Choose carefully, choose well

Early in my career I worked as a contractor at a rapidly-growing software business, who had IPO ambitions. Indeed, at the time they were #2 on the Sunday Times Fast Track 100 - the second fastest growing company in the country. Exciting times, and a fascinating place to work.

However, they had committed themselves to a business model that would severely impact their ability to build a sustainable business, and ultimately limited their options.

The company had developed software that allowed mobile phone network operators to run their customer and call databases far more efficiently, and massively reduce the number of servers they needed to track customer calls and ensure the correct tariffs were applied. The cost savings for network operators were significant, and customer billing more accurate.

Unsurprisingly there was significant interest in the product, and sales started to flow not only in the UK and US, but also Thailand and Malaysia where mobile networks were being established.

So, the question arose how to charge for the product?

This was in the mid-2000s, before the days where SaaS was the norm, and pricing was based a one-off licence fee per batch of licences.

For a few years good times ensued. Large blocks of several million licenses were sold as networks transferred to the new system, revenue rocketed, salesmen pocketed huge commissions, investors were queueing at the door, share options were much sought after, the company hit the headlines and all seemed well.

Then reality hit.

Once a network had bought sufficient licences to cope with expected demand, sales began to slow dramatically. The support offer was under-developed and could not replace the income from licence sales. The rate of cash burn increased hugely, and refinancing got harder and more expensive. Rather than the IPO initially planned, the company was ultimately bought by a mobile phone manufacturer.

Certainly not a bad outcome, but one practically forced upon the company by the business model they had chosen.

There are several lessons we can learn from this story.

Once established, changing your business model can be hard, expensive, and disruptive. Spending time and energy exploring and assessing options at the start of your venture will pay off. Look at how other companies have dealt with similar challenges. Identify all the options. Look outside your sector for inspiration and ideas. Even exploring scenarios on paper and wargaming different situations will provide insight to help you understand how your model will cope in the real world and guide your decision.

When looking at your business model, you must consider the second and third degree implications of your choice. Whilst in the example above selling perpetual software licences resulted in rapid short-term revenue growth, it meant that to build a sustainable business additional income streams needed to be developed to pick up when licences sales fell away e.g. support + maintenance packages. This required early investment in people and processes away from the engineering team to build a customer service operation. Look beyond the immediate implications of your model, and don’t be seduced by short-term wins.

Changing your business model early is much easier than doing so later. The more stakeholders involved the harder it will be to sell the short-term pain involved for the longer-term payoff. If you know you’ve got it wrong, or it needs to be tweaked, the sooner you start to change it the better! There is no argument for waiting.

An example of a successful business model change by an established business is Adobe, who shifted from a product-sales model to subscription service for their Creative Cloud services. Although the first couple of years after the change saw revenues down or flat, they are now significantly higher, and the doubters have been proved wrong.

Ensure that your business model is consistent with your strategy. If you want to build a business that will grow and be commercially sustainable for the long-term, make sure that your model supports this aim. The clearer your strategy is, the easier this is to achieve.

There are a huge range of business models options, so be clear about your aims, do your research, explore the opportunities, and choose well.