HQQA053 What’s your business model?

What’s your business model? – Be prepared for this, never stall.

Here’s what they mean…

We just brought up the point of the business model in the last question. The investor is now asking about your business model specifically. You absolutely have to be able to answer this question (“What’s your business model?”), since that is what the investor is investing in. Remember you are in a sales meeting, so saying that we sell stuff on the Internet is not a visionary thing that the investors want to buy into.

A business model is a story how your startup works.

This question (“What’s your business model?”) is quite essential because it answers VCs, your parents and Peter Drucker’s age-old questions:

• Who is the customer?
• What does the customer value?
• How do we make money in this business?
• What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?

I love this story from Fred Destine at Accel:

“If you think about TJ Parker at Pillpack – if TJ had come into my office and said: “I’m building an online pharmacy,” it would have been a short conversation. But he comes in and he says: “I’m helping people with complex conditions live better, I’m giving them back their lives because they don’t have to do pill boxes … I’m making sure they medicate properly, and I’m all about life, I’m all about enjoying life, my mission is to help people live better lives through better pharmacy,” that to me is a narrative that I can relate to because I am thinking: “I can hire people against that narrative, I can build partnerships against that narrative, I can market against that narrative – and, it’s imbued with a sense of purpose.”

Pillpack was just acquired by Amazon.

You need to tell investors a story. The more that you understand business model strategy the more compelling you’re able to tell the story, and simply. Get your story straight.

What you need to say

“Some people sell shoes on the Internet, we deliver happiness. When you think about your experience with any ecommerce, what is the first thing that crosses your mind? Probably a painful, boring experience, with horrible customer care.

Before we started Zappos, we hired McKinsey who did an extensive study and found that 73% of people would shop on a site more regularly if they had amazing customer care, and the fantastic returns policy. We acted on this market insight and designed our business model to deliver the happiness they wanted.

Of course, the first thing that you are thinking is that this is going to cost a lot of money. And you’re right! However, whilst we lose money on a first three purchases, our customers buy 37 times year.

I’m sure you don’t need to be an expert to do the basic math. Let me do it for you anyway. We have 34 purchases at an average basket price of $70. The gross margin is 40%…”