A strong and healthy business model supports a small business that is consistently profitable and that can scale.

On this episode Henry Lopez helps you determine if you have a solid business model, whether you are starting your first business or already have an established small business.

Resources:

FREE DOWNLOAD: Business Model Health Checklist

Other Podcast Episodes:

Episode 537: Is Your Business Profitable?

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This episode of The How of Business podcast is supported by advertiser Amazon DSP.

The Amazon Delivery Service Partner Program (or Amazon DSP) is designed to empower leaders who want to launch and operate their own delivery business.

Amazon DSP empowers leaders like you to launch and operate your own delivery small business, and work with Amazon to make an impact on your community.

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Learn more about the Amazon Delivery Service Partner Program, and apply today at: Amazon DSP

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Transcript:

The following is a full transcript of this episode. This transcript was produced by an automated system and may contain some typos.

Henry Lopez (00:11):

Welcome to the How of Business Podcast. This is Henry Lopez, and on this episode, I hope to help you answer the question, is your business motto broken? How can you tell and how do you fix it? And what do I mean by a business model? Well, a strong and healthy business model supports a business that is consistently profitable and that can scale. And so on this episode, I hope to help you determine if you have a solid business model, whether you’re starting your first business or already you have an established small business. To get more information about how a business, including the show notes page for this episode, and to learn more about my one-on-one coaching program and group coaching programs, please visit the how a business.com. I also encourage you to please subscribe to my show wherever you might be listening so you don’t miss any new episodes.

Henry Lopez (00:56):

I would also like to thank a few of my recent coaching clients, including Randy and Kevin, Adam and Jennifer. I appreciate the opportunity to serve as your business coach and to help you launch and grow your small business. I encourage you to download my business model health checklist. You can download that from the show notesPage@thehowabusiness.com. And as you go through this checklist, it’ll help you determine how healthy, how strong is your business model, and what areas do you potentially need to improve. So go look for that at the how a business.com on the show notes page for this episode. So let’s start with what is a business model. Give you a further definition of what I mean by that. A business model is a combination of the core strategies and the tactics that a small business executes to make a profit. That’s why we’re in business to make a profit.

Henry Lopez (01:42):

It’s how that business creates, delivers and captures value, which is again, a fancy way of how do we generate a profit through what we offer to our market and the profit generated by this business model. It has to be sufficient. It has to be consistent. So it can’t be every once in a while, or maybe last year we had a profit, but this year we don’t. It needs to be consistent and it needs to be enough. It needs to be sufficient to justify the effort that we’re putting into the business and the risk that we’re taking on by operating this business. So some components of it to think about further the business model. What makes up a business model is certainly everything that includes your value proposition. So the value that you’re offering your customers or your clients or your patients, the customer segments that you focus on, your channels, your relationships with vendors, with customers, the different product lines or revenue streams that you might have, key resources that you may have partnerships, and then the overall cost structure, what it takes for you to deliver, to make perhaps, and to deliver that product or service that cost structure and more importantly, how the business expects or does generate a significant profit and is able to scale.

Henry Lopez (02:57):

So a viable business model is one that allows your business to make a consistent and significant profit. A significant is relevant obviously, but significant enough that it’s worthwhile and that your business can scale, that it can grow, that the model allows for growth. So an example of that is if you are in a business where it’s just yourself, you’re a solopreneur and you’re offering a service, for example, where you’re trading dollars for hours, not that that’s a bad thing, but that doesn’t scale beyond the hours that you have available to offer for a service and to charge for. So you’re limited there. It does not scale. Now that doesn’t mean that it doesn’t work or doesn’t work for you, but what we’re looking at here is that component as it relates to determining do you have a healthy scalable business model and is it consistently profitable?

Henry Lopez (03:47):

So that’s what we mean by a business model. Now, what’s the difference between a business idea and a business model? For those of you who have been listening to my podcast for some time, you probably have heard me talk about the difference between an idea and a business model. In my experience and opinion and observing others. The idea part, relatively speaking is the easier part. I’m not saying it’s easy, but it’s easier than the business model side or how we’re actually going to bring that to market and sell our offering in a profitable way. That’s the harder part. So the business idea is what you do and the business model is how you do it and how you do it must be something that results in profits, significant profits, and again, the ability to grow or scale. So that’s the essential difference. A business idea is that initial concept or the innovation, the innovative solution that a business plans to bring to market.

Henry Lopez (04:40):

For those of you who are planning to bring a business to market, if you’re already in business, the business idea is what you’re currently making and selling your current offering. It’s what your business does or what it currently offers for sale. For example, a business idea could be developing a computer app that connects freelance interior designers with residential clients. That’s an idea for a business. Now, a business model by contrast, while the idea is the what of the business, the business model again is the how. It is the details of how the business idea will be executed, monetized, and sustained. The business model explains the practical aspects of bringing the idea to life, of generating revenue and of ensuring profitability and scalability. So using the previous example, the business model would outline how that app that I’m going to develop will attract interior designers and clients.

Henry Lopez (05:33):

What fees will it charge and how will it make a profit and how will it scale? That’s the business model side of it. And not every idea can we find a viable business model for now. What happens often, and this is really the most common situation for us as small business owners, is we have an idea that we’re passionate about. We don’t do the proper planning to develop or understand if it’s possible to have a business model that can be profitable. And so we go into it anyway. We invest money in, of course, lots of time and effort, and then we find ourselves a year later still struggling two years later, still struggling without a solid business model that you either project if you’re starting a first business or that you analyze and perfect. If you’re an existing business owner, you may well end up with a lower paying job than the one you left to start the business and nobody wants that.

Henry Lopez (06:24):

So a business model is important because of the sustainability of the business. So a well-developed business model ensures that the business can sustain itself financially without us having to continue to put money into the business. It has clarity and focus. In other words, this business model, it provides a clear roadmap for the business helping us to align efforts and resources towards a common goal. And if this is starting to sound a lot like a business plan, there’s overlap here because your business plan, if you’re starting a first business, should include all of these things. It is the description of not just the idea, but how you will execute on that idea. In other words, the business model. And if you’re an existing business owner, this might be your strategic plan. Competitive advantage is another component. So a strong business model can differentiate your business from your competitors through your unique value proposition and perhaps very efficient operations, let’s say.

Henry Lopez (07:15):

So in essence, while a business idea is crucial, of course for starting a business as a starting point, the business model is what transforms that idea into a viable and profitable enterprise. So how do you know if you have a strong or a viable business model? One place to start I would suggest is by asking yourself these three questions, whether you’re starting a business or running an existing business, just kind of adjust the way you asked the question, but they all three apply. Number one, are you making a profit? So after that initial startup phase, and hopefully you’ve projected that in your financial projections, once you get to consistent breakeven, are you then consistently making the profit that you projected when you did the planning or that you adjusted for? And it is typical for your industry or your segment. That’s why it’s so important to understand your numbers, your financials, and if possible, be able to compare yourself to others in the industry.

Henry Lopez (08:09):

The other question related to making a profit is your cost structure too high, so high that you can’t raise prices even to make up for it and there’s not enough profit? I keep coming back to the point of profit and scale because that’s at the heart of it. Or maybe you can’t generate or maintain enough volume to make tight margins feasible. Perhaps the business that you’re in is very slim margins, very low margins, which the only way that that works is with sufficient volume, high enough sales, and you can’t get there for all kinds of possible reasons. So if you’re making a small profit but not enough to justify your effort and the risk and you’re making considerably less than you were in your previous job, well that’s not sustainable. That’s not a business that has a solid business model. And also, if you have to keep investing cash into the business or you have to keep borrowing money either against a line of credit that gets increasingly larger and you keep having a hard time getting it paid off or whatever combination of other sources of money has to be added back into the business beyond reinvesting the profits of the business, well, this is probably a business that’s not making enough of a profit.

Henry Lopez (09:16):

Now, you might say, Henry, that’s obvious. My point is here that this question, are you making a profit, is one that you seriously have to analyze. And if you’re not after enough startup time after the right amount of investment, then your business model may be broken and there may not be much you can do about it without major adjustments to your business model. Question number two, to ask yourself to determine if you have a strong or viable business model is can you scale? Is it possible for you to grow your business? Or maybe it’s not possible because the market that you’re in, is’ it big enough or the product or service that you offer has a limited market or that market is eroding? Let’s say, does your business depend on you or a few key people? Is it depending on a specialty that only you can deliver or are you the only contact or person that your key or larger clients will do business with?

Henry Lopez (10:08):

Are you trading dollars for hours? As I mentioned earlier, again, nothing wrong with that if that’s the business that you want. If you’re a solopreneur and that’s the height to which you want to scale, nothing wrong with that. Plenty of people that make a very good living doing that. But if you’re looking to build a business, if you’re looking to become an entrepreneur or you’re growing beyond the hours that you have to offer, then the business has to be able to scale. It has to be able to generate revenue without you, meaning, without you being the only person that delivers the product or the service. And what happens if you’re away from the business? When was the last time that you took? For those of you who have a business already, this is the last time you took a full week truly away from the business and what happened while you were gone?

Henry Lopez (10:52):

This is Henry Lopez with a brief break from this episode. To share a business opportunity with our show advertiser, the Amazon Delivery Service partner program, the Amazon Delivery service partner program or Amazon DSP, is designed to empower leaders who want to launch and operate their own delivery business. Amazon DSP empowers leaders like you to launch and operate your own delivery small business and work with Amazon to make an impact on your community. Since Amazon DSP launched in 2018, over 3,500 delivery service program partners have built their own business with Amazon across 19 countries, creating over 275,000 jobs and delivering over a billion packages to customers around the world. Amazon is looking for hands-on owners with grit who want to hire and motivate a high performing team of local delivery associates. No existing logistics experience is required, but it is helpful to have great customer service skills and experience managing a team. By partnering with Amazon, you’ll have access to deals, services, and best in class technology at every stage of your business, and the Amazon DSP team will provide ongoing support as you work to launch and grow your delivery business. Learn more about the Amazon delivery service partner program and apply today at amazon.com/radio. That’s amazon.com/radio. You can also find the link on the show notes page for this episode@thehowbusiness.com.

Henry Lopez (12:25):

So that’s question number two. Can you scale this business or is the model such that it just does not lend itself to scaling? Now, you could argue that what you offer is a premium product. You only need to sell a few of them and you can make a handsome profit. Great. Those are exceptions, but by and large, for us as small business owners, we have to really analyze can the business scale and can it scale without me having to be in the business day to day? Question number three, to ask yourself to determine if you have a strong and viable business model is can you compete? Are your competitors executing better than you, including perhaps maybe they have economies of scale that you are just not going to get to. So a big player comes into your market offering what you offer, and they can do things like they have more resources, they have more marketing dollars, they can offer it at a cheaper price.

Henry Lopez (13:15):

Are you having to compete almost exclusively on price? If your value proposition or what you’re having to lead with to win business consistently is to discount or to lower your price, that is not sustainable unless you can get to a certain level of scale, right? And there’s always exceptions here, but it’s pretty hard to out Walmart. Walmart or out Amazon. Amazon, right? It’s very hard for us as small business owners if all we’re competing on is price, at least for the long term. It really hurts your business model from it being able to consistently produce a profit and also to be able to scale. Also, are you able to compete for the best employees, especially in this tight labor market? Are you losing best employees, either candidates or existing employees because you can’t afford competitive wages or benefits? Of course, these are all tied together.

Henry Lopez (14:07):

Number one, are you making a profit? Can you scale and can you compete? They’re all intertwined, but hopefully about asking yourself those three high level questions. Are you making a profit that’s consistent and that’s significant enough? Can you scale the business in particular? Can you scale beyond just you making the donuts every day and can you compete? And the competition part can change on us. I’ve worked with people and I’ve had the situation myself where I went into the market initially and everything was great, but then competition comes along and it’s always going to, if you’ve got something good, somebody else will come in and try to take that business from you. And sometimes we can defend against that and other times we cannot. And that’s a hard reality to face, but it is what happens in a lot of businesses. We just have to be honest with ourselves as to, okay, now what do I do?

Henry Lopez (14:56):

I can’t compete head to head with this new player or combination of players. What do I do? So what do you do if your business model is broken or isn’t healthy? First of all is to start identifying maybe of those three areas, profit, scale, competition, which one of them is my biggest problem because I think that if we can isolate it as opposed to try to fix it all at once, we might have better success. And hopefully it’s in one of those areas that we can make an improvement or perhaps a complete pivot and have a significant impact on changing our business model for the better. Perhaps we need to develop new lines of business or service offerings. We may need to get out of certain product lines or service offerings that are no longer competitive, that are no longer profitable. We may need to completely change our business model, and that is a hard thing to do.

Henry Lopez (15:46):

But how we go to market might need to be completely changed because that’s where the market has moved to because that’s where stronger competition has shifted it to because the tastes or appetite of my market has changed because the demographics of where I might be physically have changed. All of those are reasons why I might need to significantly change my business model, reinvent the business, and then one of the hardest decisions we have to make sometimes, is this business viable or do I need to exit the business? And I know nobody wants to hear that. Nobody wants to do that. I’ve had to do it a couple of times in my business career and it’s extremely painful. It’s embarrassing. You’re going to lose money, of course. Typically, it’s probably the hardest decision in my experience that a small business owner has to make. But the alternative that I see people do or take rather, is to continue to work at it, continue to bang your head against a wall, continue to make little to no money, continue to drain your savings or your personal resources.

Henry Lopez (16:49):

Continue to let that stress eat away at you and your family. Continue to reinvest in something that is not going to get there no matter how hard you try. And it’s hard for us to accept that because we feel often, I know I do that well, if I just work harder at it, if I put in more hours, if we just can get through this season, we’ll turn the corner and maybe you will. And certainly I’m all about not giving up too soon, but at some point, and I think ideally, you need to get help with this decision. It’s time to limit your exposure there, cut it off and move on to the next thing. As painful as that is. Now, I’m not saying that’s the only solution for a broken business model. I’m saying that that’s something we always have to consider after enough time that you’ve given a business model and it’s just not working.

Henry Lopez (17:34):

It’s not generating profits consistently, and it’s not scalable beyond you, but it could be that you can fix it. Maybe you need some help to fix it, maybe you can’t see what needs to be fixed, and so you bring in someone to help you with that. All of those things are things that I want you to try first, obviously before you decide to shut down or maybe sell parts of the business. So key takeaway here on this topic of is my business model broken? A great business idea is not enough. You must also have an underlying, solid, strong business model. The business idea, again, is what you do and the business model is how you do it and how you do it must result in profits, significant profits, and the ability to scale or grow the business if you want to. So start by carefully.

Henry Lopez (18:22):

If you’re starting a first business, start by carefully planning and validating as best you can. It is a projection but projecting what that business model should be able to produce. That’s what the business plan is for. And specifically, that’s what the financial projections are for. And ideally, as you’ve heard me talk about many times, if you’ve listened to other episodes, take the MVP approach, the minimally viable approach. So if you’re starting your business, start as small as you can to validate that business model to validate the people will in fact pay for this and pay enough to make it profitable and worthwhile enough for you to deliver that product or service and then grow from there. Be honest. For those of you who are currently business owners, be honest about assessing your current business model. Where are you really? Ask yourself those three questions that I posed, which are, are you making a profit?

Henry Lopez (19:12):

Can you scale? Can you compete? And if you can’t do those things consistently and you’ve been trying for some period of time, then it’s time to honestly assess and reassess, fix it now. So if there are opportunities in those areas, something that you could change, a product line that you want to get rid of because it’s not profitable, a new service line that maybe is related or complimentary, do it quickly. Although you want to test it, of course, you don’t want to wholesale make a change without validating it to some degree, and you may have to make that hard decision of changing entirely the business model and reinventing the business, or sometimes we have to abandon the current business model altogether. As hard as that might seem. The sooner you identify that your business model is broken though, the more opportunity you have to hopefully correct course and get it turned around so that you do end up with a solid business model. And don’t forget to download the Business Model health checklist to help you with assessing the health of your business model. You can find that checklist at the notes page with this episode@thehowabusiness.com. This is Henry Lopez, and thanks for joining me for this episode of the Howa Business. I wish you the best as you start and grow your profitable and scalable small business. I release new episodes every Monday morning, and you can find the show anywhere you listen to podcasts, including the How of Business YouTube channel, and at my website, the TheHowOfBusiness.com. Thanks again for listening.