Friday, August 21, 2009

The Perfect Business Model

With an education in philosophy and law, I am hardly well positioned to run a business. However, like most entrepreneurs, I never tire of talking about business. Surprising as it may seem, it was only recently that I discovered that having a business model (a term I never would have dreamed of using thirty-three years ago when I began my practice) is as important as the business one does. I understand a business model to be a framework for creating economic value. To enlarge somewhat, as our good friends at Wikipedia have stated, "The term business model is thus used for a broad range of informal and formal descriptions to represent core aspects of a business, including purpose, offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies." Well, I hardly need observe that such a definition expands the desirability of having a business model far beyond my scope and imagination. Nonetheless, I have in my own way developed certain theses which I feel are useful for a small business.

It is primary that one should have a good product. I don’t believe for a minute in using marketing as a foil to sell dud products. Inherent in this prerequisite is personal commitment to one’s work, unflinching attention to detail, and constant review and analysis of what one has done until completion. As I say, the object is not merely to get paid for something; the object is to deliver value.

One further needs to establish the price of one’s goods or services. Possibly if we were all given a free hand at the cookie jar, we might tend to be less than scrupulous, but that is not a realistic possibility. So it comes down to one having to settle upon what one considers to be fair compensation. Knowing what other people charge for similar goods and services is not necessarily the answer. Indeed the variations in quality make such comparison almost worthless. While the answer may not unfold immediately upon commencement of one’s business, it should become apparent relatively quickly where one’s comfort zone is for the work being done. In the past I have heard such formulae as the following: decide how much you want to earn in a year (say, $100,000), then add your anticipated expenses (say $50,000), then divide by 48 weeks in the year that you intend to work, 5 days per week, and an estimated 3 hours a day of billable time, and you get an hourly rate of about $200. This approach does not allow for block charges for routine work, where one has a good idea what an acceptable return would be, based upon past experiences. Whatever method is chosen, the point is to have in mind what an expected rate of return is to be.

So now we have a product and a price. Next of course we need a client or buyer. That might sound obvious, but it isn’t. For years I overlooked that you need to be as selective about your customer as you are about your product and price. It is a grave mistake which many sellers make to assume that they have a product and price which will suit everyone. One only needs to look at the vast array of products available elsewhere to see that one supplier does not fit all people. So the supplier has to decide what client base he or she hopes to service. This decision is partly driven by what the client wants done, and it is all part of the process of choosing the customer. In plain terms, don’t undertake work which scares you for some reason. It is in this region that I suddenly become mystical for the simple reason that I prefer the visceral to the cerebral; that is, trust your guts, not your rationality. The instinctive reaction is so often far more compelling that the reasoned response. Granted it may take some time for the legitimacy of the instinctive decision to become apparent, but it undoubtedly will, and hopefully not coupled with the words, "I knew I shouldn’t have done that!". The choice of a client is not only to avoid doing what one does not like, but more importantly to do what one does like. It is after all axiomatic that "If I do what I like, then I’ll like what I do". There is no reason running a business should be a complete drain. There is a sphere in which everyone is comfortable, and staying there is the key to enjoying one’s work.

Now armed with the product, price and the client, it remains to ensure the communication of these critical features is accomplished. At the outset, the written communication of the terms of the business relationship is important for both the seller and the buyer, as it would be in any commercial transaction. There is no point in leaving anything to be sorted out later, as tempting as it might be at the time to ignore what are likely to become sore points. If the transaction starts with full disclosure and acceptance by both parties, then it will end satisfactorily, again by definition.

These maxims are in some respects easy to trot out, but less easy to live by. Like any other venture it takes practice. It is at times tempting to dilute one’s starting position, but that merely erodes the economic value of the transaction and contaminates everything about it. One might as well have no business model at all if that conduct is adopted.

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