4 Sets of Questions to Check Your Business Model

If you are feeling like Eeyore, it could be time to reclaim control of your business model.

I recently attended a discussion, with business leaders, on business conditions and the economic outlook for the remainder of 2012 and next year. Interestingly, I came away from the discussion feeling utterly schizophrenic. During the discussion it became evident that we interact primarily with two types of managers. One is the Eeyore camp, who believe business conditions are largely out of their control and imploding, that the key to success is survival and risk management, largely through active cost management and customer retention. The other is made up of optimistic striving individuals who are fighting status quo, re-designing their businesses, and investing in experiments that they believe could transform their businesses.

As these disparate groups came into view, it struck me that the central difference between the Eeyores and the Strivers was a deep understanding of their business model and a desire to reshape it in the wake of market changes. As we dug a bit further, it became painfully clear that many of the Eeyores lacked a fundamental understanding of, or control over,  key elements of their business models. I started to wonder how many could answer the following sets of questions about their models:

  1. Sales:
    • Which customer segments are growing or likely to grow?
    • What do these segments want to buy and do we have the right products?
    • How do these segments want to buy, and are we selling that way?
    • What price does each segment expect?
    • What’s the cost of customer acquisition and the lifetime value?
    • How long is the sales cycle and the yield between each step?
    • Do we create enough opportunities at the top of the funnel to drive growth?
  2. Gross Profits:
    • What does it cost us to produce our products/services?
    • Are we driving enough volume on our high margin products or too much on our lower margin products?
    • Do we understand which customers are more and less profitable?
    • What are the biggest opportunities to reduce our costs of goods sold?
    • Should we rationalize, or innovate within, our product mix to increase margins?
    • If we reduce these costs, what are the implications for our sales and operating models?
    • Can margins be increased to the point where investments in growth are self-financed?
  3. Operating Model:
    • Are you spending the right amount on key functional operations outside of product creation and service delivery?
    • Where can we eliminate costs without impairing the customer experience?
  4. Cash Flow:
    • How quickly must we pay our liabilities, can we delay payment further?
    • How fast can we get customers to pay for goods and services?
    • Are there customers who will pay substantially in advance?
    • Can we reduce the amount of cash tied up in inventory or our supply chain?

How would you answer these questions about your business model? Do you and your team understand the interconnections between different elements, particularly their impact on cash flow? Where’s the highest value place to wrest control of your business model?

If you have recently addressed one or more of these questions, share your thoughts and experience by commenting here.

-TGK



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