Here’s an example of a lucrative business model
QUESTION: Yaneek, my dream is to start a business one day in the future, but I need some advice about practically turning an idea into a business that can make money, not just pay bills. I don’t want to start a business to struggle. I know there is no guarantee of success when starting any business – so I’m not expecting that; however, I read a few of your articles where you said we should do a business model. Can you give me a clear example of a business model that makes money?
– Marsha
BUSINESSWISE: Just this week, I had an experience with a motor insurance company that was such a powerful reminder of how lucrative a business model they enjoy, I was compelled to share it on social media.
In fact, in my training programmes on business models I typically cite insurance, financial services, telecommunications, distribution, food, petroleum, technology, and medical services among the industries that have highly profitable and enduring business models.
There are several definitions for business models, however, the term generally refers to how a business intends to create value for given target markets in a profitable, competitive, and sustainable way.
Before I drill down to the issue you outlined, I want you to appreciate that business models aren’t just about profitability, which appears to be your exclusive focus, but they should also detail how the enterprise will thrive and endure amid strong competition and a rapidly changing environment.
DEMAND AND PRICE INELASTICITY
To answer your question, let me revert to the motor insurance example. What makes their business model most attractive is that insurance is mandatory, therefore, prospective customers are compelled by the Motor Vehicle Insurance (Third Party Risks) Act to purchase.
The primary revenue stream, which is premiums paid, are renewable annually and nonrefundable. The primary service for which customers pay is a promise to protect, in the event of an accident, the probability of which is usually low for the average motorist.
Not only is there a guarantee that customers will need such services, but equally important, that demand will be relatively price inelastic.
Price inelasticity is usually sweet music to the ears of a profit-driven entrepreneur. In simple terms, demand is likely to remain steady even when price increases are imposed because the target market can’t do without the service. Therefore, you have ready and relatively inelastic demand, consistent, sustainable and lucrative revenue streams, and substantial average customer lifetime value, which are all among the critical positive indicators of a winning business model.
Internally, the challenge will be to manage risks, operations, and expenses so as to maximise profitability, competitiveness, and sustainability — which is no easy feat in any industry, let alone motor insurance.
BARRIERS AND LEGISLATIVE LAG
Another state-imposed and enforced advantage that the motor insurance business model enjoys is high barrier to entry, particularly relating to licensing requirements of the Financial Services Commission, and the Insurance Act.
Where barriers to entry in an industry are high, it constrains the rate and number of competitors entering an industry. Fewer competitors are almost always advantageous to players within industry.
Also, the infrequent and legislative lag in addressing excess and minimum coverage continues to provide considerable cushioning for industry players, though at the expense of the motoring public — a point raised by my fellow Sunday Gleaner Business columnist and insurance expert Cedric Stephens in his column published on April 1, 2018, titled ‘Motor Insurance Law Short-Changing Accident Victims’.
Unintentional though it may be, the support of the State in protecting your industry and its viability are also very persuasive indicators of a winning business model.
SERVICE STANDARDS
Whereas the strict statutory provisions governing the business of insurance help insulate the industry from competition, it is far more loose when it comes to service standards and obligations to consumers.
Again, this augurs well for their business model as the lack of guaranteed service standards and consequences for breaches are less burdensome for insurers operationally and financially. This is further supported by a slow and costly justice system that enables greater flexibility and power in denying, negotiating, settling, and paying claims by companies.
Lax consumer protections are less cumbersome for service providers, again enhancing the attractiveness of motor insurance as a business model.
One critical point to note is that the most successful of business models are those that put the consumers first rather than exploit them. This mean consistently adding value to customers and faithfully acting in their best interest to ensure that they are very happy doing business with you and that they may remain loyal and even become promoters of the business through positive word-of-mouth.
As you noted, there are no guaranteed successful business models, however, there are several propitious elements of the motor insurance model that you can take away to guide you in selecting an industry and crafting your own model. I hope you found this example useful.
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