“Most businesses fail because the business model does not work,” that’s was the opening line from John Mullins, co-author of “Getting to Plan B” in last night’s talk to Edinburgh University’s E Club. “Business plans are full of naive and unfounded assumptions“; by spending great effort on a very detailed business plan it’s unlikely to make it any more correct. (It maybe makes it more accurately incorrect?) The good news is that it’s usually your Plan B that works.
PayPal is a great example of this. They started out writing software for Palm Pilot’s to let users transfer money wirelessly (by infra-red) from one PDA to another. In fact the PayPal we all now use came along much later, after a few subsequent plans had been tried and none had yielded any potential.
Getting to Plan B is thankfully what small entrepreneurial companies are good at. While large companies may have the resources to invest and try new ideas they are usually so committed to the very well thought out Plan A that they will not deviate from it. Even when it’s clear to all that it’s not working, they won’t adapt to the business model that might just have a chance of succeeding.
So what are you to do?
Admit that there’s too much you don’t know about your new business, so:
stop working on your plan;
start working on your business.
The question you should address is, can I innovate on the business model in any of these five areas:
- What is your revenue model?
- e.g. Shanda (online gaming in China) – give away the game for free but make money from charging users for in-game purchases, such as weapons, clothes, etc.
- What about the gross margin?
- e.g. ebay – the gross margin is huge thanks to minimal costs of sale
- Other operating costs?
- e.g. Ryanair – their success has come from having the lowest operating costs of any airline
- Working capital innovation?
- e.g. Costco – a major part of their revenues comes not from the retailing but from annual membership fees paid by customers. This is money upfront and funds new store openings.
- Investment model?
- e.g. Vonage vs. Skype. Vonage spent $246M on marketing in year one to bring in around 1.5M customers, compared to Skype who spent nothing and achieved 7M customers.
Most examples are limited to one type of innovation at a time, but some companies have succeeded with a multi-dimensional approach. e.g. Zara
Which of these can you use in your business?
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John Mullins is an Associate Professor of Management Practice and holds the David and Elaine Potter Foundation Term Chair in Entrepreneurship and Marketing at the London Business School. John appeared in Edinburgh as part of the Silicon Valley speaker series organised by Michael Clouser of the University of Edinburgh Business School and was co-sponsored by The Edinburgh Entrepreneurship Club, the School of Informatics and Informatics Ventures.
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