Let’s begin by contrasting two very different types of business model, says David Molian, Visiting Fellow at Cranfield School of Management.
I embarked on this theme with a piece on how changing your behaviour as the boss can assist you in building value in your business. In this article I’ll be focussing again on the challenges of building value, but this time we’ll attack the issue by looking at the kinds of business model you choose to develop.
Let’s begin by contrasting two very different types of business model. Business A has a customer base that provides long-term, repeat, predictable revenues. New business leads come chiefly from referrals and recommendations and the rate of customer attrition is low. Once this firm acquires a customer they tend to stick, and they sign contracts. Business B has a model that is based on securing and delivering short-term projects. It’s on a constant hunt for new business leads. The customer base churns and there is little guarantee of repeat business. Its sales people are constantly on the phone or on the road. As a consequence it’s hard to predict revenues from one year to the next.
Two questions for you. Which business would you prefer to run? And which business is the more valuable?
There are no prizes for the right answers. I guess if you are an absolute workaholic – and something of a masochist – you might prefer to run business B. But the market provides a definitive answer to question two. In terms of value, model A will always beat model B hands down. To give a concrete example, it’s why advertising agencies have historically sold at higher valuations than design agencies: the advertising model is built on longer-term relationships based on a deeper level of client commitment, while design agencies have traditionally been more artisan-like in their operations, working episodically on a string of projects that are largely one-offs. That’s not to say there are exceptions that buck the trend: ad agencies lose accounts and some leading designers secure long-term business from larger clients. The changing media landscape is also giving rise to new hybrid business models. But the fundamental point remains the same. The closer your business gets to model A, the more valuable it is likely to be and the more enjoyable to run.
How does this translate into practical action?
First, you need to invest in the relationship with your customers, not just satisfying them but delighting them by over-delivering, both in terms of the work currently in hand and by anticipating their future needs before they have even come to realise these. Some will value this. Others will not. Never mind. Keep persevering.
A second point, which follows from the first, is that you should review the balance of customer-facing staff between “hunters” and “farmers”. Hunters are the classic sales folk who thrive on the thrill of the chase. Good ones will bring in new business, but have little interest in retaining it. Farmers enjoy nurturing and growing your customers. They are the natural account managers. If your business consists purely of hunters you will be condemned to constant customer churn and a business that is stuck in the mode of model A. If you only have farmers, you will have a problem with your sales pipeline as the result of the inevitable attrition of the customer base over time.
Get the balance between the two types right, and you will have a business which is both more valuable and more fun to run.
David Molian is a Visiting Fellow at Cranfield School of Management and former Director of Cranfield’s renowned Business Growth Programme.