Pricingcanbeusedeitherasa“carrot”ora“stick.”Anexampleofthecarrotapproachisarestaurantthatoffersadiscounttodinerswhoeatearlyintheevening.Creditcardcompaniesoftenemployastickapproachwhentheyimposealargepenaltyforlatepayments.Airlinesuseboththecarrotandthestickapproach,offeringsizablediscountsforadvancedpurchasefaresbutchargingmoreifpeoplewanttochangetheirtravelarrangementsatthelastminute.Whetheryouwanttousethecarrotorthestickapproachdependsinlargemeasureonyourcircumstances,yourcoststructureandthetypeofrelationshipyouhavebuiltwithcustomers.
Pricingcanalsobeusedtocontroldemandwhileproductionrampsup.Forexample,anintroductorypricingschemecanbeusedthatistemporarilyhigherthantheprojectedlong-termpricefornewtechnology.Thatenablesahighqualityserviceandsupportstructuretobefundedduringtheintroductoryperiod.Oncegreatervolumesoftheproductareavailable,thepricecanthenbelowered.Oralternatively,manyservicebusinessesusetemporarilylowpricestoencouragecustomerstotryouttheirnewservices.Theselowpricesenticepeopletotrythenewserviceandhopefullykeepusingitinthefutureoncethepriceshavereturnedtonormal.Thisisagoodstrategyifyourbusinessmodelmakesthisaviableoption.Lowintroductorypricesandtheresponseofestablishedcompetitorstotheseofferscanalsogeneratelotsofattention.
■Eliminatenon-essentialcosts
Thethirdapproachtoreinventingabusinessmodelistotryandreduceunnecessarycostsfasterthanyourcompetitors.Thisnotonlyincludeseliminatingdirectcostsbutalsoembracesabolishingthetimewastersthatcustomershateaswellaseliminatingunnecessaryfeaturesthatmaybedifficulttotrackandadminister.
Logically,regardlessofwhichbusinessmodelyouadopt,eliminatingnon-essentialcostsmakesgoodsense.If,however,youcanmakethereductionofcostsanintegralpartofimprovingyourbusinessmodel,youhavethepossibilitytoestablishandbuildagoodcompetitiveadvantage.Theconversionofbusinessmodelcostgainsintonewcustomerbenefitsshouldbethefocusofmuchmanagementattentionandeffort.
Sowhere,precisely,shouldabusinesslooktoreduceitscosts?
Tryaccessingsuperiorknowledgeassets—tofindbetterwaysofdoingthingsorofcustomizingyourproductsandservicestomeetthepreciseneedsofthecustomer.
Becomeawareofanyinternalconflictsofinterest—whereonepartofyourorganizationdoessomethinginthenameofeliminatingtheircoststhatendsupgeneratingmuchhighercostsinanotherpartofyourcompany.
Outsourceyourproductionfunctionstoamoreefficientproducer—whowillthengetpaidiftheydeliverthecostreductionsyouagreeupon.
Expandratherthannarrowyourfocus—andlookatallyourcustomer'scostsinusingyourproductorservice.Mostcompaniestendtostopthinkingaboutcostreductionattheshippingdockendoftheirbusinessmodel.Customers,however,mayhavemanyadditionalcostsforinstallation,serviceneeds,repackagingorotherareas.Ifyourbusinessmodellooksatwaysofreducingthecustomer'stotalcostsratherthanjustyourowncosts,manymorepossibilitiesmaycometolight.Itmayevenbefeasibleandrealistictocreatecostbenefitsforyourcustomer'sstakeholders(suppliers,partnersandendusers)aswell.
Openthedoortoneworalternativetechnologies—whichoffergenuinecostadvantagesovertheoldwaysofdoingthings.
Locatepartnersormakeacquisitionswithpartieswhowillbecomeintegratedintoyourbusinessmodel—Inagoodacquisition,costsarereducedinboththeacquiringandtheacquiredcompany.Inanidealacquisition,however,bothcompanieswillbeabletodevelopanimprovedbusinessmodelofferingmanymorestakeholderandcustomerbenefits,whileatthesametimereducingcosts.
Talkmoreintensivelywithyourcustomers,suppliersandshare-holders—andtakeadvantageoftheirknow-how.
Reducethecostofyouroperatingcapital—byusingyourstockintelligently.Forexample,youcanofferstocktoasupplierorstockoptionstoemployeesratherthanwageincreases.Oryourlendersmayagreetoconvertdebtintoequity.Alloftheseavenuesshouldbeexamined.
Thegoalofredevelopingyourbusinessmodeltooffercustomersmorebenefitswhilealsoreducingcostsisanaggressivebusinesstarget.Itstandstoreasonthatsomemistakesanderrorswillbemadewhilepursuingthisgoal,especiallyinlightoftheneedforsometrialanderrortofindwhatworksandwhatdoesn't.Thereare,however,somemoreobviousmistakesthatareworthavoiding.Specifically,itmakesgoodsensetoavoidanycostimprovementmeasuresthat:
Causeprofitablecustomerstogoelsewherewhileattractingcustomerswhocontributelittleornoprofitstoyourbusiness
Reducecostsinoneareaonlytohaveevenlargercostsshowupelsewhereinthebusiness
Encouragetopperformingemployeestomoveelsewhere
Reducethequalityofyourofferings
Reduceyourcashflow
Generateloadsofnegativecommentandpublicity
Attracttheattentionofregulators
Alsokeepinmindthatwhentalkingaboutreinventingabusinessmodel,thereisatendencytolookataccountingcostsandhowmeasureswillbereflectedontheprofitandlossaccounts.Thisisusuallyunhelpful.Amoreusefulapproachistofocusoncashflowinstead.Fromthatperspective,activity-basedcostingisworth-while.Thiswillhelpyoucomprehendthecostsincurredinoperatingonewayversusanothermuchbetter.Activity-basedcostinganalysiswillalsohelpyoubetterunderstandthecostpotentialofdifferentbusinessmodels.
AMoreAmbitiousReinventionIsTackled
Armedwiththesuccessofoneroundofbusinessmodelreinvention,therearetwocommontendenciesthatarise:
Thereisaperceptionthatallthehardworkisdoneandnomorechangesareneeded.
Stakeholdersstartworkingonmaximizingtheirgains,evenattheexpenseofothersifnecessary.
Bothoftheseareathreattofuturesuccess.Toovercomethem,tackleanothermoreambitiousbusinessmodelreinventionprojectandaddresstheissueofsharingthebenefitsmoreequitably.Thatwillsendalltherightsignals.
■Keepimprovingandbuildabuffer
Asyoustarttoreapthebenefitsofyourearlyattemptstoreinventyourbusinessmodel,youmaybetemptedtorestonyourlaurels.Theonlyproblemwithdoingthisisthatthereinventionprocessneedstobeongoingratherthanaone-offevent.Ifyoustopinnovating,youwillgraduallybutsurelystarttofallbehindyourcompetitors.
Withthisinmind,staymotivated.Createanidealvisionofwhereyourbusinessshouldbeinthefutureandwhatyouneedtodotogetthere.Specifically,youneedto:
Makecertainyourbusinessisgeneratingresourcesfasterthanyouareconsumingthem—soyouhaveabufferofresourcesavailabletofuelyourfuturegrowthprograms.
Worktomakeitmoreattractiveforallstakeholderstosupportyourcompanythananyother.
Buildcompetenciesandotherelementsthatwouldtakemanyyearstoduplicate—makingitverydifficultforacompetitortoovertakeyou.
Drawonyourorganization'svalues—tocreateahighlyinspirationalbusinessmodelforthefuture.
Instillaspiritofteamwork—betweenallthevariousorganizationalstakeholders.
Nurtureaclimatewhereitisokayforpeopletousetheirpersonalinitiative—totakesmall,affordablerisksthattryoutnewideas.
Thislastpointisimportant.Insomeorganizations,onceasuccessfulbusinessmodelreinventionhasoccurred,thereisanappetiteforoverexpandinginthefuture.Excessivedebtmaybeassumedtofundworkingtowardsanoverlyaggressivetarget.Thismayresultinprojectsbeingattemptedthatcarryanexcessiveamountofrisk.Thiscanbeaproblemiftheeconomicclimatedeterioratesinthefuture,leavingthecompanyexposedtohighcontingentliabilities.