Knowledge
16 mistakes in a business model
At first glance it may seem that the problem in a service company is weak marketing, no sales, too much competition or a difficult market. But my experience shows that the source of many difficulties lies deeper: in the business modelitself. It is not a topic that excites everyone right away, but it is precisely here that the key decisions are made which later either build stable growth or make the company operate under constant tension.
In this post I have collected 16 typical mistakes in business models that I regularly encounter when working with owners of software houses, creative agencies and B2B service companies. This is not an academic list; these are real problems with very concrete effects: low margins, no scale, owner burnout or fear of the next client. If you want to organize how your company operates, increase its predictability and prepare the ground for further growth, start right here.
1. No clearly defined target group
If someone says that “our offer is for everyone”, it means it reaches nobody in particular.
When I work with service companies, the starting point is most often that they can do almost anything for anyone. As a result, it is impossible to conduct effective marketing and sales communication. So in order to go to market effectively, we always have to carry out precise segmentation, and only then do the activities start to make more sense.
2. An offer that is too broad and scattered
This is the situation when the company offers everything it has ever had the chance to do, instead of focusing on what works best and brings the greatest value.
Think about what you sell. It may turn out that one or two main lines of your solutions generate as much as 80% of profits.
3. No unique value proposition
You will recognize it when the offer does not stand out with anything specific. It uses general slogans that tell the client nothing.
Mythical quality, many years of experience and flexibility towards the client. On top of that a “close-knit young team” that treats clients’ projects like its own… How many times have you heard that?
4. Billing for time, not for results
Although it is sometimes justified, selling time instead of specific results can be a major limitation. If you communicate it badly, the client does not see the value, and the company will have trouble increasing its scale.
Selling time, increasing scale will only be possible in connection with rising costs. You will need more people, and that is an additional organizational and process challenge. Consider productizing at least some of the services you provide.
5. The adopted model does not scale
This is the situation when every new client means more work and more chaos. I have come across companies whose owners were downright afraid of winning more clients. Such a situation occurs when the company has no mechanism to grow without increasing costs linearly, and lacks processes and procedures.
6. Dependence on the owner
The whole model is based on the owner’s competencies, knowledge or relationships. The company does not function without them.
These are the realities of the vast majority of small and medium-sized companies. If you are at this point too, consider whether in 10 years you will still feel like working as intensively as you do now.
7. Margins that are too low
This situation occurs when the adopted business model allows only a small profit, despite a large volume of work and sales. A low-margin business usually requires enormous scale and carries many risks.
That is the case, for example, in the retail trade of tobacco products, fuel or electronics.
If you base your competitive advantage on imposing minimal margins, then know that there will always be someone who will try to bid you down.
8. No sales process and no standardization
When sales look different every time, when each person acts according to their own concept and modus operandi, it is hard to monitor progress and the result is unpredictable.
If you want repeatability in sales, it must result from a clear process and not be the work of chance and market circumstances.
9. A badly constructed cost structure
When fixed costs dominate and revenues are variable, the company has no buffer or financial flexibility.
Many companies operate from client to client. When there is a client they earn, but when the project ends and there is no new one, fixed costs drag the company down. Very often I observe in companies an approach in which the owner says they will keep people or machines “in reserve”, so that when a client appears there is someone to serve them.
In service companies balance is essential.
Keeping experienced people obviously makes sense, you just have to take care to eliminate downtime, and therefore to sell more. If that sales volume is lacking, maybe it is worth thinking about another, more flexible way of delivering projects…
10. No systematic client retention
When clients buy once but do not come back, and every month starts from zero and you fight from project to project, then most likely the mechanisms of loyalty building, upselling and retention are missing: there are no subscriptions, retainers or service plans.
If you operate in a model in which your client disappears after the order is delivered, then either you have nothing in your offer they could continue to buy, or the value you deliver is not at the right level. Both of these issues certainly need attention.
11. Basing the model on one or two main clients or one industry
A very dangerous situation that I often observe in companies. Too much dependence on one segment or group of clients means no diversification of risk.
I have seen companies that grew dynamically for 15 years, only to suddenly slam on the brakes and stop, because problems appeared at the main customer or in the whole industry.
If one client generates more than 15 to 20% of your revenue… you are literally walking a very thin, even if for now profitable, line. Many times I have seen companies in a similar situation disappear literally from one month to the next. Often leaving the owners with debts, because they still had to cover the wages owed to people.
12. Excessive customization of every order
Instead of standardizing, the company adjusts its offer anew for every client. The result is chaos and a drop in margins.
If the company does not have its own tools, procedures, content, technologies, modules or components that could be used many times and in almost every project, then you have to reinvent the proverbial wheel.
You are not building a competitive advantage, e.g. in the form of reusable components that can shorten delivery time in the future and provide a higher margin.
So when I hear from companies that they are very flexible and adapt to the client, it most often means that, consciously or not, they have not yet developed standard procedures and components and are probably still learning what they do.
13. No strategic partnerships
If your business model assumes that your company produces all the components on its own, you may be missing the economies of scale that cooperation with others can bring. You do not have to do everything yourself, because some elements you can simply buy on the market.
In many business models outsourcing really makes sense and can add up financially and operationally. Ideally you find a partner with whom you will have common goals, but will not be competition or a cost to each other.
For example, one party makes tables and the other chairs. So we combine the offer to lower the cost of reaching clients and at the same time provide them with more comprehensive service.
14. An overly complicated way of delivering value
In such a situation the process of delivering the service or product is too complex on your side, incomprehensible to the client and hard to manage.
Theoretically this could be fine. Because if you have the ability to deliver very complex projects requiring vast knowledge and experience, you probably have less competition, since not everyone will be able to handle it. The question, however, is whether you operate in a market that pays enough for it.
Think of the manufacturers of luxury watches, which consist of hundreds, and some over a thousand parts, and of the incredible finesse of their workmanship. Think of processor manufacturers, or better still, manufacturers of the machines that make processors. The barrier to entry really seems high. But the prices at which they later sell all this are adequate too.
If your company, for example, makes websites and you have a forty-stage process in which 15 different people take part and which requires 70 interactions with the client, then hardly any client will want to pay for something so complex. Especially since they are not interested in the process, only the result.
15. A model that does not fit market realities
A model that “sounds nice in theory but does not add up even on paper”
is a model that does not respond to the real needs of the market and clients.
It is the affliction of many startups that are still looking for their repeatable and scalable business model. Founders often think they know something better than the clients for whom they want to do something.
If the business model does not add up on paper first, I would definitely hold off on investing time and money.
16. A bad balance between operational and strategic activities
This is the situation when the team and the owner are constantly caught up in “daily firefighting”. Nobody has the space to look at the model from a distance.
If everyone in your company is rowing with all their strength, maybe from time to time it is still worth someone lifting their head and checking, firstly, whether you are sailing in the right direction, and secondly, whether an engine could perhaps be attached to your boat after all…
The problems above do not appear overnight. Usually they build up gradually, until one day the owner of the company realizes that, despite the enormous amount of work, the team is standing still or, worse, is starting to go backwards. The good news is that each of these mistakes can be fixed. But it will not happen by itself. It takes courage to look critically at what works and what does not. And determination to stop patching holes and start designing the company anew: more consciously, with the future in mind, and not only survival.
If you see your company in this description, you are not alone. That is exactly why this post was written. So that you do not have to figure everything out on your own and can build faster a model that will work not only when you are on board, but also when you want to step away from it for a while. And if the business model is a topic you want to explore further, I encourage you to listen to episode #24 of the podcast “Droga Przedsiebiorcy” (The Entrepreneur’s Road, in Polish): “Why some companies grow and others do not.”
