Entrepreneurial Business Models

Since I started teaching a class to Entrepreneurship students at Fresno State on Business Plan Writing I’ve found that there are only 3 business models from a strategic perspective worth pursuing. There are 2 other business models that aren’t worth pursuing at all, but is where most business owners fall into because it is so easy to. The business models are Category Creators, Niche Perfectors and Category Killers. I learned about these categories in the book ‘Blueprint To A Billion‘ by David Thomson that goes over businesses that have gone public since 1983 (386) that have achieved $1 Billion in annual sales. He found that all of these ‘Blueprint Companies’ fit into one of these three business models.

I think that whenever you are looking at starting a new venture you MUST figure out how to make it fit into one of these models, otherwise your chances for success and growth are marginal.

The first model is that of Category Creators. It’s pretty self explanatory from the name, but these are companies that create an industry that never existed before. The most famous examples cited in the book are Microsoft, eBay and Yahoo. Their products never existed before and met a huge need in the market. Also, they became the defacto standard because they achieved such fast adoption and growth. Finally, the timing of their launch was perfect with market conditions and consumer demand so that they didn’t offer their product before people were ready for it.

Many entrepreneurs feel they have to occupy this space and create and next brilliant invention to solve everyone’s problems. This is mostly because it is the ’sexiest’ model to follow after and creates the most buzz so much of the time. The problem though is that it also carries the highest potential for failure mostly due to the timing factor and meeting the market’s needs right when they are ready for them to be met.

The Niche Perfector model is defined by taking a boring or mundane business and mashing it together with another boring or mundane business with the result being something unique and different than everything else being offered in the market. The most famous example of this is Starbucks who took a very boring model of coffee shops and blended it with the cafe/bistro model known throughout France and Italy.

Another great example of this model can be seen from Cirque du Soliel. They took the very ordinary model of a three ring circus made famous by Ringling Brothers and combined it with the model of broadway and theatre shows. The result is simply spectacular! The shows are entertaining for nearly every adult category, provide a high end experience and took the pricing from $12 for a three ring circus to $90 for the hour and a half show.

The common traits of the Niche Perfectors are that they end up creating a unique experience for their customers which is unlike any other company in their related industry, thus taking them to the position of essentially having no competition. Also, they demand higher prices in nearly every circumstance because the clients value the unique experience and there aren’t alternatives, so price erosion isn’t a factor.

This model is my favorite because it can be done in nearly every existing industry and business type and isn’t nearly as risky as the Category Creator model. Also, it doesn’t require the ‘inventor’ gene that I seem to be lacking so I don’t have to create things out of thin air to have a viable business model.

Finally, the last model to follow after is the Category Killer. This is defined as the consolidator of a mature industry that competes on low price, one stop shopping and variety of products. This model is identified by the Big Box companies such as Wal-Mart, Best Buy, Costco and Home Depot. This model is not evil like so many in the media want to make them to be and are just the next logical step to move to in mature industries.

The only problem I see with creating a business in this model is that it takes significant capital to create the economies of scale to get up and running. Also, the logistics systems to manage inventory that need to be created from the get go are absolutely massive.

The two business models not worth pursuing that the majority of business owners and startup entrepreneurs fall into are ‘Me Too’ and a ‘Job.’ The Me Too model is based on copying another business that already exists and just competing by taking away market share by effective lead generation and fighting with lower price. It’s a bloody model to get into and really isn’t scalable. Also, there are usually enough of any given business type out there and the world doesn’t just need another Me Too out there struggling to stay alive. The most common Me Too businesses are restaurants, salons and car lots. There are too many of each already and most struggle to survive right from the get-go.

The Job model is typically where professionals live, but can also be other service businesses, too. I call it a job because if the business owner ever leaves, the income stops, so there is no leverage or scalability in the model. It is also the spot where ‘golden handcuffs’ show up because one can end up in this model and make a good income, but not have the true freedom of being an entrepreneur and leaving the business and still have revenue coming in. This model is typically filled by attorneys, accountants, financial planners, insurance agents, mortgage brokers, realtors, and contractors.

Most people who end up in the Job model are characterized by the need to ‘be their own boss’ and end up just owning a job.

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