Focus on finding value improvements that open the doors to further value improvements, and your business model will improve its profitability in exponential ways.
As you consider the type of value you want to add to your business model, you should also examine the longer-term consequences. Otherwise, you may create short-term solutions that offer limited benefits.
For example, adding new variations on a fad toy, like a hula hoop, will extend its life. Yet, at some point, the fad will be over no matter what you do. The rewards of offering those variations will not continue to expand into the future.
By comparison, other improvements may have a geometric effect over time, especially in rapidly growing markets. For instance, EMC decided in the mid-1990s to make sure that all of its storage products and software would work with any server platform or operating system at no extra charge. This change made it easier for a customer to connect EMC's storage to their existing servers, and made it less likely that EMC would lose a customer after a new server vendor made a temporary or even permanent inroad.
During the period when most other electronic storage was not so flexible, EMC rapidly gained market share while charging higher prices for its products, as its customers highly valued this flexibility.
The most far-sighted companies think about how having a benefit for customers in one area can be used to create an important benefit in yet another area. For instance, Paychex began as a company that provided reliable, low-cost payroll services for small companies.
Paychex's leaders began to realize that many other services that small companies need depend on having accurate payroll records. Whoever is providing those records can do the best job also in those other areas, saving customers lots of time, money, aggravation, and government fines.
As a result, Paychex offers a whole range of record-development and record-keeping services related to employees that are built from the payroll database that was its initial product line. Many of the company's customers buy all of Paychex's services because of the accuracy and time-saving benefits that its integrated systems provide.
Ultimately, the most valuable benefits are those which are built on knowledge that cannot be duplicated in any other way. For example, Ecolab started out in the business of providing cleaning chemicals for manufacturers, institutions, restaurants, and other service providers.
For restaurants, Ecolab learned that it was more important to restaurants to keep good relations with the health inspectors than it was to simply have good cleaning supplies. As a result, Ecolab expanded its offerings to include the chemicals to sanitize everything in a restaurant.
With its knowledge of the chemicals, Ecolab also added ways to improve and maintain the equipment to make better use of the chemicals. Later, the firm also defined itself as being in the pest elimination, janitorial, floor care, water treatment, and management advice businesses.
In each area, Ecolab carefully measures its customer's experiences to locate what the best practices are. Combining expertise from these perspectives and many customers that Ecolab has developed in each of these areas, the company can show a customer how to save a lot of money, get better results, while paying normal prices for its chemicals and services.
The cost reduction benefits are often a large multiple of what Ecolab's products and services cost. Compare that happy situation to the alternative of the immediate and long-term costs of a restaurant's harmed reputation due to having a facility closed down because of a health problem. Imagine how much worse this problem is for the large restaurant chains.
No local provider of any one of these services can hope to provide a more effective combination of solutions than Ecolab does. No new entrant can hope to gain the knowledge that Ecolab has to create valuable, custom solutions at regular prices.
As a result Ecolab is often the first choice of restaurant chains for cleaning supplies and related services. The added exposure to similar activities in other end use markets (such as food manufacturing, as a similar space for restaurants) provides even more chances to learn and create customer benefits.
Having seen how well this expanded business model applies to restaurants, Ecolab has duplicated this knowledge-based benefit-development process for other types of customers. Hospitals were an early and natural extension of this concept.
As you can see, Ecolab is beginning to develop many of the characteristics of an ideal business model.
Copyright 2008 Donald W. Mitchell, All Rights Reserved
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