Using Value to Explore Potential Business Models

In my last post, I looked at the role of a business as a creator of value. In short, companies make money by producing and delivering value for which customers are willing to pay in order to satisfy a want or need.

I also explored three ways in which aspiring entrepreneurs can build a viable business model based upon different forms of value. Namely, start-ups can earn revenue

by:

1. Creating a product, a tangible item of value for which people are willing to pay
2. Offering a service, some type of assistance or skill to someone else for a fee
3. Selling access to a shared asset, a resource that can be used by many people (i.e. gyms, aquariums, and museums)

In this post, I look at five additional forms of value to help you find a solid business model. Some of these forms of value are a bit more niche than products, services, or shared assets, but no less viable in creating a profitable, lasting enterprise. So here we go!

Subscription

A subscription is a type of program in which a user pays a recurring fee for access to certain specified benefits. These benefits often include recurring provision of products or services. Unlike a shared asset, however, your experience with the product or service is not affected by others. To have a successful subscription-based offering, you ideally want to build a subscriber base by providing reliable value over time, while at the same time taking constant efforts to attract new customers to keep customer attrition low. As you may have seen, the number of subscription services has exploded in recent years. From magazines to Netflix to Amazon Pantry for groceries and even subscriptions for wine, businesses are turning to a subscription-based model with seemingly great success.

• Pros: This model provides certainty in the form of predictable revenue streams, making financial forecasting a bit easier. It also benefits from a loyal customer base and customer inertia (lazy customers forgetting to cancel or switch to a competitor).
• Cons: In order to run this model, your business operations must be VERY strong. If you can’t deliver the value when the customer wants it, you may want to consider something else.

Lease/Rental

A lease involves obtaining an asset and renting it out to another person for an agreed upon amount of time in exchange for a fee. People can lease pretty much anything, but leases are typically only for things that are durable enough to be rented and returned in good condition. This is so the owner can lease the good multiple times or eventually sell it. To provide value and profit from leases, the key is to ensure that the revenue you get from leasing the asset before it wears out is greater than the purchase price that you paid for it. This requires being smart with financing and potentially NOT leasing to those you don’t think will be responsible with the asset. Leases are pretty common—you may have one right now for an apartment, car, or old movie that you rented!

• Pros: You don’t have to have some great idea to make money this way. You can purchase assets from others and rent them to others that wouldn’t buy them for full value otherwise, earning a premium.
• Cons: You’ll need to protect yourself from unexpected damage to your assets. One way to do so is through is…

Insurance

Insurance entails the transfer of some type of risk from a customer to a seller of an insurance policy. In exchange for the seller of the policy taking on the risk of some specified thing occurring, the buyer receives periodic payments (“premiums” in insurance lingo). If the bad thing doesn’t happen, the insurance company keeps the money, but if it does, the company has to pay the policyholder. So, in a sense, insurance is the sale of safety—it provides value by protecting people from unlikely, but catastrophic risks. Buyers can take insurance out on almost anything: life, health, house, car, boat, etc. To run a successful insurance company, you have to be able to accurately estimate the likelihood of bad events and charge higher premiums than the claims that you pay out to your customers.

• Pros: If they calculate risks accurately, insurance companies are guaranteed to make money.
• Cons: If they calculate risks inaccurately, insurance companies are guaranteed not to make money. Insurance only works because it spreads risk over large numbers of people. Insurance companies can fail if the same people are all impacted by a big terrible event that they didn’t see coming (think about the Global Financial Crisis).

Reselling

Reselling is as simple as it sounds—it’s the purchasing of an asset from one seller and the subsequent sale of that asset to an end buyer at a premium price. Reselling is the process through which most major retailers purchase the products that they then sell to us buyers. Companies make money through resale by purchasing large quantities of items (usually at a bulk discount) from wholesalers and selling single items for a multiple of that price to individuals. Think of farmers supplying fruits and vegetables to a grocery store or manufacturers selling goods to WalMart.

• Pros: Mark-ups can often be high for retail sales. For example, a bottle of water might cost maybe 10 cents to produce, whereas a customer may be willing to pay $1.50 or more for a single bottle.
• Cons: You need to be able to gain access to quality products at low costs for reselling to work. You’d also better have the room to store a lot of inventory to manage sales cycles.

Agency/Promotion

Agents create value typically by marketing an asset that they don’t own to an interested buyer. They then earn a fee or a commission for bringing together buyer and seller. Thus, instead of using their own skills to create value, they are teaming up with others with value to help promote them to the world. Running a successful agency requires good connections, excellent negotiation skills, and a willingness to work with a diverse set of individuals. One example is a sports agent. They promote players to teams and negotiate on behalf of the player to get the best deal. And in return, they usually get something like 10% of the value of the contract.

• Pros: You can highly profit from expertise and connections in one industry, be it publishing, acting, advertising, etc.
• Cons: You only get paid if you seal the deal, so you have to be able live with some uncertainty.

These eight forms of value are by no means the only ones out there. For example, the world of finance has a LOT of different instruments that aim to create value for investors. However, if you’re looking to start a business, and need a place to start, well, one of these could just be your underlying business model. Good luck!