How to Choose a Business Model That Actually Makes Money

How to Choose a Business Model That Actually Makes Money

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Figuring out the right business model means making a difference, not making widgets.

Nearly 20 years ago, as a reporter at The Wall Street Journal covering the travel industry, I encountered a particular species of entrepreneur: guys with a niche. These were guys–always guys, for some reason–who had found angles in very messy industries, creating faster billing systems for auto rental companies, for example, or converting frequent-flier miles to cash with a nice margin. These weren’t revolutionary ideas, but they made money. These guys grabbed a slice of the action, and they had the pinky rings to prove it.

I admired their savvy, but could never imagine doing what they did. That’s not how my brain works. Still, these days I often find myself thinking about those guys, with more than a little respect for their guile. At my startup, Iodine, we’re working out our business model, and our approach is the exact opposite of the one those guys took.

We started Iodine to build something lots of people would want to use; figuring out how to get paid for it came later. This approach was necessary because we’re in the health care industry; conventional wisdom holds that consumers are reluctant to open their wallets for health care (as compared, say, with diet or fitness products). The only people who’ll pay for health care are those already footing most of the bill: insurers and self-insured employers. If we want to get paid, we have to build something so good that insurers and employers can’t not pay us to give it to their people.

But having a target customer isn’t the same as getting paid. To do that, we must prove ROI. We’ve spent hours on spreadsheets, trying to link our consumer metrics (great website traffic, growing app downloads, solid user retention) to a clear cost benefit for insurers and employers. But all those metrics are just model airplanes until some brave soul is willing to take a flier.

Thankfully, it turns out insurers aren’t the only stakeholders that benefit from our products; other potential customers, from pharmaceutical companies to physician groups, have knocked on our door, hoping to bring our technology to their people as well. It turns out, having a product that is actually useful does help you sell it.

Unfortunately, these other customers come with tradeoffs. First, we need to make sure we don’t settle on a business model that brings in revenue but stops us from us scaling as much as we originally intended. This would not only sell our ambitions short; it would also fail to attract the investment capital we require to fulfill those grand ambitions.

Second, we want to choose a business model that complements our business strategy. Choosing the first paying customers might make it impossible to do business with other, preferable companies. Or worse, choosing the wrong customers could force us to solve their problems, rather than the problems we set out to solve. I’ve heard plenty of stories of entrepreneurs who were relieved to find their business model, only to realize they’d committed to making widgets instead of making a difference. As entrepreneurs, we need to think through the implications of where a model will lead–and whether that’s where we had intended to go.

The model chase, it turns out, besides being a frenetic search for a way to make money before the bank account runs dry, is a race to prove that your beautiful vision can survive the hard heat of the marketplace.

Sometimes, I envy those guys with a niche, who had their angle figured out before they began. Still, I’m glad we didn’t start Iodine with some sure-fire approach; for me, this is part of the fun of entrepreneurship.

[Inc]

April 5, 2016 / by / in , ,

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