It pays to run a check on one’s business model for flaws

More than 80% of Indian startups don’t make it past the first 5 years and even fewer the next five. As part of a few startups that survived these two milestones, we can tell you how important it is to constantly look at your business models and make corrections while staying lean all the time. Some business models are inherently more attractive than others. Yet, oddly, stakeholders often don’t ask the obvious questions. This may be because it is perceived as either complicated or too much work. For those looking for a quick overview of what makes one model superior to another, here are some key questions.

Are we able to create switching costs once we have customers?: Some of the most powerful business models in use today depend on the fact that it is inconvenient, expensive or time-consuming for customers to switch to another provider. Look at how Microsoft and eBay modelled their businesses for long. Network effects raise switching costs. Once all friends and family are on a social network, for instance, moving elsewhere is painful. Of course, switching costs can be undermined by adroit competitors. Wise, a fintech firm formerly called Transferwise, undermined switching costs for foreign exchange transactions by lowering barriers faced by customers, weakening the dominance of banks. Instead of actually transferring money from one place to another, this business model works by brokering transactions of funds within geographies, making low-cost, low-effort transactions available to customers.

Are we transactional or relational?: Business models that are based on ongoing relationships of some kind tend to be more profitable than those that are purely transactional. A fascinating field in which this is playing out today is food delivery, where companies such as Swiggy and Zomato are creating relationships with customers on the backs of restaurants so desperate for more business that many have yielded control of customer engagement to digital players, which are leveraging their knowledge of purchase patterns and financial information to build on their ease-of-use. Inevitably, restaurants find themselves app-dependent and therefore squeezed, and yet, it’s hard to see how they can avoid being dominated by apps that control the delivery infrastructure to meet evolved customer preferences. Perhaps this is an opportunity to have “delivered by Domino’s” become a thing in support of smaller local restaurants.

How interchangeable is our user interface?: Some user interfaces used to access a product or service are easily interchangeable. Take ATM machines, or the Qwerty keyboard; everybody uses them, so there is no big difference between providers. On the other hand, some offerings have user interfaces that cause users to continue to use the one they know. Take something like the Excel spreadsheet platform. It may well not be the most efficient or effective, but once you’ve gone through the trouble to learn its use, the desire to switch to an alternative is muted. Rivals like Google Sheets simply copy the functional aspects, reducing the learning cost involved in switching over to it.

Painkillers or vitamins?: Groundbreaking innovations tend to be major painkillers. They are not merely nice to have, optional or intriguing. They actually solve an immediate, pressing and urgent problem for customers. The cloud-based storage service Dropbox got its start when one of its founders, Drew Houston, happened to be on a bus from Boston to New York, a four-hour ride in 2006. While he was planning to get work done on the ride, he discovered he was missing a critical component—a USB stick with his stored files. That gave him the inspiration to never let this happen again, because documents could be stored in the cloud. The company went public in 2018, and is called “the ultimate tech value stock” by many.

Do we have a chance to take advantage of network effects?: This question gets at whether something about the business offer increases its attractiveness as more users join, more connections are made or more activity takes place, thereby making it increasingly valuable in a self-reinforcing way. This is the secret sauce behind the popularity of platform business models, in which companies try to match two sides of a market and take a little cut of all transactions that happen there. Facebook has been so successful because its users want to be where other users are—and so do advertisers.

This is not always as powerful as it may seem at first. Uber, for instance, is learning, painfully, that the power of network effects is limited because the business is confined to purely local areas. There comes a point at which adding more riders or drivers reaches a point of diminishing returns.

Do we solve a problem once and for all, or is it recurring?: A tricky aspect of capitalism, ironically, is that a business is often better off treating a chronic problem than offering a complete solution to a problem. The result of this is that lasting cures for problems tend to come at a very steep price, as that is the solution provider’s only opportunity to make a profit. For example, the wildly high prices of drugs that cure formerly incurable diseases such as hepatitis-C reflect this dilemma. Once a patient has been through the regimen, the problem is resolved and there is no further need for treatment. But such cures are expensive. A Sovaldi pill for hepatitis-C costs around ₹25,000 and a 12-week course can cost ₹3 lakh. Many SaaS companies follow this model.