At the essence of every great business idea is consumer value. Without any form of value, any business idea might as well be thrown out with the trash. Chances that a consumer will exchange money for anything will dramatically increase when the value of what they’re paying for is discernible. Just think back to the last time you made a purchase for a non-essential item: what was going through your head? For young entrepreneurs and startups, giving value to your consumer is what is going to win you that consumer, not just for the sale, but for life. You have to come up with a business that will make them feel that there is so much value in doing business with you that they would never even think about going elsewhere. Why? Because with value comes happiness, and with happiness comes loyalty. It is a beautiful circle.
Sounds easy, right? Well, in some cases, the answer is yes, but in most cases, the main cost of delivering increased value is a little bit more attention to detail as well as a greater investment of time in creating a value-based business idea.
In his book Personal MBA, Josh Kaufman brings to light twelve standard forms of business value and in this post I’ll adopt and expand them to give you the 10 Basic Models of a Great Business Idea for your startup:
“When the product is right, you don’t have to be a great Marketer.”Seth Godin, Author & Marketer
A product is defined as any tangible item or entity sold and delivered for more than what it cost to make. A product can be physical or in virtual or cyber form. Products can be duplicated and multiplied, and therefore scale better than other forms of business value.
For a great business idea to make money out of selling products, you must create something of value that people want to buy, produce it as inexpensively as possible while also having an acceptable quality, sell as many units as possible, at the highest price possible for the market and also be able to keep an inventory to deal with future orders.
A bottle of sanitizer is a good example of a product. You have to put together raw materials that make the liquid, bottle a certain quantity, pack it in boxes or cartons and ship to retail stores in sufficient quantities before reaching buyers. Leave out any of these steps and consumers wouldn’t be able to buy a bottle of sanitizer. To make money, the sanitizer bottle must be sold for more than it cost to make, package, and distribute.
Products can be durable, like masks, bicycles, computers, and vacuum cleaners. They can also be consumable: goods like goats, apples, donuts, and prescription medications are products as well. Products don’t have to be physical—even though things like software, e-books, and MP3s don’t have a distinct physical form, they are entities that can be sold.
A great business idea that provides value in Product form is valuable because Products can be Duplicated. The formula of a sanitizer is only mixed once, but duplicated and delivered millions of times to consumers around the country. As a result, products tend to Scale better than other forms of value, since they can be Duplicated and/or Multiplied.
“Wealth, like happiness, is never attained when sought after directly. It comes as a by-product of providing a useful service.”Henry Ford
A Service is defined as help or assistance charged for a fee in exchange of the benefits rendered. To create a great business idea that will provide value via services, you must consider providing some type of benefit to the user.
A great business that’s successful in providing services for money should have employees capable of a skill or ability other people require but can’t, won’t, or don’t want to do themselves, ensure that the service is provided consistently with high quality, and also be able to attract and retain paying customers.
A good example of a service business is an online class. A lesson is not a product: you can’t purchase one from a shelf. The service is the series of words and instructions the teacher uses to inform, educate and transform your current knowledge skill into the one you desire.
Services can be lucrative, particularly if the skills required to provide them are rare and difficult to develop, but the trade-off is that they’re difficult to duplicate.
Services typically depend on the service provider’s investment of time and energy, both of which are finite. A teacher can only complete so many one-hour lessons on any given day.
If you’re developing a great service business idea, be sure to come up with a charge that will compensate for the time you’ll be investing on a daily basis in providing the service to your customers. Otherwise, you’ll discover that you’re working too hard for too little a reward.
“I grew up in Russia. We had a telephone line, but a load of our neighbours didn’t. It became a shared resource for the whole apartment complex. People would come and knock on the door and ask to call their family in another city.”Jan Koum
A shared resource is a durable asset used by many people, with each paying a set fee to access or use it. You can invest initial capital in creating the shared resource once, then charge your customers for its use.
If you’re considering a great business idea that creates value to customers via a shared resource, you must consider creating an asset people want to have access to. You’ll be serving as many users as you can without affecting the quality of each user’s experience. Think about charging enough to maintain and improve the shared resource over time.
Bike sharing is a modern example of a Shared Resource. Your company may purchase forty modern bikes, build base stations and invest in security and management systems that track their use. Just like NYC’s Citi Bike, US’s largest bike share program, with 14,500 bikes and nearly 900 stations across Manhattan, Brooklyn, Queens and Jersey City.
The program’s members benefit by being able to access this equipment without having to purchase it themselves—instead, they pay an access fee, which is much easier for an individual to afford.
Businesses like museums and national parks work in much the same way. Whether it means renting a range rover or sitting on a bus to Mbarara, Shared Resources allow many people to take advantage of experiences that would otherwise be too expensive.
The tricky part about offering a Shared Resource is carefully monitoring usage levels. If you don’t have enough users, you won’t be able to spread out the cost of the asset enough to cover up-front costs and ongoing maintenance.
If you have too many users, overcrowding will diminish the experience so much that they’ll become frustrated, stop using the resource, and advise others not to patronize your business, diminishing your Reputation.
When forming your great business idea, it’s important that you find the sweet spot between too few members and too many to make a shared resource work as a valuable business.
“Cancel my subscription to the resurrection.”Jim Morrison
A subscription business offers tangible or intangible predefined benefits on an ongoing basis in exchange for a recurring fee. The actual benefits provided can be the expectation of additional value to be provided in the future, or that fees will be collected until the subscription is canceled.
A successful subscription business idea must consider providing significant value to each subscriber on a regular basis, building a subscriber base, and continually attracting new subscribers to compensate for attrition, billing customers on a recurring basis and also retaining each subscriber as long as possible.
Video-on-demand (VOD) content service like Netflix is a great example of a modern subscription business. After signing up, the company will continue to provide video content as long as you make the payments. You don’t have to call up the company every month to buy another thirty days’ worth—the service continues as long as the invoice is paid.
Subscriptions are an attractive form of value because they provide more predictable revenue. Instead of having to resell to your existing customers every day, subscriptions allow you to build a steady base of loyal customers over time. This model ensures a certain level of revenue coming in each billing period.
The key to subscription offers is doing everything you can to keep customer attrition as low as possible. As long as you continue to make your customers happy, only a small percentage of your customer base will cancel each period, giving you the ability to plan your finances with more certainty.
Your subscription as a great business idea will overcome subscriber attrition by providing continuous value and signing up more customers.
“The big money is not in the buying and selling … but in the waiting.”Charlie Munger
To resale is to purchase an asset from one business and later sell it at a higher price. A classic example is a piece of land or retail product. Resale relies on helping wholesalers sell their products without having to identify, market, and sell to individual customers.
Resale is how most of the retailers, like your favourite supermarket, work: they purchase what they sell from other businesses, then resell each purchase for more than it cost.
To successfully start reselling as your new business idea, you’ll have to consider purchasing a product as inexpensively as possible, usually in bulk, keep the product in good condition until sale—damaged goods can’t be sold, find potential purchasers of the product as quickly as possible to keep inventory costs low, and you’ll be selling the product for as high a markup as possible, preferably a multiple of the purchase price. For example, you can buy bicycles at UGX 200K each and resale at UGX 300K each.
Resellers are valuable because they help wholesalers sell products without having to find individual buyers. To a farmer, selling tomatoes to millions of individuals would be time-intensive and inefficient: it’s far better to sell them all to a supplier chain and focus on growing more tomatoes. The supplier then takes the tomatoes into inventory and sells them to individual consumers at a higher price.
Major retailers like Shorite and Capital Shoppers, book retailers like Aristoc, and hardware stores like Seroma work in fundamentally the same way: purchase products at low prices directly from manufacturers, then sell them for a higher price as quickly as possible.
Sourcing good products at low prices and managing inventory levels are the keys to reselling. Without a steady supply of sellable products at a low enough price to turn a profit, a reseller will have a hard time bringing in enough revenue to keep going.
Accordingly, when crafting your retail business idea, you’ll have to primarily establish close relationships with the businesses that will supply your stock to ensure your business continues to get a reliable supply of good products at low prices.
A Lease business involves acquiring an asset, then allowing another person to use it for a predefined amount of time in exchange for a fee.
The asset can be pretty much anything: Apartment, Artificial Flower Trees, Audio/Video Equipment, Baby Furniture , Car, Book, Camera And Accessories, Carpet Shampoo Machine, Coffee Machine, Conference Room, Construction Equipment, Costume, Dumpster, Electric Wheelchair, Gas Cylinder, Home Appliances, Luxury Bus, Multimedia Projector, Musical Instrument, Office Equipment, Office Space, Popcorn Machine,Truck Rental,Video Game, Virtual Office Space.
As long as an asset is durable enough to survive rental to another person and return ready for reuse, you can lease it.
To start successfully and survive, your lease business idea will have to take into consideration acquiring an asset people want to use, leasing the asset to a paying customer on favorable terms and protecting your new business from unexpected or adverse events, including the loss or damage of the leased asset.
From leasing, your customers will benefit from being able to pay less than the outright purchase price of the asset and yet have full access to use. They may not be able to afford to spend millions of shillings to build a modern office space, but for a few hundred thousands a month, they can certainly lease or rent one. After their lease is up, the asset can be leased by the owner to someone else.
When pricing your lease, the business idea must ensure that the revenue from the lease covers the purchase price of the asset before it wears out or is lost. Most assets have a limited useful life, so you must charge enough to bring in more revenue than the purchase price before the asset loses its value.
In addition, be sure to plan for repair and replacement costs to ensure you’re charging enough money to cover you in the event your asset is lost or damaged in use.
The relationship between a manufacturer and his advertising agency is almost as intimate as the relationship between a patient and his doctor. Make sure that you can live happily with your prospective client before you accept his account.David Ogilvy
Agency is a business model that focuses on marketing and selling an asset you don’t own. An agency establishes a relationship between a seller and a buyer, and earns a commision.
The benefit for sellers is generating sales that without an agency might not happen. Buyers benefit by finding assets to buy that the agent, whom they trust, filters for them.
Instead of producing a product or service by yourself, you team up with someone else who has already created value with existing products and services to offer, then work to find them buyers. In exchange for establishing a new relationship between your source and a buyer, you earn a commission or fee.
If you’re settling to the business idea of starting an Agency, you must consider finding a seller who has valuable products and services to offer, then establish contact and trust with potential buyers, negotiate until an agreement is reached on the terms of sale and finally collect the agreed-upon fee or commission from the seller.
Sellers benefit from an Agency relationship because it generates sales that might not otherwise happen.
Travel agents are a classic example: the travel operator may not have direct contact with travellers. By working with an agent who has pre existing connections in the travel industry, it’s far more likely that the operator will get bookings easily. In exchange for finding a traveler and getting them to book, the agent gets a percentage of the ticket price.
Buyers also benefit from an Agency relationship—good agents can help them find great assets to purchase. Agents often act as a filter for buyers, who trust that the agent will bring their attention to assets worth purchasing and keep them away from bad deals. Residential real estate is a great example: working with an experienced buyer’s agent who knows the area often makes purchasing a home in a new town much easier.
The key to creating a great Agency business idea is to ensure that your fee or commission is high enough to make the effort worth it. Since most agency relationships are dependent upon closing a sale, you’ll spend your time on activities that will result in a completed transaction, and ensure that the commission or fee from that transaction compensates you for the time and effort you put into closing the deal.
“So long as there’s a jingle in your head, television isn’t free.”Jason Love, marketing executive
Audience Aggregation business focuses on capturing the attention of a group of people with similar characteristics, and then selling access to that audience to a third party (like an advertiser).
This benefits the audience by providing something worthy of their attention. On the other side it benefits the advertiser because it gives him attention, which leads to sales.
Today’s technology inventions have made attention a limited and valuable resource, gathering a group of people with a certain demographic is quite valuable to businesses or groups that are interested in getting the attention of those people.
Scaling Audience Aggregation as a valuable business idea, you must consider identifying a group of people with common characteristics or interests, create and maintain some way of consistently attracting that group’s attention, find third parties who are interested in buying the attention of that audience and then sell access to that audience without alienating the audience itself.
FM and TV stations, Audio streaming, Magazines, blogs and advertising-supported Web sites are good examples of Audience Aggregation businesses: users benefit from the information and entertainment these sources provide in exchange for being exposed to some level of advertising. If the advertising becomes obnoxious, they’ll leave, but most people are willing to be exposed to a certain amount of advertising if the content is good.
Audience Aggregation benefits the advertiser because it gets attention, which leads to sales. Think of a conference or trade show: buying a booth in the center of a building full of people interested in what you have to offer can be a smart decision.
Done well, advertising attracts attention, attention brings prospects, and prospects lead to sales. As long as the sales bring in more money than the cost of the advertising plus the business’s Overhead, the advertising can be a valuable tool to bring in new customers, which means the advertiser can continue to support the aggregator by purchasing more advertising.
If you would know the value of money, go and try to borrow some.Benjamin Franklin
A Loan is an agreement to let a borrower use a certain amount of resources for a period of time in exchange for a series of payments over a predefined period of time, equal to the original loan plus an interest rate.
Your loans business idea will have to consider having some amount of money to lend, find people who want to borrow that money, set an interest rate that compensates you adequately for the loan, estimate and protect against the possibility that the loan won’t be repaid.
Used responsibly, loans allow people to benefit from immediate access to products or services that would otherwise be too expensive to purchase outright.
Personal loans allow people to improve quality of life without having huge savings accounts. Mortgages allow people to live in houses without having millions of shillings in the bank. Auto loans allow people to drive new vehicles in exchange for a monthly payment instead of a 100 percent down payment. Credit cards allow people to purchase goods and services immediately, then pay for them over the course of several months.
Loans are beneficial to the lender because they provide a way to benefit from excess capital. The addition of compound interest on top of the original loan (the “principle”) means that the lender will collect much more than the original loan—in the case of long-term loans like mortgages, often two to three times more.
After the loan is made, little additional work is required on the part of the lender aside from collecting payments—unless the borrower stops making payments.
Accordingly, the process of identifying how risky a particular loan is—a process called “underwriting”—is critically important for your loans business idea, you may require some sort of asset as collateral to protect against the risks of a loan gone sour.
If the loan is not repaid, ownership of the collateral is transferred to your business, then sold to recover any funds lost in the transaction.
The investor’s chief problem – and even his worst enemy – is likely to be himself.Benjamin Graham
Capital is the purchase of an ownership stake in a business. If you have resources to allocate, you can provide capital to new or existing business owners to help them expand their business.
By acquiring a certain percentage of the business, investors benefit from the business’ activities without active involvement. Investors hope to receive a higher rate of return than other methods, like leaving the money in the bank.
Angel investing, venture capital, and purchasing stock in publicly traded companies are all examples of providing value via capital, which are part of the Hierarchy of Funding.
To start your business idea as a capital investor, it’s important you consider having a pool of resources available to invest, find a promising business in which you’d be willing to invest, estimate how much that business is currently worth, how much it may be worth in the future, and the probability that the business will go under, which would result in the loss of your capital and most importantly negotiate the amount of ownership you’d receive in exchange for the amount of capital you’re investing.
Some industries, like manufacturing and financial services, require huge amounts of funding to start or expand. By taking on investors, business owners can accumulate enough funds to move forward quickly.
Your capital business will benefit by acquiring a certain percentage of that company’s ownership, which will allow you to benefit from the business’s activities without active involvement. Instead of leaving your money in a bank account with provide peanute returns, you can allocate it to companies that are involved in promising ventures, which may provide a higher rate of return.
If the business brings in a lot of cash, then your capital business may benefit from a regular dividend. If it’s acquired by another company or is listed on a public stock exchange, then you may receive a percentage of the purchase price as a lump sum payment or sell their shares of the company on the open market for a profit.