When the business model doesn’t ring true – it often isn’t

 

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Last week I wrote about the need to monetise.  An innovation is only valuable if you can monetise …. generally that means creating a business model that gets more than eyeballs or customer visits and makes money.

From a customer point of view, convenience is great. Nothing better than have an Uber turn up to your door or a meal delivered by a courier booked through a site such as Menulog.  But I have looked at a lot of the services that ‘deliver’ to your door and thought “how do they make money?” People are expensive and that last mile of delivery is not cheap.

Obviously I’m not the only one that has thought this and we are seeing an increasing number of startups that set up with a key component being ‘the last mile of delivery to the customer’ go out of business or forced to change their model.

Even Amazon has been addressing the cost of delivery by introducing Prime as a service cost/subscription and looking at buying physical stores as a way of reducing distribution costs.

Below is an article from Fortune by Kia Kokalitcheva talking about “The Great Business Model Correction continues”.

Earlier this week, Munchery, one of San Francisco’s many meal delivery startups, finally began to serve lunch in addition to its dinner service— but it’s expanding conservatively. While other so-called “on-demand” food delivery services let customers order food on a whim and deliver it as soon as it’s ready, Munchery customers will have to pre-order lunches the night before, at the latest. What’s more, the company is only making lunch available to office workers whose employers have signed up to regularly order through Munchery, and each day it will deliver the meals all at once—all in the name of efficient operations and predictability.

In other words: Munchery wants to minimize any losses on its new endeavor, unlike competitors that ferry burritos, salads, and everything in between to individual customers.

Thanks to Uber’s success, we’ve seen an explosion of startups over the last several years that let consumers order anything from a ride to groceries to flowers by merely tapping an app.

But these business models have proven much more challenging than they seem. Several have closed shop, and many of the remaining ones are now making significant adjustments in the search of more sustainable businesses—and hopefully, someday, profitability.

With investor appetite for these startups seemingly declining, according to data published in July by CB Insights, it’s no surprise that many are looking for an exit from the venture capitalist subsidy-driven growth that was once popular.

The only remaining question is whether the startups can do it without hiking the price of their services and alienating customers who are not young, Silicon Valley dwellers with a lot of disposable income.

 

At some stage you have to be able to monetise

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Currently, there are a lot of rumours in the market about who is going to buy twitter. names such as Salesforce, Alphabet and Disney are the most frequently mentioned.

Personally I am a massive fan of twitter as I find it a quick and easy source of articles and knowledge – it is probably the social site that I use the most.

While twitter has a great reach, the problem is that a viable commercial model has never been established. And while readership volume is seen as important, in the end it is only valuable if you can monetise the user base.

To me it is a valuable lesson in the development of any start-up or even creating the digital channel of an incumbent. People often fall in love with the concept or the technology and don’t spend enough time really understanding the commercial model – what customers are willing to pay for, how much are they willing to pay or is it monetisable through some other medium such as subscription or advertising.

Sounds simple doesn’t it?

But there has been an enormous amount of money spent without really spending the thinking and analysis time up front to answer the ultimate question.

It’s not all about the app! 


So many organisations get excited about an app and believe creating an app ‘makes them digital’. Too often, all they are doing is taking an existing service online and not adjusting the business model to suit a new world. Paving the cow patch as we used to call it. 

Below is a great article from Fortune that describes the failure of Washio, a laundry service start -up that raised $17m but did little to really change the business model.

Getting to the essence of customer needs and understanding how your business model addresses the needs is the most crucial elements in today’s world. Not easy but fundamental for success. 

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Turns out that demolishing laundry isn’t all that easy.

Earlier this week, on-demand laundry startup Washio told its customers that it was shutting down its service. Founded in 2013, the Los Angeles-based startup provided laundry and dry cleaning services to customers in six U.S. cities. At first, customers had to schedule the pickup and drop-off ahead of time, but in 2015, Washio added the option of a pickup within 30 minutes.

But all that “innovation” didn’t prove sufficient, despite the nearly $17 million Washio raised from investors like Sherpa Capital, Canaan Partners, and actor Ashton Kutcher.

Washio is far from the first startup in the so-called “on-demand” economy to call it quits. Last year, Homejoy, a service that dispatched house cleaners with the tap of an app shut down after it couldn’t raise additional funds, was slapped with a labor lawsuit, and generally failed to create a sustainable business, as Backchannel detailed in a lengthy report. Valet parking apps Caarbon and Vatler folded last year, and “Uber for kids” startup Shuddle shut down in April.

And we’re only going to see more of them die. Why?

Because despite their fancy mobile apps and funding from technology-focused investors, these startups are in the business of providing a consumer service. They must build complex operations that involve customer interactions and delivery staff while competing in low-margin, labor-intensive businesses.

Ask anyone in the service sector and they’ll surely tell you it’s no walk in the park. Even supposedly “mature” companies like Uber, which now offers rides and food delivery, still struggle with things like customer service, managing drivers, and providing consistent service to customers.

It doesn’t matter how shiny your app is, if you lose my laundry or burrito, make me pay a small fortune, and still can’t deliver it on time, it’s game over.

Kia Kokalitcheva

@imkialikethecar

Focusing on the outcome


When driverless cars were first discussed everyone focused on the technology  – that then seemed fanciful and a long way from reality. Largely because of the technology focus, the main discussion centred around the ethical dilemma of programming to kill – that is, if someone stepped in front of a driverless car would it be programmed to swerve or continue? 

Developers of the technology have learned to change the narrative. By focusing on the real outcomes such as increased safety overall, lessening the environmental impacts by reducing the number of cars and lowering the cost to consumers and the economy, we now see positive stories and the ‘programming dilemma stories have largely gone away. 

In business it’s the same. It’s not the technology,  but how the technology will impact the business model that is the real story. And how the business model can help you win in the market. 

The surprise to me is how we still see so many people so caught up in the technology they can’t see outcome it can really produce. 

Btw – driverless cars are going to be here s lot quicker than you think. See the link below 

Mobileye and Delphi aim to bring self-driving cars to market as early as 2019

The opportunity in India – innovate & scale

I recently did a trip to India to attend the Deloitte India Partners Meeting and the Deloitte Global  Board Meeting. Spending time in India you become impressed by the entrepreneurship, innovation and opportunity in that economy. 

The sheer numbers of people helps, but it is the attitude of developing business’s that can scale with low unit values that sets the country apart – new innovative models, many of which can be transported over time to more developed economies. 

India is also looking at how it can become an even bigger manufacturing hub. Combining innovation and manufacturing in a 1 billion plus population base, says big things ahead for India. The article below from Forbes paints an interesting picture of India manufacturing incentives. 

http://www.forbes.com/sites/gordonchang/2016/03/27/india-wants-to-make-everything-you-buy/?utm_campaign=Forbes&utm_source=TWITTER&utm_medium=social&utm_channel=Opinion&linkId=22787022

Where is the value in your organisation? 

  
IBM has just spent $2.6bn buying Truven Health – a big investment and one that is all about the acquisition of data (and customers). 

Increasingly organisations are seeing that the real value in an organisation is in the data assets – with the ability to use analytics to get rich insights from large data sets. The smart organisations are using analytics and big data to truly understand customer behaviour, value levers for an industry and value points in the supply chain (amongst many other things) to put themselves in an advantaged position. 

So the things that we have for so long called ‘intangible’ – such as data, customer contacts and relationships – have become the most tangible in determining value. 

The challenge for organisations is to ensure that they are capturing and curating the data and intangible assets that sit within their systems and processes and then using the analytical tools to extract the value. 

See below a link to an article in Fortune on the IBM acquisition. 

Why IBM Is Dropping $2.6 Billion on Truven Health

 

Innovation leads to growth for all?

IMG_0135Taxi companies have been up in arms about the disruption to their business from Uber. Earlier this week, Deloitte Access Economics published a report that showed that Uber had grown the market in Australia by 61% (see below). We have seen similar impacts when Virgin and Jetstar were introduced in the domestic airline market. Often a market will have latent demand and so a lower priced disrupter will create growth way beyond what is expected.

So while it is understandable for the incumbents to be concerned about their business, more time should be focused on how the they will differentiate themselves from the disruptor.  In the taxi industry, the effort seems to be on trying to create a regulatory block, rather than developing a winning proposition against Uber.

I have been asking taxi drivers (booked through Uber) where their business comes from. At the moment, 1/3 is flagged, 1/3 called through the taxi cooperative and 1/3 through Uber. This is anecdotal but seems to support the Deloitte Access Economics research.

“Ride-sharing company Uber is generating annual benefits to Australian consumers worth more than $80 million a year, according to analysis by Deloitte Access Economics. Deloitte’s report, Economic effects of ride sharing in Australia, commissioned by Uber, showed uberX, the standard ride-sharing service offered by Uber, had grown the market for commuting to a specific destination via a third-party driver by 61 per cent as consumers switched from driving their own car, using public transport, walking, or were simply enticed to travel. Uber operates an app that connects drivers to users, processes fare payments and identifies drivers who are given a rating by consumers. Deloitte found the service was delivering an annual benefit of $81 million. Less than half, or $31.5 million, of the benefit was the result of cheaper prices, while $49.6 million was derived from a “consumer surplus”, or the amount consumers would have paid above the price charged for the service.”