One of the most important steps you need to take when starting a business is developing a viable business model. Do it right, and you’ve taken the first step toward entrepreneurial success. Do it wrong and you’re setting yourself up for failure.
Despite the real or self-perceived high-quality of your products or services, or the current demand in the marketplace, basing your startup on a poor business model is a recipe for disaster.
Business Models – The good, The Bad And The Ugly
The best business models are profitable, sustainable, ethical and of course legal. The worst business models are the opposite of those things. Unfortunately, there is such a thing as the worst business model, which can be very easy to develop if you do the following things:
- Skimp on consumer research
Detailed consumer research will give you a better idea of the long-term profitability of your startup. You want to know if your target market is willing to pay for your startup’s offerings, even after any initial frenzy has subsided. Many businesses fail after the initial launch phase, due to poor consumer research.
- Be laser-focused on slashing costs
Sure, you want to be profitable from the start. However, if you focus heavily on cutting costs, you’ll end up negatively impacting other important goals like quality and value. Plan to measure the success of your startup in terms of other metrics like customer satisfaction and referrals, instead of just revenue. Remember, money spent on things that increase customer satisfaction and improve your product/delivery/service is worth it.
- Ignore market saturation
Say you have an idea for a relatively new and unexplored market. If your products and services are good, chances are you’re going to grow and become successful, but for how long? What happens when the appeal of the market attracts other entrepreneurs to compete against you? What happens when the market is saturated? When you plan for sustainability and factor in both future competition and market fluctuations, you plan for success.
Three of the Worst Business Models in the World
We’ve written before about some of the worst business models. Here are three more examples of the types of bad business models to avoid…unless you don’t mind failing after some time.
1. One where you rely heavily on advertising
A business model that relies on non-organic sources (primarily advertising) for the generation of 50 percent of its revenue (or more!) is the worst business model for a startup. To ensure you’re not choosing the worst business model ever, ask yourself – what is the primary source of cash inflow for your startup? Not only is advertising less profitable (people actively avoid ads), advertising-based revenues are more difficult to generate and, for the most part, unsustainable.
2. One where you sell your time
What makes this business model one of the worst is the limits it puts on your revenue potential. Even if you charge high rates when selling your own working time, there’s a ceiling on the number of hours in the day and therefore how much you can make. Additionally, you won’t be creating any real asset(s) that can be sold later, since all you’re really selling is your own time. However, since businesses based on trading hours-for-dollars require very little investment, many people do consider starting out this way, while actively planning on ways to move to evolve their business to a more sustainable model.
3. One where you have to invest heavily to start up
Fancy restaurants and brick-and-mortar retail stores are two examples of startups requiring high upfront investment costs. What makes them among the worst is their cost-intensive labor and high turnover. You also have to factor in legal costs, competition (especially online competition for retailers), regulatory issues and an array of growth challenges.
What’s Your Experience?
Have you made mistakes early on as an entrepreneur? What did you learn to avoid in order to be successful the next time you started a business?
Photo credit: Nicholas Echkhart
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