What’s the Secret for Making Money at Your Own Business? - dummies

What’s the Secret for Making Money at Your Own Business?

By Consumer Dummies

At its most basic level, your business model is the formula that allows you to make money. You can think of it as the combination of everything you do — your secret sauce — to provide your customers with value and make a profit doing so. The more differentiated and proprietary your combination is, the more profitable you’ll be.

Set yourself apart through differentiation

Differentiated business models offer customers products, services, or other value that stands out from the competition. Consider the following examples:

  • BigBelly Solar doesn’t just make trash containers; BigBelly’s trash containers harness solar power to compact trash five times more than a typical container. This capability allows cities like Chicago, Philadelphia, and Boston to collect trash far less often and save fuel, manpower, and vehicle wear and tear.

  • Camp Bow Wow offers more than kenneling or dog‐sitting. Dogs play together much like children at recess. Customers pay a premium for their dogs to have a good time rather than be cooped up all day.

  • The Huffington Post is an Internet‐only news outlet.

  • Southwest Airlines offers customers more direct flights than other airlines, plus it has a fun‐loving staff. Operationally, Southwest flies only 737s to keep operating costs at a minimum, doesn’t use fee‐based outside reservation systems, and uses a faster boarding system with no assigned seats.

  • Tesla makes only high‐performance electric automobiles.

  • Walk‐In Lab doesn’t accept insurance. Instead, the company provides low‐cost medical testing to the uninsured.

Make your model difficult to copy

A proprietary business model is a differentiated model that’s difficult or impossible for a competitor to emulate. Typically, proprietary models create methods to

  • Deliver products and services better, cheaper, or faster through a business process known only to that company. Examples include the following:

    • Toyota’s lean manufacturing process.

    • Appliance retailer H.H. Gregg’s radically realigned retail and operational systems to allow for same‐day delivery.

    • Walmart’s heavy investing in technology during the 1980s to create a logistical system that brought goods to market significantly more cheaply than its competitors.

  • Create a closed ecosystem where ongoing use of your product is highly desirable or required. A powerful ecosystem attracts new customers and discourages old customers from leaving. Here are some examples of successful closed ecosystems:

    • The iTunes ecosystem (iPod, iPhone, iCloud, and iTunes) that created a proprietary business model for Apple.

    • Amazon’s Kindle, which created a large library of books on the proprietary format, making it difficult for customers to purchase any other product.

  • Find a way to serve customers others thought were unprofitable. Consider the following:

    • Vistaprint attacked the micro business printing market thought unprofitable by most competitors. The combination of an Internet sales process and large‐scale combining of orders allowed Vistaprint to grow rapidly in a contracting market.

    • Microfinance company SKS lends small amounts to remote villagers in India. At the end of 2011, the company had outstanding loans of $925,844,433 to more than six million active borrowers. Because SKS lends money to those whose only lending option is loan sharks, the company can charge a much higher interest rate than banks charge large corporations.

    • SafeAuto offers minimum coverage to drivers the big insurers deem too risky and too financially unstable to cover.

  • Do business in way competitors thought was unprofitable or impractical. Your business model can be well protected if your competitors think you’re nuts for trying. Here are some business models that had competitors shaking their heads:

    • For decades, Southwest Airlines served second‐tier cities at second‐tier airports and insisted on flying only Boeing 737s. Most large airlines were happy to let Southwest serve these less‐than‐desirable markets with their small airplanes. However, as cost pressures continued to grind upon the industry, it became clear that Southwest had spent 20 years creating a low‐cost model that the large airlines couldn’t duplicate or compete well with.

    • FedEx started as a Yale business school project for founder Fred Smith. Everyone, including Smith’s professor (who gave the project a C), thought delivering packages overnight was an awful idea. Not dissuaded, Smith pursued the concept and spent years building the infrastructure to deliver packages efficiently and quickly. By the time it was clear that overnight package delivery was a good business model, Smith had a ten‐year head start.

    • Nearly every computer maker attempted a tablet computer and failed. It was well known that tablet computers were a niche product for hospitals and a select few customers. Apple ignored the gloom and doom and launched the iPad anyway. The product was a huge success and left competitors scrambling to create their own tablet computers.

  • Create a product or service that’s patented, trademarked, or difficult to duplicate. Consider these examples:

    • The Xerox 914 copier used a proprietary process to duplicate documents. It’s quite possible that Xerox wouldn’t have grown to become a Fortune 500 company if it had simply sold the 914 machine outright. Renting the machines was a much better business model. It cost Xerox around $2,000 to build one machine. Instead of selling it, Xerox rented the machines for $95/month plus five cents per copy for each one over the first 2,000/month. Large customers like General Motors were copying up to 100,000 documents per month (that’s a $4,995 rental per month).

    • NoChar makes an unpatented polymer that turns nasty liquid spills of anything from diesel fuel to nuclear waste into a solid. The proprietary product isn’t patented because the company doesn’t want to reveal the formula, even to the patent office. NoChar has built a successful business based on a product its competitors simply can’t figure out how to copy.

Becoming the absolute best in your field creates a product or service that’s difficult to duplicate. The same holds true for any skilled trade. People always want the best, and they’re willing to pay a premium for it.