What Should Your Business Model Look Like

Business model is one thing that someone considers before investing in a business.  At a certain point, the investor needs to decide is this business a feature, an app, or an actual business.  An actual business might not have revenue today, but there is at least some sort of vision in the future of how to monetize the business.

There are plenty of different examples of different business models, but one I really like puts customers closer to the source of what they want.  Business models that disrupt and go around several layers of distribution are very interesting, especially if those layers of distribution are within business to business supply chains.

Why B2B?  For one, the target market is clearly identified.  The other is that usually to execute on this sort of business model the entrepreneur has experienced the problem that they are trying to solve.  They have some “local knowledge”.  In efficient market hypothesis parlance, they have more information than the market and they can execute on it.

When disrupting a supply chain, if the startup can create network effects around the disruption it’s even better. That causes all kinds of things to happen.  They get a defensible moat around the business that doesn’t necessarily need expensive intellectual property protection.  They also don’t have to worry about patent trolls.  Platforms with network effects are sticky in ways that are bigger than simply price.  Compete on price and the platform is a commodity.  Compete on things other than price and the platform is truly building value.  Customers will gladly pay where marginal revenue equals marginal cost and it will be tough for competitors to enter.

The reason supply chains are so interesting is logistics, timing and what people call the “bullwhip effect”.  Little disruptions in operations at the mouth of a supply chain have outsize effects downstream in the chain.  The more variance that is wrung out of a supply chain, the more efficient and cheaper it becomes.  If you think a minute, you will notice that consulting agencies don’t have a “demand chain” practice.  Demand is totally random and fickle when compared to supply.  Marketing helps understand and target demand.  Supply has quantifiable inputs that can be worked on mathematically.  This is also a reason that supply side economics is more efficient than demand side economics but I digress.

There has been some disruption in the B2B market over the past twenty years, but most of the efforts have been in B2C.  On the B2B side, much of the disruption uses a software as a service kind of business model.  But, I think as the startup community learns more and more how platforms and two sided markets work, there be plenty of opportunity to use them to disrupt entire supply chains.