Startups must take a closer look at their business models

Published: Sun 17 Dec 2023, 9:10 PM

Some business models are inherently more attractive than others, yet stakeholders often don’t ask the right questions

By Rita McGrath & M Muneer

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More than 95 per cent of startups fade away before the first five years and even more the next 5. As part of a few startups that survived these two landmarks, we can tell you how important it is to constantly look at your business models and make corrections.

Some business models are inherently more attractive than others, yet stakeholders often don’t ask the right questions. It may be because either it is perceived as complicated or too much work. For those looking for a quick overview of what makes one model superior to another, here are six key questions. Dubai Next will want to use this model for improving the mortality rates of cohorts.

Q #1: Does the initiative create a platform for interactions?

As the value of products and services becomes subsumed by data-driven digital networks, the importance of having some kind of platform strategy increases. A standalone offering, while not necessarily a bad thing, doesn’t offer the exponential growth potential of many platform business models. Michael Bloomberg made his fortune with the creation of the Bloomberg Terminal, providing information for traders at the tips of their fingers. More importantly than the technology, were the social interactions fostered by it, making the technology irresistibly sticky for its users, commanding a premium price.

Q #2: Does it matter?

Many entrepreneurial businesses have failed because the improvement they promised their customers lives is marginal or insufficient to overcome the inertia of simply continuing to do what the customer has always done. Groundbreaking offerings make a material difference to what the customer is able to do or the problems that can be solved in a noticeable way. Wise was able to offer the equivalent of foreign exchange trading for a really noticeably lower price than a similar offering by your bank. The result has been massive customer adoption and substantial growth.

Q #3: How interchangeable is our user interface?

Some user interfaces 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 it, the desire to switch to alternatives is muted. Offerings like Google Sheets simply copy the functionality in the same way, reducing the learning cost to switch for new users.

Q #4: Once and done, or ongoing problem?

A tricky aspect of capitalism is that ironically one is often better off treating a chronic problem than when offering a complete solution to a problem. The result is that true cures for problems tend to come at a very steep price, as that is the providers’ only opportunity to make a profit. For example, the wildly high prices of drugs that cure formerly incurable diseases such as hepatitis reflect this dilemma. Once a patient has been through a regimen, the problem is done and there is no further need for treatment. But the cost of the cure is expensive. One Solvaldi pill costs US$ 1000 – a 12-week course will run a patient US$ 84000!

Q #5: Transactional or relationship oriented?

This factor gets at all those intangibles that surround an economic transaction. If you’re buying a commodity whose prices are known, there’s no need to establish a relationship with the seller. If the purchase is high-risk, or the need for customisation is considerable, the quality of the relationship between buyer and seller takes on a larger significance. To the extent that there is an emotional and economic benefit to the purchase, there is often greater willingness to pay higher on the part of the customer, and the relationships tend to be stickier.

Q #6: Lone ranger or co-created?

While the popular imagination just loves the idea of Steve Jobs arriving on a clamshell and single-handedly inventing uniquely desirable products that change the world, such standalone approaches to innovation tend not to work. Instead, the more powerful models today are bringing together communities of participants – users, developers, makers, designers and more – to envision and create new offerings. Once you are part of the community, it becomes very difficult to leave it, particularly if you had a hand in creating key aspects.

Rita McGrath is professor at Columbia Business School and founder of Valize, and M Muneer is Fortune-500 advisor, startup investor and Co-Founder of the non-profit Medici Institute for Innovation. Twitter @MuneerMuh


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