In a webinar titled "Designing Business Models for Startup Success", hosted by Qatar Science and Technology Park, Mohammad Zebian explored business models that leverage partnerships and distribution channels, while considering financial constraints.
Startups are constantly looking for new opportunities to disrupt industries, even those with large companies that dominate the consumer landscape. In fact, some startups see these large competitors as a welcome challenge to test their mettle. Despite their small size, startups have some key advantages over existing companies, and are well-suited to disrupt and even win. In my many years of working for tech startups in various roles, winning requires a great product, committed team and compelling business model.
It’s clear that a committed startup team is essential to build a product that customers value; we see that every day. But that’s only part of the picture. Business models are increasingly important to a startup’s success, especially in those industries where the products offered are similar across all competitors. To win customers, a compelling, radically new business model must be part of your company’s value proposition and a key part of your competitive edge. It’s even more important when you are selling products that are ‘commoditized’, meaning that consumers have several different choices, but the competing products have similar features.
In these situations, consumers rely more on product branding, reputation and pricing when making buying decisions, since the product features are similar across the spectrum of competitors. As a startup, you have few customers (if any) and very little cash on hand, so you simply cannot afford to get into a price war to win customers. But what successful startups have is a compelling business model that can tip the scales to their advantage.
A business model describes your startup’s ability to deliver the value of your product to your customer (in the way they want it) and how your startup generates revenue. To illustrate the importance of a business model, let me use an example from the solar energy industry. The business model of most residential solar energy installation companies is quite simple – the homeowner pays a company ($10,000 for example) to install solar panels on the roof of their home. The homeowner generates clean electricity and expects to get a return on investment (ROI) after 15 years. For 30 percent of homeowners, the up-front cost and 15-year ROI is acceptable, but for the remaining 70 percent it’s still not enticing enough to convince them.
The solar panel industry is very price competitive, with low profit margins, so as a businessperson, it makes no sense to create another solar panel installation company and compete on price. Instead, a new startup enters the market with a new business model, which is designed to win new customers and create a significant competitive advantage that will temporarily shield it from competitors. This new startup will install the entire solar panel system for free. In exchange for that, the homeowner gives the startup 75 percent of the solar energy generated from their roof for 30 years, leaving them with 25 percent for their own personal use. The startup makes money by selling the energy back to the grid and calculates that their ROI is 15 years. In short, this startup’s business model is essentially renting access to your roof in exchange for giving you some of the solar power generated.
This example illustrates the two key competitive advantages of a well-crafted business model. Firstly, its ability to deliver value to an unserved market; in this case the 70 percent of homeowners that were not interested in spending $10,000 for panels. Secondly, its ability to give the startup a sustained competitive advantage by making it very difficult for competitors to compete. In this example, competing requires existing companies to significantly reduce their costs, restructure the company and make staff redundancies, just for the chance to compete. That’s a difficult task both from a strategic and human cost point of view. I don’t know many CEOs that relish the experience of a corporate restructuring exercise, especially one that results in job losses – it’s an emotional minefield.
The above example is repeatable across many industries, particularly those which have had modest innovation in terms of their products and business models. Startup founders would do well to understand the importance of a compelling business model and to design one that generates value and is difficult to copy, thereby giving them a sustained competitive advantage. To underscore the importance of a well-crafted business model, let me give you something to reflect upon in the example above. As a homeowner, which solar installation company would you buy from? As an employee, which company would you prefer to work for?
Mohamed Zebian, is the Program Manager – Acceleration, at Qatar Science and Technology Park (QSTP), part of Qatar Foundation Research, Development and Innovation. Prior to joining QSTP, Mohammad worked at several technology startups in the United States and Canada, helping to transform ideas into commercial success.