A great product alone simply won’t cut it – it’s the business model that makes or breaks it
Inexperienced companies believe that having an innovative product is all it takes to succeed. To achieve this, they invest in cutting-edge tech such as AI, immersive technologies, or blockchain. And when they finally develop a breakthrough product or service, they fail to turn a profit. There are no long lines of customers in front of their shops, and no media attention, leaving entrepreneurs wondering what went wrong. How could they fail despite having such a unique idea?
Their failure often boils down to a few crucial issues. The product might be innovative, but if it doesn’t address pain points, consumers will simply find another product that does. Or in the case of tech companies, their technology might simply be too complicated for ordinary citizens. Whatever the reason, one thing is clear — innovative products alone don’t guarantee success.
The solution is two-fold. It’s necessary to design products with consumers’ needs in mind and have a business model that will guide the company in that process. Volans’ John Elkington and Richard Johnson argue that “Business models are what connects a technology’s potential with real market needs and consumer demand.” A good business model helps you reach target customers, creates value for them, and earns you money. For example, dozens of companies produced MP3s, but only Apple had iTunes as a business model for its iPod. But developing and executing a business model also requires the right mindset. Companies must be willing to adapt quickly and learn from their mistakes. They need to act fast when opportunities arise and stay ahead of the competition. And most importantly, they need to be ready to change their business model at any time, so they can survive in a market where being the first to innovate often means being the first to fail.
Why companies with great products fail
The reason why companies in the first wave of innovations don’t last long isn’t the low quality of their products or services. Rather, it’s about “a missing business model in a space where customer needs are initially uncertain,” Lucid’s CEO, Han Jin, explains. Since entrepreneurs operate in new industries, consumers aren’t used to their products. At the same time, companies have a hard time predicting customer behaviour. And as a result, they run out of money and come to a grinding halt.
However, businesses in the second and third wave are luckier. They study the failures of their predecessors by reading customer feedback, analysing online reviews, and talking to industry peers, leading to a higher success rate and better business models. They do however need to be wary of other potential problem, such as the amount of investments they receive. On the one hand, without enough money they can’t hire more people and execute their business model. On the other hand, too much money from investors isn’t good, either. And that’s what often happens, as startups working on a new technology tend to receive substantial funds from investors. Delivering a great new product and a sustainable business model in a very short period of time is indeed costly. But large sums of money and pressure “distract executives from long-term objectives to short-term gains impacting the startup’s direction and focus,” Jin argues. This leads to a chain of events that can eventually destroy even the most promising companies.
How to create a successful business model
To avoid such a scenario and keep their company on the track to success, entrepreneurs should continuously innovate their business models. After all, “future competition no longer occurs between products or processes, but between business models,” says Lead Innovation’s Franz Emprechtinger. So how should companies come up with innovative business models? The first step is to use proven tools. For example, lead users (leading buyers who are the early adopters of new methods, products, and technologies) can help the company understand the needs of the general population. At the same time, know-how from related industries should be applied to prevent costly mistakes. And smart managers always look for patterns in the way other companies develop their business models.
But more importantly, entrepreneurs should learn from their mistakes and adapt along the way. The ability to change is crucial. Not even giant corporations like Facebook or Google can afford to have rigid culture, as that leads to stagnation. Entrepreneurs should also be willing to reinvent their entire business model if the current one doesn’t work. They need to spot trends and act on them. And if they face a big competitor, startups shouldn’t be afraid to take risks. Corporations tend to be risk-averse, leaving smaller companies with the opportunity to act first. However, not every corporation is slow; some of them can act fast and reinvent their business model in a short period of time.
Not every corporation is slow to change
One of those corporations is the British aircraft engine manufacturer Rolls-Royce. It introduced a new sales model by which it charges airlines only for the operating hours of their engines, meaning that clients are no longer obliged to buy the engine for a large one-off payment. In addition to this, Rolls-Royce is also responsible for the maintenance and repairs and this innovation caused a profound shift in the industry. It even led to the growth of low-cost airlines that are now able to rent the engines that were previously too expensive to buy.
Dow Corning, a US chemical business, is another example of a highly adaptive corporation. It produces silicone products used in many industries, and its focus used to be on selling high-margin products that require consulting services. But after some time, managers noticed declining sales, as many clients no longer needed expensive consultants. All they wanted was a cheap product in large quantities. And that’s what Dow Corning provided. It created Xiameter, a new brand that sells a range of products over the internet at competitive prices. This brought in more sales and proved just how profitable a new business model can be.
Never stop learning
The modern economy is competitive and an innovative product in itself doesn’t always guarantee profits. Customers might not understand its value, or it simply doesn’t address their pain points or meet their requirements. Many entrepreneurs however still fail to realise that their business model is just as important as the product itself as it connects the technology’s potential to the demand in the market. And to succeed, it’s important for companies to develop innovative business models that help reach customers and create value. More importantly, entrepreneurs need to be agile and not afraid to reinvent their business model, listen to customers and never stop learning. As HiBoost’s Sam Page writes, “If you’re not learning, you’re losing.”
This article was originally published in 2019 on the Richard van Hooijdonk’s blog.