Alex Osterwalder and I recently got to thinking: what are the different ways someone could “purposely” run their business into the ground? It’s easy to talk about how to poorly execute a business (hire the wrong people, scale too fast, or ignore your customers). But Alex and I wanted to plot out some of the variables that can poke holes in a business model. It’s a great way to think about what you might be doing wrong as you build your business. Check out our list and share your own examples, too.
1. Build a product that customers love, but can’t cover costs
You’ve built this fantastic product that looks beautiful, works well, and your target market is in love with what you’re building. But if you can’t drive down production costs, can you recoup enough from sales to keep the business afloat? You’re now stuck with a value proposition that costs more to make this fantastic product than customers are willing to fork out the cash. This seems like an obvious point, but it’s incredibly easy to get carried away with shipping your product instead of delivering a great value proposition.
2. Spends lots of money on acquiring customers in markets with low switching costs
It’s not a bad thing if you’re spending a lot of money to acquire customers--it’s just a risky move in markets with low switching costs (the things that make it easy for your customer to switch to a competitor). Take Groupon for example. The company spent heavily to attract new customers to its various daily deals offerings, but there was nothing to stop those same customers from switching to a rival competitor like LivingSocial. Things like locked in contracts, membership fees, or even loyalty perks can keep customers around. Now Groupon has to continually spend more to acquire a whole new batch of customers.
3. Focus on customers with insanely long buying cycles
Be wary of attracting customers with incredibly long vetting cycles. You risk making an enormous investment in a contract or project that may not result in any cash for years to come. Only target these customers if you have the financial stamina to do so. Government clients are notorious for this--they have a lot of money, but the decision making process can be lengthy and unpredictable. You might run out of money or face cash-flow problems before the contract materializes.
4. Spend heavily on acquiring market share in new markets
When you enter a new market, there’s no market share to be gained--the market has to be created first, and that can be a costly undertaking. You just can’t walk into a new market as if it’s an existing one because you’ll either go broke spending a lot on marketing, or have to be really good at hoarding cash for that moment when people understand your unique value. As Steve Blank, father of the Lean Startup movement puts it, your business will endure years of flat revenue while it chases that tipping point when your target market finally has a need for your service.
5. Target customers with channels that are blocked by a gatekeeper
You’ve got this unique value proposition but someone else is blocking your access to millions of paying customers. That gatekeeper might be a person, a company, or an entity that holds the keys to your future profit--and they’ll do whatever it takes to keep you out. It’s why record labels put up a fight to hand over lucrative copyrighted music content to streaming services, or how Amazon exerts incredible influence on the publishing industry.
6. Move slowly in a fast market
The technology industry is a great example of how speed is an important factor when entering a market. Whether you’re early (like I mentioned in point #4) or late, both attempts have the unfortunate circumstance of targeting an uninterested or uneducated customer base. Iridium, a company that hoped to build a satellite based mobile phone system, paid the price for entering the market too slowly. By the time Iridium launched there weren’t enough customers that required its service, and cell phone towers already covered the vast majority of territory Iridium wanted to penetrate.
7. Ignore your business model environment in a highly regulated market
Violate copyright laws and your once growing business might be stalled defending itself within the legal system. Create something so groundbreaking that laws around your service don’t even exist yet? Prepare to put up a helluva fight while competitors, unions, or governing bodies try to make sense of, and break apart, your creation. Aereo, a startup that tried to stream television content through broadcast antennas, lost a hard fought battle at the US Supreme court for tip toeing around intricate copyright laws. There are exceptions: both Uber and Airbnb are slowly working their way through or around the rules that dictate how both businesses can work.
There are a plenty of points and examples to keep this list going. Alex and I thought it was a great exercise to reflect on how strong or weak a business model could be against these elements.