“The web changes business models.” Every business person says so; it’s much discussed, but little understood, often not thought through and even less deliberately reacted to and implemented. Yet the web, the broadband driven internet, has radically disrupted business models and none more so than that of the traditional middle man, the so-called distributor (that includes agents, brokers, channel partners, intermediaries, merchants…) who stand between the source of a good/service and the end client. Let’s look at business models and then at how they get discombobulated by the web. Looking for an informed business model definition, I went to two of my favourite sources, the Harvard Business Review (HBR) and then Techcrunch, where I found Vivek Wadhwa’s insightful article describing a business model as having seven basic components:
1. Reaching customers. 2. Differentiating your product. 3. Pricing. 4. Selling. 5. Delivery/distribution. 6. Supporting Customers. 7. Achieving customer satisfaction. I agree it’s a pretty exhaustive list that you can’t really go wrong with. What I liked about it was the detail which you can read below and that, varying by sector, it is essentially applicable to every business when disseminated. The omnipresent web, all those connections and all that information have structural implications for every component or your business, most especially if you are, or if have in your chain of value, a distributor.
TechCrunch is a wonderful source of information “dedicated to obsessively profiling startups, reviewing new Internet products, and breaking tech news”. Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. Clearly he is a wise business guy with excellent geek credentials. His seven components of a business model are as follows:
- Reaching customers. Ralph Waldo Emerson famously said, “Build a better mousetrap, and the world will beat a path to your door.” The reality is that even if you did, no one would find you. Even when you know who your prospects are, it’s usually difficult and costly to reach them. You have to find them via the Internet and e-mail, or the old-fashioned way—through broadcast media, print ads, direct mail, telemarketing, references or by cold-calling. And these potential customers are not likely to be waiting to hear from you and may not respond to you. So be sure you know how you are going to find and reach them.
- Differentiating your product. You think you’ve got the very best solution, but so does the other gal (or guy). There’s always competition, whether you realize it or not. Smart marketing executives know how to develop unique product-positioning strategies that highlight a product’s true value. You need to thoroughly understand the competition and effectively communicate the unique advantages of your product.
- Pricing. One of the most basic decisions you have to make is how much you’re going to charge for your product or service. Giving your stuff away is the way to go on the web, but remember that you still need to figure out how you are eventually going to make money—you can’t make it up on volume. Start by understanding how much customers value what they’re gaining from you. Then you need to estimate your total costs, analyze the competitive landscape, and map out your long-term strategy. For your company to survive, your product’s price must be greater than its overall cost.
- Selling. Persuading customers to buy a product that they need is one of the most important skills an entrepreneur must learn (read It’s All About Selling for Survival). You’re going to be selling at every juncture. So you have to understand what it takes to close a deal and put together the necessary sales process. And this process has to be perfectly conceived. Be sure to test your selling strategy as you would your product.
- Delivery/distribution. This is easy on the Internet. But for big-ticket items, you usually require a direct sales force: for mid-range products, distributors or value-added resellers and for low-priced items, retail outlets or the Internet. It’s different in every industry and for every type of product, but you have to get this right. Your products need to be designed and packaged for the channel through which they will be distributed to customers.
- Supporting Customers. In addition to teaching customers how to use your product, you need to ensure that you can deal with defects and returns, answer product questions, and listen to and incorporate valuable suggestions for improvement. You may need to provide consulting services to help customers integrate and implement your products. If your product is a critical component of a business, you may also need to provide 24/7 onsite or web support.
- Achieving customer satisfaction. The ultimate success or failure of a business depends on how much it helps customers achieve their objectives. Happy customers will become your best sales people and buy more from you. Unhappy customers will become your biggest liability.
And he concludes, “all the pieces have to come together like a jigsaw puzzle in your business model”. OK let's work with that then.
A distributor is an entity that stands between the producer of a product/service and another entity in the distribution channel, to get to that much sought after, fought over and all valuable end client. It now gives me great pleasure, as the task is much simplified by Viveks easy to review component check list, to examine the role of the distributor in reaching customers, differentiating products, pricing etc. OK you get the process. At each stage the internet has evident implications for the creation and capture of value as nicely illustrated for us in the Harvard Business Review.
Distributors disrupted by the web have brought us many distribution winners and losers. Think through the distribution changes associated with the business of investments/equities, travel, fax machines, videos, books, phone books, maps, records, newspapers/magazines, phone and the mail. These spectacular changes are all directly associated with reaching customers, differentiating products, pricing, the nature of selling and of course delivery/distribution itself. In each case, single or even multiple components of business models have been directly impacted by the web. Simply put, but not simple to achieve, the winners understood both their business models and the web; the losers did not. Spectacular winners that we all know include Amazon, Apple, Craigslist, Dell, ebay to start at the beginning of the alphabet. Losers include many businesses which, while debating brick and mortar stores, saw components of their business model walk right out the door. Examples include: Barnes & Noble, Staples, Virgin Mega Stores.
Export driven businesses face the same seven components to be successful in their international development, but relative balances are altered. Delivery/distribution, in the widest of senses, takes on a whole new level of critical importance if new international markets are to be entered, developed and retained. Vivek Wadhwa's summary on Delivery/distribution is now worth repeating: This is easy on the Internet. But for big-ticket items, you usually require a direct sales force; for mid-range products, distributors or value-added resellers; and, for low-priced items, retail outlets or the Internet. It’s different in every industry and for every type of product, but you have to get this right. Your products need to be designed and packaged for the channel through which they will be distributed to customers. Starting off with the internet I agree with his statement, apart from the fact that it is easy! It is far from easy; it is extremely complicated to get right. International delivery/distribution is complex, requiring levels of understanding and resource that can be beyond many businesses. However, the starting point is, of course, the internet. The internet radically changed export and international business development, most especially in terms of delivery/distribution. Old distribution models and relationships became rapidly worthless and the middle-man was no longer in the middle but clearly side-lined. Unless using the internet itself changed their business model, they remained unavoidable and essential as a route to market for the exporters of goods and services. What we have seen is the dramatic growth in internet driven direct relationships for exports and internationalization, whether in Business to Business (B2B) or Business to Consumer (B2C). Original equipment manufacturers (OEM’s), at all tiers, can leverage the internet to go direct to the end business client. Consumers have changed the game, they now want, can and do go direct to source. In short, it’s all about the internet and distributors have been, are and will be disrupted.
