Why Clear Business Models are Important
If you don’t have a clear business model you can’t grow or market effectively
If you have a clearly defined business model, you can check any future opportunities, partnerships, activities, etc against whether it helps your business model. Successful companies are able to explain their business models as quickly as their elevator pitch. Where the elevator pitch should be able to explain what you do to potential customers, your business model should be able to explain how your business works to potential partners, suppliers, etc.
I’m not going to go into some of the stereotypical business models that are already established. That will be a topic for a later article. In this article, I will explain my process for understanding and expressing what your existing business model is.
Some examples of clear business models include
· Wal-Mart uses scale to lower their prices to sell to bargain shoppers in physical stores and online.
· Amazon provides a marketplace to connect buyers and sellers, allowing for an easy online shopping experience. They earn a percentage of every sale on their platform.
· AKI Energy (http://www.akienergy.com/about-aki-energy) installs geothermal heating for people with electric heating in rural Canada. They earn their income based on a percentage of the savings in heating energy costs through a partnership with provincial utilities.
While I don’t necessarily agree with the business practices of Wal-Mart and Amazon, in order to grow to the immense scale that they have now, they needed to have a clear and easy to understand business model. Aki Energy is different because it is a social enterprise, but a social enterprise still needs to have a clear way of explaining how they earn their income in order to grow and multiply it’s impact.
Clarify Key aspects of your business
When you’re thinking about your business model, there are four key aspects that you should make sure you address. These are:
1. What you do
2. What you sell
3. Who you sell to
4. How you get paid
For social enterprise, identifying the difference between the last two points is key. Many social enterprises provide services for people who are not the primary purchaser, and the products or services are subsidized by some other third party. Identifying where the money comes from is a key part of operating a business long-term.
What you do
What you do is the first element of describing your business model. If you can’t explain what it is that you do, people will tune out. Being unable to simply describe what you do is a problem for engineers, scientists and social entrepreneurs. For engineers and scientists, the problem is that what they do has a specific language that is key to describing what they do to other trained professionals, and it doesn’t translate well for the public. For social entrepreneurs, the problem is often that they feel the need to explain every piece of what they do and how it relates to the societal issues that they’re addressing, but they also need to include stories of specific instances because every element is unique and…… It’s too much to explain fully in a sentence.
For social entrepreneurs, I recommend focusing on the key elements of the business model separately from the social goals. You can include the social impacts as a separate point after you’ve explained the four elements of the business model.
For AKI Energy, what they do is they install geothermal heating systems. That is the simplest way of explaining the work they do on site. It doesn’t capture the intricacies or the nuance of how they do it, but it does get the basics across.
What you sell
What you sell tends to be different than what you do. Instead of thinking about the activities or process that your business does, think about the benefits that you provide. Barbers cut hair, but what they’re actually selling is a stylish appearance. Recognizing the difference between what you do and what you sell is key to understanding the brand that you are developing.
Another key aspect is that you might be selling different things to different customers. Amazon is a great example of this, because they are selling to both the customers on their site, and the sellers who use their marketplace. To the customers, they are selling ease of searching through similar products, and a catalogue that extends into the tens of millions of products. To the sellers, they are selling access to the customer base, and they also upsell with convenience services such as fulfillment by amazon.
Back to AKI Energy. What they sell is reduced electrical bills for the customer, but they also sell a reduced energy load for the utility. In Canada, we have significant incentives for demand side management of electricity consumption and AKI Energy is helping the utility achieve their mandate. The difference is enough for the utility that they have struck a deal with AKI to ensure that more of these geothermal systems can be put in place.
AKI Energy is also selling the impact that they are making in the Canadian North by getting paid to reduce energy bills in rural communities, and increasing self sufficiency by hiring their staff from the same communities. You will be better off if you can find a business or government agency that is willing to pay for the benefits that you are providing to them either directly or indirectly.
Who you sell to
If you don’t sell something to a market, you are not a business. You must have an understanding of what your market is in order to start attempting to grow your business. There are three main distinctions of levels of markets.
There is B2C, which stands for business to consumer. These are businesses that are selling to individuals or small groups. Nearly every grocery store, clothing store, or bookstore is a B2C operation. If you think the business might fit in a mall, it’s probably a B2C business.
Next is B2B. These are businesses that sell products and services to other businesses. At it’s simplest, it’s stores like staples that sell printers and paper to offices. B2B also includes complex consultancy firms that provide design and engineering services to big businesses.
The third category is one that I like to call B2G. This is for organizations that have contracts with governments. In most cases, these businesses will also have B2B elements in order to sustain themselves and have enough income sources just in case their main clients stop ordering. It is important to include governments in a separate category for social enterprises, because we are often providing benefits to governments without being paid for our efforts. We need to make a conscious effort to get government to pay for the social benefits being provided, especially if they reduce the cost of government departments or programs.
Within each level of market, you should be defining a specific niche that you are serving. For Wal-Mart, they are primarily a B2C company that sell to budget conscious or bargain shoppers. That is a specific kind of consumer that is specifically focused on price.
AKI Energy is focused on people within a specific geographic area (rural Canada) with a specific element of their housing (electric heating.) This allows them to focus in on a specific area and not waste time trying to earn business from people who live in Urban centres and have natural gas furnaces. On the social side, they are also selling to a public corporation in the provincial utility.
The kind of techniques they will use to negotiate contract and agreements with the utility are not the same techniques they use to earn new on-site customers. By understanding precisely who they are selling to, they are able to focus their efforts in on areas that are likely to provide beneficial agreements, and enough customers to fulfill their agreements.
How you get paid
This is the most important part of a business model. If you can’t tell how you will earn revenue, you will not last long as a business. If your social enterprise shuts down, you cannot keep making an impact on your social goals. You must understand where your revenue comes from.
This point is important because it’s not always clear where the revenue comes from. The simplest way to understand how you get paid is a customer comes in your doors, picks up a product and pays for it at the till. If that is your revenue stream, then just write it down, you’re done with this section.
Many social enterprises have more complicated revenue streams that involve multiple actors. Try to get to the core of how you earn the income for your product or services. One organization I’ve spoken with is Level IT Up (https://levelitupmb.ca/about/.) They provide workplace training for people with autism who already have some IT training and experience. They are paid by a combination of government grants, and look for placement revenues each time they hand off one of their trainees to a company.
For Level IT Up, this could be explained as they earn commissions as recruiters for businesses, which is supplemented by grants. While this might not reflect the nuance of the relationships between the businesses, Level IT Up, and the trainees, it makes it simple, clear and easy to understand. If people have more questions after hearing the short form business model then you can give them more detail.
AKI Energy also has a more complicated revenue stream. They have agreements with public utilities such as Manitoba Hydro that are supported by provincial government legislation. These agreements state that if a geothermal system will save more money than it costs to install, the utility will fund the project, and earn the money back through including charges on the now reduced utility bill.
Here’s an example taken from An Army of Problem Solvers: A system costs $18,000 to install, but it saves $150 a month in energy costs. Because the systems will last long enough that the costs will be recovered, Manitoba Hydro foots the bill. The customer who gets the system installed will see a $50 energy savings per month, and Manitoba Hydro takes $100 per month until the system is paid off. They call this the Pay As You Save program, as it allows lower fees for the consumer, and the utility still gets the system paid off.
For AKI Energy who installs the systems, they know that the details of this program and agreement is key to their operation in that is makes capital accessible for these projects. As far as the business model is concerned, this is needless detail. They can say that they earn their income through contracts with utilities and it’s enough to see where the money comes, and how growth could be possible.
Business models are important in order to understand where your income comes from, and who is purchases the products and services. If you can explain your business model simply, there is a better chance that potential partners can understand where they fit within your business. It will also help you keep focused internally and avoid opportunities that would weaken the model by being pulled in too many different directions.
Do you have any questions about marketing your social enterprise? Please tweet @MatthewRempel.
Does trying to grow and market your social enterprise overwhelm you? Does your social enterprise have too many ideas but not enough direction? Strategy Made Simple offers coaching to help social entrepreneurs develop marketing systems so they can expand with confidence and grow their impact. For more information, please email Matthew@StrategyMadeSimple.ca
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