How to Tweak Your Business Model to Make it More Scalable, Part 2

As I discussed last week, if you want to build a more scalable and successful business, you have to have a scalable business model—which is why I introduced you to the WTG Business Model Canvas to help you develop a more scalable version of your business.

WTG Business Model Canvas

If by chance you didn’t read last week’s post, make sure you read Part 1, before you continue on here with Part 2.

Also, just as a reminder, one of the things I discussed in last week’s post was that scalability, itself, is scalable. In other words being scalable isn’t binary (i.e. either you’re scalable or you’re not). Every business is somewhere between the two end points of totally unscalable and totally scalable. What you should want to accomplish with tweaking your current business model is moving farther and farther away from the left side of that range (totally unscalable) to the right side (totally scalable).

In addition, don’t forget that when you’re tweaking your business model, you don’t have to tweak all eight areas to build a more scalable business model. You might only need to tweak one or two or maybe four of the areas to create a breakthrough.

Finally, last week we looked at the first four areas you could tweak in your business model (note: these should be filled out in order from left to right, top to bottom). If you didn’t do this last week, you can click on the following link to get a downloadable pdf of the WTG Business Model Canvas. In review, the first four areas were

  1. Your Target Market Customers
  2. Their Problems
  3. Your Solutions
  4. Your Competitive Advantages

Now, you’re ready for the final four areas.

5. Your Marketing Channels

Once you’ve played with the first four areas and you have a differentiated solution to an urgent problem that your ideal customers want to have solved—and they like your solution, the next part of your business model involves, “How are we going to get that message out?” That old Field of Dreams line, “Just build it and they’ll come,” works well in selling movie tickets, not so much in real life.

In order to scale your business, you have to be able to figure out a systematic way that you can get a repeatable and predictable response from your marketing and sales efforts. You need to be able to know, for example, for every $1 we buy in Facebook ads, we’ll get $5 in sales back. Once you know that formula, you can choose how much money you want to invest to scale your business. Do you want to invest $100/day? $1,000/day? $10,000/day? If the ratio is right and Facebook is the right channel, then you know that at $1,000/day you’ll end up with $150,000 per month in sales from Facebook (or $1.8M for the year).

For some of you, trade shows are a key marketing channel. If you know that you can run a trade show booth and it’ll produce 100 leads and 30 customers at an average of $10,000 per customer, then you can scale. If you do four trade shows and work your process, you should end up with $1.2M of new business.

The key here in tweaking your business model is asking the question, “Are there some marketing channels we’re not using that could help us scale out business?” Maybe you haven’t tried webinars or local speaking engagements. Maybe you haven’t tried direct mail or TV ads. Maybe you haven’t tried paid online ads or sponsorships, etc. There are tons of different marketing channels. You simply need to think, “Which of these channels would allow us to best connect with our ideal customers?”

And then, “Are we currently using some marketing channels inefficiently that if we used them correctly, could help us scale our business?”  For example, let’s say you do two direct mail campaigns a year. That’s not very scalable. However if you believe that you could get a predictable response with a more consistent and better messaged direct mail campaign, then that could help you scale. Maybe instead of two pieces a year, you moved to four to six campaigns per year with a sequence of marketing pieces (maybe three to five) tied into a major sales promotional campaign could make your business more scalable.

So, what could you tweak in your model to get your message out to more of your ideal prospects? Different channels? Or better executed channels?

6. Your Delivery Process

Before you pass by this area of your business model, it’s worth thinking about. Just because you’ve always delivered your service or product one way, doesn’t mean you should always deliver that way. Remember back in the 90’s, if you wanted to buy a Mac, you did that by ordering online. Who would have thought that an Apple Retail store would work? Not me. I predicted it would fail (other computer companies had tried before and failed). However, the Apple Store concept has the highest grossing retail store per square foot percentage by a mile.

Or who would have thought that people, who liked the social atmosphere of a coffee shop, would line up for blocks to buy their coffee at a drive through? Or who would have thought that an ATM would beat out a teller? Or that you wouldn’t have to leave your house to visit with your doctor (using an online physician)?

Technology sure has changed a lot of business models. So, what about you and your business? What are the givens/assumptions you make about how your product should be delivered? Now go back and consider, “What if we didn’t do it that way? What would that look like?” Or, “Is there a way we could automate this piece?” Or “What if we had a partner deliver this?” Or, “What if we outsourced this?”

Remember, just because you have delivered your product or service a certain way doesn’t mean that it has to remain that way. Even better, if all of your competitors deliver a similar product a similar way, choosing a new way could be a huge breakthrough. At the end of the day something is only impossible until someone does it. Why not let that someone be you?

7. Your Pricing

This is one of my favorite business model tweaks. Pricing is far more elastic than most business owners and entrepreneurs think. And it’s often critical to change if you want to scale. For example, one of the biggest problems for professional service firms when it comes to scaling is that their business model isn’t scalable. When you have to find a highly talented person and you have to bill for each hour of their time, that’s not very scalable (by definition, there’s a linear relationship between revenue and cost, which means it’s not scalable).

So, how do you solve that dilemma? By playing with your pricing model. For example, moving to a value-based pricing model can make your business more scalable. If the value of a solution will save a company $100,000 in real costs this year, what is the value of that solution? Would you pay $10K to save $100K? Probably. Now, do you care if I can get you that result in one hour or 100 hours? No. You just want the result. The number of hours invested is irrelevant.

The reason why value based fees are a better pricing model is because they align the customer’s and the business’ interests. You want the result as fast as possible. I want to produce that result as fast as possible—and with the lowest cost. So we’re in alignment. Another reason why value-based billing is better is because time based billing increasing inefficiency (in fact, it encourages it). However, value-based billing increases efficiency which allows you to increase the profit margin on your revenues (which makes your model more scalable).

Fixed rates (which are different than value-based rates) also encourage scalability. For example, when every job has to be priced by a senior person, that takes time. However, if you’re a tax firm and you offer three packages (silver, gold, platinum) everyone knows what the price is and they know what they’re buying for that price. Similar to a franchise, you can quickly scale up that way. Anyone can do the intake now. It doesn’t have to be a senior partner who has to ask a series of questions, put together a proposal, wait to hear back, follow-up several times, negotiate out the final rate and then finally begin the tax prep. All that wasted time is eliminated.

Those are only two pricing options. There are plenty of others out there. But start playing with them. Find a pricing model that will allow you to scale fast.

So, what can you tweak in your pricing model to make your business more scalable?

Note: one major change you should make if you bill in arrears is to stop it. It’s nearly impossible to scale when you bill in arrears because you have to pay salaries and vendors before you get paid—which means that growing fast will kill you (i.e. your cash will be gone).

8. Your Profit Model

We finally arrive at the last section of your business model. While each of the above seven are critical and important, if you can’t make this one work well, it’s not worth being in business. Note: While Amazon is fine without showing a profit each quarter, I don’t know any small business owners who want that model. On the other hand, I know plenty of business owners who work 60-80 hours a week who would be making more working at a fast food restaurant. They’re paying employees and vendors but they’re not paying themselves well. That makes no sense. And it’s clearly not scalable. They need a better profit model.

So, if you want to build a scalable business, you have to keep working your numbers until you can make the profit margins work (and the cash flow necessary to drive and sustain growth). In light of that, using a macro view, what are your anticipated numbers?

Gross revenues – COGS = Gross Profit – Overhead/Expenses = Net Profit. Once you have those numbers, start playing with them. Note: you’re looking for big movers here. Do you need to reduce your head count? Do you need to outsource some functions? Do you need to move to a smaller space? Do you need to go back and change your pricing? Do you need to invest more money in marketing? Do you need to systematize certain functions so you can have a $40/hr employee handle work that you now have to pay someone $120/hr to do?

Keep playing at this macro level until you feel confident that your numbers and your profit margins are accurate and scalable. If you want to scale your business and have a life, you have to figure out a profit model that can produce a consistent and predictable profit margin so you can live the lifestyle you want, pay a lot of good people good wages, make a bigger impact and be a good corporate citizen. You can’t do any of that without a good profit model.

Oh, and once you figure out your profit model, make sure you calculate the lifetime value of your customer. Why? Because it’ll help you make better marketing decisions. If a customer has a LTV (Lifetime Value) of $5 or $5,000 or $250,000, don’t you think that’ll affect a lot of decision-making? Absolutely.

So, there you have it. The eight key components/areas of a business model

  1. Your target market customers
  2. Their problems
  3. Your solutions
  4. Your competitive advantages
  5. Your marketing channels
  6. Your delivery process
  7. Your pricing
  8. Your profit model

Now, all that’s left is for you to play with them to figure out what tweaks you need to make to your current business model in order to make it more scalable and successful.

To your accelerated success!

P.S. Again, if you didn’t download the WTG Business Model Canvas, you can do so now by clicking here >>> WTG Business Model Canvas