When you are thinking about starting a business, investing enough time in identifying a viable business model is a critical first step. If you overlook this step, you may undermine your chances of success—even if your product or service has excellent, sustainable demand in the marketplace. If you have not yet finalized your business model, it is always a good idea to know what to avoid.
Here are a few of the worst business models.
A model that does not factor in market saturation
This is the problem with Groupon and similar businesses. They started big, in a field that was more or less unexplored. The good news was, they quickly gained ground and achieved huge market share. Until that point, everything looked great and the business kept growing by leaps and bounds. But then the shopper community as well as merchants reached the saturation point and the troubles began. This was not something that the daily deals business model had planned for early on.
Despite the fact that the business model was based on the winning idea of zero inventory and healthy margins, it still turns out to be unsustainable in the long term. The business owners did not think far enough ahead and plan for this situation.
A model that focuses on cutting costs
A business model that prioritizes on cost cutting turns out to be an unviable one too. While cutting costs or keeping costs at a reasonable level is a worthy goal, too much emphasis on cutting costs may negatively impact the business’s purpose. In fact, at some point of time, all operations may be aligned to achieving cost efficiencies rather than delivering products/services that are marketable. A business model that focuses on delivering value rather than cutting costs is more likely to be successful than one where an overdependence on cost reduction slowly distorts the business’s entire strategy.
A model designed without adequate consumer research
A product/service may be attractive to the marketplace in the initial period after its launch. Consumers may even line up to buy it at the price you quote. However, once the initial euphoria fades away, will the market still be willing to pay? A business model that does not explore this question is bound to fail shortly after the launch phase. Existing and new competition in the marketplace and the intensity of sustained demand (or lack thereof) are factors you need to carefully consider during the planning stage.
Even the biggest names in business have their share of disasters when it comes to trying out innovative ideas. Microsoft’s Encarta is a good case in point.
As an entrepreneur, you need to pay special attention to your business model to ensure it can weather the inevitable ups-and-downs of market trends and public perceptions.
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