A short talk describing four major reasons business models fail: solving an irrelevant customer job, flawed business model design (e.g., unit economics like CAC vs LTV), external threats from environment/competitors/technology/funding, and poor execution (team, infrastructure, leadership). Provides examples (Segway, Apple Newton, Qualcomm Flow TV, Kodak) and closes with diagnostic questions founders should ask.
Chapters
Business models can fail for many reasons, but there are four big ones to be avoided. The first type of failure occurs when your business model is built around a value proposition that helps customers get a job done that they don't care about or don't care about enough? This sounds trivial, but haven't we all experienced entrepreneurs and executives that get deeply excited about a value proposition that is removed from the customer reality? Something that customers just don't care about? Illustrations of this type of failure are the infamous Segway, a personal transportation device. The Apple Newton, an early PDA or Flow tv, a portable device by Qualcomm that comes with a mobile TV service. All three examples were very expensive flops and one cost over a billion dollars. Unfortunately, your business model can fail even when you have a great value proposition that helps your customers get a job done that's relevant to them. Type 2 occurs when your business model design is flawed. For example, you're guaranteed to fail when your costs to acquire customers, so called customer acquisition costs, are higher than what you can earn from them directly or indirectly over time. This is called their customer lifetime value. Here's a different example, a real world case. The now bankrupt American company Kodak used to earn the lion's share of their income from high margin film for Cameras and employed 145,000 workers at their peak. Despite helping invent and commercialize the first digital camera Back in 1975, they failed to come up with a business model design for digital cameras that would compensate for the evaporating revenues from selling film. Their new digital business model was fundamentally flawed. Type 3. Now let's assume you have a great value proposition, you're solving a relevant customer job and you have a sound business model design. You can still fail. This third type of failure is based on external threats emerging from the business model environment. Your competitors might offer a similar value proposition at a substantially lower price because they have a business model with different economics. Your customers might be interested in your value proposition, but but they might think you're not sufficiently environmentally friendly. New technology innovations might undermine your business model or a stock market crash might dry up your funding. Type 4. Even with all the fundamentals in place, there is still one big potential for failure. Poor execution. You can screw up even the best business models if you're incapable of building the required infrastructure, if you assemble the wrong team with the wrong skills, or if you lack the leadership to turn the concept into reality. Summarising, we saw four types of solving an irrelevant customer job, flawed business model, external threats and poor execution to help avoid them. Ask yourself these simple questions. Are you helping customers do a job they care strongly about? Do you have the right business model that's profitable and scalable? Is today's environment the right context for your business model? Is your business model designed to excel in that given context? And finally, does your team have the right skills to execute your business model and make it reality? Quite a challenge, but nobody ever said building a business was easy.
