Do You Have a Good Business Model? Use This Assessment to Find Out

Business model is a term that a lot of people talk about, but few are able to explain thoroughly.

For example, how often have you heard people say, “Apple has a great business model.” Super. Why is it great?

The authors of “Value Proposition Design: How to Create Products and Services Customers Want” have created an assessment not only explains business models, but also gives you a tool to evaluate the strengths and weaknesses of your business model.

1. Switching.

How easy or difficult is it for customers to switch to another company?

10: My customers are locked in for several years.
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0: Nothing holds my customers back from leaving me.

Example: Apple’s iPod got people to copy their entire music library to iTunes, making it very difficult to leave.

2. Recurring revenue.

Is every sale a new effort, or will each sale result in follow-up revenues and purchases?

10: 100 percent of my sales lead to recurring revenue.
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0: 100 percent of my sales are transactional.

Example: Nespresso and its single-portion coffee pods that fit only its coffee machines.

3. Earnings vs. spending.

Are you earning revenue before you are incurring costs?

10: I earn 100 percent of my revenues before incurring costs of goods and services sold.
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0: I incur 100 percent of my cost of goods sold before earning revenue.

Example: Dell changed the computer industry by selling directly to consumers and earning revenue before assembling PCs.

4. Game-changing cost structure.

Is your cost structure substantially different and better than your competitors’?

10: My cost structure is at least 30 percent lower than my competitors.
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0: My cost structure is at least 30 percent higher than my competitors.

Example: Skype has changed the telecom industry by using the Internet as a free infrastructure.

5. Others do the work.

How much does your business model get customers or third parties to create value for you for free?

10: All of the value in my business model is created for free by external parties.
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0: I incur costs for all the value created in my business model.

Example: With social-media platforms like Facebook and Twitter, other people create the value.

6. Scalability.

How easily can you grow without facing roadblocks (infrastructure, customer support, hiring)?

10: My business model has virtually no limits to growth.
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0: Growing my business requires substantial resources and effort.

Example: Licensing and franchising are examples of extreme scalability

7. Protection from competition.

How much is your business model protecting you from your competition?

10: My business model provides substantial protection that’s hard to overcome.
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0: My business model has no protection, and I’m vulnerable to competition.

Example: Ikea has had few imitators.