Do you have a profitable and sustainable business model?
Many startups have a good team, an innovative technology, a solid business idea, yet still fail to commercialize the idea or maintain a sustainable business.
One of the reasons for failure can be the business model.
What is the business model? In a narrow sense, the business model defines the way in which the company makes money. Broadly speaking, the business model includes the identification of revenue streams, various incentives created for a defined user base, a distribution network，and key strategic partnerships that the company can leverage.
Some startups in the market are good at telling stories in order to raise funds. Typically they offer free trials, crazy discounts to gain market share and have won the trust of the market until the company files IPO or obtains the next round of funding or sells to another company. This is a good story in the capital market. But is this a good business model?
The criterion for judging the quality of a business model is whether this model can bring stable cash flow to the company and whether this model can be sustained.
What is the core of your business model?
When it comes to business models, many founders will look to Google as an example, saying that Google did not find a convincing business model when it was founded. “Google didn’t know how to make money at the beginning, but later search advertising was successful, and only then did it find a business model.”
Before Google was established, what Larry Page and Sergey Brin wanted to do was to let everyone find the information they wanted for free and easily in the Internet age. Larry Page is a very business-minded person and when Google was founded, he often invited elites from all walks of life to come to the company to share their experience and stories. This included EchoStar, the second-largest satellite TV network in the United States. EchoStar’s business model is summarized as below:
- The company does not make satellites. All satellites are bought or rented.
- The company does not produce TV programs by itself but obtains authorization from the media company.
- The company does not make satellite receivers and TV set-top boxes. The former is bought from China, and the latter is customized from Motorola.
What EchoStar does is deliver the TV program to the end user’s home.
What Google does is deliver Internet content to millions of households, and it doesn’t matter who provides the content. Today, Google’s services have far surpassed search engines, but all its business still follows this principle, which is the core of Google’s business model.
How does your business make money？
Let’s take Google as an example.
In the early days, Google focused on how to expand its user base. In addition to being technically better than competitors, it is also extremely simple to use. The most classic is that only the search box appears on its homepage. This is distinctive on the Internet where there are overwhelming banners and pop-up ads, and the high accuracy of search results has attracted many users. When the user base is large, the effect of advertising is relatively good, because there are enough people to reach.
When people get used to Google for whatever information they are looking for, Google starts trying to generate revenues through search ads. Before Google, Overture had begun to try to rank search results by how much they paid for the site and achieved considerable success. Google has always emphasized the fairness of page ranking and concerned that directly adopting Overture will affect Google’s reputation in the long run. So Google decided to create Google AdWords as a paid business while the page ranking itself remained objective. Compared with TV and newspaper advertisements, Google can provide accurate reach for advertisers because of the user ’s usage data. According to the search keyword bidding method, advertisers can control the advertising budget in advance and can track the advertising effect. All of this allows Google’s search advertising to continue to generate profits.
Please note that Google’s model is more sustainable than companies that rely on discounts and subsidies to expand market size. If other companies stop offering discounts to customers, see how many people will continue to use their products or services.
Do you have a profitable and sustainable business model?
For many companies targeting the B2B market, the key to the success of the business model is how to increase customer stickiness, rather than doing a one-time trade. One-time trade means you must constantly develop new customers. The business is not sustainable and stable. Remember cash flow is the king to business operation. CBC interviewed Li Ka-Shing, ranked 30th in the 2019 global rich list, to ask what is the most critical issue for business operation? He answered: cash flow.
Let us use GE Aviation as another example.
GE Aviation is GE’s most profitable unit. GE Aviation’s $6.8 billion total profit in 2019 represented a 5% increase. What makes GE Aviation so profitable? Let’s take a look at its business model.
The business model of GE Aviation includes three parts:
1. Hardware sales – There are four engines on the Boeing 747 aircraft, and there is also a spare engine in the warehouse. The price of the engine is very high, the average price of a civil airliner engine is about 130 million US dollars.
2. Maintenance and data monitoring services – In addition to selling engines, GE Aviation also provides repair and data monitoring services. Subsequent engine parts replacement must use the parts provided by GE Aviation, and all maintenance services are also priced by it. The engine collects the operation and overall working conditions of the main components of the engine by a specific sensor, and then wirelessly uploads it to the satellite or nearby ground station. Once the data indicates that the engine is abnormal, GE Aviation’s technical support department will be alerted and immediately notify the flight crew in flight, telling them what measures should be taken. Generally, the shorter the data transmission interval, the higher the service price.
3. Engine leasing – Another new business model is engine leasing. When buying an aircraft, you can rent a few engines that are charged by the hour, and replace them if there is a problem. This can save maintenance and inventory costs. However, this market is still small, and most airlines buy spare engines and put them in the warehouse for depreciation.
Through the examples of the business models of Google and GE Aviation, I hope you can get some ideas that will make your company’s business model sustainable and create stable cash flow. Mans International would be happy to sort out your existing business model with you.
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