Your business will be more successful if you have a solid model.
A solid business model is key to building a long-term, profitable business. How can you determine how valuable your business model? These 8 questions can help you assess the strength and weakness of your business model.
People talk about having a niche market. This is a market that is small and can be easily protected. Your business will have to fight for every dollar if it doesn’t have enough growth room. If your market is worth more than a billion, you are in a strong position. You’ll have to look for leftovers from other businesses if it is less than $ 100million.
It’s one thing to be able to do business in a large market. But it’s quite another to see that market shrink. Your market should be growing at a rate of 20% per year to maximize future opportunities.
Market share is a fascinating metric. 20-40% is the ideal number. This gives you plenty of scope to grow while also allowing you to be a dominant competitor. You can’t grow your market share if it is too high. This will make it difficult to find new markets. Jack Welch, an American businessman who died in 2008, had to rethink his mantra that every GE business should be ranked first or second in its market. They deliberately redefined their markets to gain access to larger markets, lower their share and get out the number one or two positions.
These are the three main areas where companies compete: customer intimacy, cost, innovation and innovation. What is your business model built on? It is important to pick a business model that your customers are happy with. You should reconsider your approach if you try to do too much for too many people and clients disregard you.
Your business will be more valuable if it has more recurring income. The more committed income, such as contracts lasting 5-10 years, the greater the value of your business. It is nice to have sequential revenue where customers are motivated to update products, but it can be a step back. Companies with more than 90% recurring revenues are the most successful.
In an ideal world, every business would retain 100% each year. This would allow you to start every year with a client base to work from. You need both recurring income and withholding. If you work only on a recurring income model where each year you have to find new customers for your business, this will make you score low.
Gross margin is your net income after taking into account the cost of goods sold but before subtracting overhead. A good gross margin should be between 80-90%. This is when you make cash, and cash creates growth opportunities. Your business will be less valuable if your gross margin is less than 15%.
Larger companies make 25% or more profit, while smaller companies earn 5% to 5%. When you combine high profits and high recurring income with high growth rates, magic happens to your business’s value.
These eight questions will help you evaluate your business model objectively.