose Weakness Executive summary Summarizes the key points of the business plan, including a brief description of the product, market opportunity, and funds sought None Background information Explains the history of the concept, purpose, and management team None Marketing plan Explains the marketing methods, segments, and so on Can presuppose the value proposition, marketability, and ability of product to generate profitable sales Operations plan Shows management expertise and operational systems Spends significant energy explaining how company will deliver on sales that may never happen Financial plan Shows expected profitability of the company under various scenarios May assume sales targets will simply happen when more proof is needed to show how sales will occur Risk analysis Explains potential risks and how they’ll be mitigated None All the sections of a business plan listed in this table are important in the running of a business. However, none of these areas creates a good business. Instead, these areas sustain a good business. To create a good business, you need a good business model.