LevelUp – Understanding Business Models – How To Generate Business Models
How do you have a great business idea? Coming up with a great business idea doesn’t necessarily require a brand new insight. Once you start understanding the finite number of business models in existence, you’ll have a much easier time applying those models to new problems and generating new business ideas.
At the beginning of this course, we asked a fundamentally important question “How do I have a great business idea?” As you’re well aware, most new entrepreneurs really struggle to come up with good business ideas, even though great ideas seem to come easily to experienced entrepreneurs. We discovered that the reason it’s so hard to come up with good business ideas is that having a “business idea” means having the answer to a number of important questions, each of which requires real world data in order to answer accurately. Each question needs to be understood and explored in order to generate business ideas that have real-world applications.
So far, we’ve been exploring some of the key individual elements of a business model – traffic sources, product types, and monetization methods. We still haven’t explored some key elements of a great business idea – a unique selling proposition, who our customer is, and our solution to the customer’s problem – but we’ve put together enough information that we can start understanding how to generate a business model. Now its time to start tying those individual elements of a business model together so we can systematically identify new business opportunities.
Generating Business Models
Contrary to popular belief, you don’t need to solve a brand new problem in order to start a successful business. If that were the case, there would be no such thing as competition – but every problem worth solving attracts multiple solutions who compete against each other.
Another approach is to find a problem that already has existing, profitable solutions, and focus on determining whether the problem can be solved better with a slightly different angle, monetized better, or marketed through an untapped channel. Taking this approach increases your chances of success significantly – if you can understand the existing competitor’s business models you can not only extrapolate the potential market size, you have already validated the problem (or rather your competitor has done it for you). You may still need to validate your superior solution (and adding more features to an existing product is NOT necessarily a superior solution), but at least you know there is a market for it.
Another approach is to take existing business models and apply them to other markets. By taking existing business models and applying them to different markets, you might find a better way of doing things. In some cases, this combination of models can actually make you appear very, very original – even disruptive. Netflix started by taking the library model and applying it to the DVD rental business.
Here are some other examples of companies taking models that worked in other areas and moving it to another market:
Before FedEx, packages couldn’t be delivered overnight. But they noticed how banks were able to clear checks overnight by sending them to a central processing point, then back out to the appropriate bank branch. FedEx then took that model and applied it to shipping, so that every package went to their central spoke in Memphis, Tennessee, and then flown to its final destination.
Re/Max, the huge real estate brokerage, supposedly had trouble keeping high performing agents in the beginning. When the founder went to a barbershop, he asked the owner how they were able to keep good barbers from going out and starting their own barbershop. The owner replied that instead of taking a percentage from their barbers, he only took a monthly fee – successful barbers stayed on because they were earning so much more money. Re/Max implemented the same 100% commission policy to its agents (which is unheard of in the industry), only charging a monthly fee, and grew to over a billion dollars in annual sales volume and carved its name in the real estate world.
Being original is not a pre-requisite to a successful business. Also, seemingly original business ideas can be created simply by taking existing models and applying them to different markets.
Can you take an existing model that works well in one industry, and apply it to another one?
Exercise
Find 5 websites in an industry that you’re interested in. The sites should have a minimum alexa rank of 100,000 or lower. Answer the following questions as thoroughly as possible:
- What traffic source(s), product type(s), and monetization method(s) are they using?
- What different combination do you think could work equally well or better?
Example
Mixedmartialarts.com – Alexa:
Traffic Sources
Google search, referring sites, repeat visitors
Product
Community site
Monetization
Display ads, premium upgrade, one-off sales (e-commerce as monetization)
Improvements
- A premium section with a recurring subscription, featuring video training teaching MMA techniques.
- A martial arts/mixed martial arts directory could be added and monetized via listing fees or lead gen.
- Partner with smaller, untelevised combat sports promotions around the world and offer a subscription streaming service that gives fans access to unseen events, while providing an additional revenue stream to smaller promotions.
- Paid traffic could be used to directly grow the e-commerce aspect of the business.
- While community sites typically rely on organic traffic to grow, if the site is well monetized and the owner knows the lifetime customer value of each customer segment, paid traffic could be used to profitably grow the community aspect of the site as well. The community site would be the main product, but would also function as the top of a funnel that drives the user towards additional products and maximizes the business’ lifetime customer value.
Success Criteria
Correctly identify traffic sources, product type, and monetization methods for 5 websites, and make at least 3 improvement suggestions (or alternative combinations that could work just as well) for each site.
