Ask any expert for tips on how to start a business, and you’re bound to hear a few good ones focused on business models. And with good reason. A business model is the foundation upon which a successful start-up is built.
Your business model explains the needs of your customers and any pain points they need to solve. It differentiates your offerings. It shows how you’re better and why should someone should pick you vs. the competition. It helps attract customers, investors and shareholders. It opens doors, attracts buzz and gets cash flowing.
That’s why developing a strong business model is the number one priority of entrepreneurs. But why create one from scratch when you can borrow a tested model from the great entrepreneurs?
And the award for the best business model goes to (*drum roll*): Growth first, Profit later
How strong is your desire for instant gratification? If not particularly high, here’s an idea – why not offer your products/services at the lowest industry rates for the sake of growing? Once you’ve captured large market share, change your strategy to make profits.
Instead of going for a niche, go for a large market segment. Offer the same high-value, high-quality customer experience your competitors provide. Except, provide your offerings at the cheapest rates – something your competitors won’t or can’t do. Word spreads. Orders start pouring in. Your start-up grows. You capture market share. Now, it’s profit time!
Expand your portfolio. Arrange volume discounts with suppliers. Use technology to ramp up customer service, your website experience and your response times. Reduce waste from operations. As your volumes increase and your operating expenses decrease, profit emerges. Since you’ve won market share already and are delivering low prices, profits become sustainable.
Brands who’re doing so (and winning!)
Perhaps the best-known start-up with this model is the online retailer Amazon. Since its inception in 1995, Amazon has grown at an average annual rate of 27 percent. Over the last decade, its stock has risen 22 percent annually on an average.
It wasn’t until the early 2000s that the company saw the first signs of profits, but needless to say – it was worth the wait.
Jeff Bezos invested heavily in buying warehouses to stock huge inventory so virtually any book a customer requested could be delivered fast – and cheaply . He earned interest by receiving immediate payment from customers first and paying suppliers later. After achieving enough target mass, he expanded Amazon’s portfolio.
Today, the company sells CDs, electronics, apparel and virtually every other tangible consumer product. It even acts as a platform for affiliates and takes a share of their revenues without handling the inventory. Amazon has survived bubbles, booms, market crashes and everything that came its way for a decade. And it’s here to stay.
In the social media spectrum, start-ups like Instagram and Snapchat are other examples of how the “growth-first-profit-later” model delivers value (ultimately) to entrepreneurs. Early on, both made no profits at all (no revenue in fact), yet are valued at billions of dollars. Why? Because they’re huge! Instagram was sold to Facebook for $1 billion. Snapchat was offered $3 billion as part of a buy-out, which it happily refused. Why are big-name companies paying billions of dollars for start-ups that have no revenue and no profit? They’re doing it for the market share they were able to capture.
If you look back to the early years of Google and Facebook, they were building their brands (offering cheap or free products, high-quality services, etc.) while not being profitable. Because truly, profits can wait. Customers won’t. Focusing on meeting their needs first and being the best product/service provider is a good way to flourish in today’s cut-throat entrepreneurial environment.
It’s not for everyone
Of course, it’s not a model for everyone, especially the faint of heart, the impatient or the broke. For many microbusinesses and solopreneurs, not making a profit from the start is not really an option. Even so, try to avoid grasping at any dollar out there, just for the sake of being “profitable.” Shortsightedness will cost you in the long run, leading to a smaller business (and business model) than you are capable of building.
Photo credit: Erik Söderström
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