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The Two Dimensions of a Business Model

Management consultant Joan Magretta adds another layer of important detail to business models in her outstanding article Why Business Models Matter, which is excerpted from her book, What Management Is. Magretta shows that a business model actually consists of two halves: the numbers side and the narrative side.

The numbers side focuses on financial aspects of the business: do the numbers add up? Can overhead be covered to achieve break-even and then make a profit?

The narrative side covers the underlying assumptions of the plan. Will customers actually buy and why? Will other players whose cooperation is needed in the marketplace actually cooperate with the new venture?

Many rookie entrepreneurs make their fatal planning mistake on the narrative side by jumping to conclusions over the level of support that will be forthcoming from established players in the industry. It pays to be paranoid and automatically assume that others will not be interested in giving you a helping hand in establishing a beachhead in the market.

Magretta illustrates this key point in a story about Priceline’s WebhouseClub. (You can add in other failed buyer aggregators as well such as Mobshop and Mercata.)

“Here’s the story Walker tried to tell. Via the Web, millions of consumers would tell him how much they wanted to pay for, say, a jar of peanut butter. Consumers could specify the price but not the brand, so they might end up with Jif or they might end up with Skippy. Webhouse would then aggregate the bids and go to companies like P&G and Bestfoods and try to make a deal: Take 50 cents off the price of your peanut butter, and we’ll order a million jars this week. Webhouse wanted to be a power broker for individual consumers: Representing millions of shoppers, it would negotiate discounts and then pass on the savings to its customers, taking a fee in the process.

What was wrong with the story? It assumed that companies like P&G, Kimberly-Clark, and Exxon wanted to play this game.Think about that for a minute. Big consumer companies have spent decades and billions of dollars building brand loyalty. The Webhouse model teaches consumers to buy on price alone. So why would the manufacturers want to help Webhouse undermine both their prices and the brand identities they’d worked so hard to build? They wouldn’t. The story just didn’t make sense. To be a power broker, Webhouse needed a huge base of loyal customers. To get those customers, it first needed to deliver discounts. Since the consumer product companies refused to play, Webhouse had to pay for those discounts out of its own pocket. A few hundred million dollars later, in October 2000, it ran out of cash – and out of investors who still believed the story.”

The lesson here is to never assume anything other than a complete lack of cooperation, if not a full assault on your venture, by vested interests. Think about it this way, why would anyone be willing to let a johnny-come-lately shoehorn into their market for a share of their profits?

Generic Online Business Models

Here is an overview of generic business models found on the Internet.

Excellent Resource on Business Modeling for Startups

Modeling techniques can be highly beneficial to startups.

This is an excellent resource and well worth the nominal investment.

More on Business Modeling.

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