What is your 'WHY' in your business model?

By Kelvin Chungu

Last week, in our Daily Nation ‘weekly, Industry Corner Column’ we featured a second article on business models focused on a pointed question of what is the ‘WHY’ in your business model?

Thought uncritically, the question might almost sound juvenile. But hear me out. One of the fundamental reason that a number of successful enterprises, in fact excel is their understanding of this very question. The ‘WHY’ of their business model.

This article is rewritten primarily based on various request we got on this topic from a number of business school students.

Magretta (2002) of the Harvard Business Review, wrote in ‘Why Business Models Matter?’ that the word “model” often conjures up images of white boards covered with arcane mathematical formulas. And Magretta (2002) concluded that “business models, are anything but arcane, they are, at heart, stories—stories that explain how enterprises work, that a good business model answers Peter Drucker’s age-old questions: Who is the customer? And what does the customer value? It also answers the fundamental questions every manager must ask: 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?”

So now that it is clear, let’s ask the question again. What is the ‘why’ in your business model?

McNulty (2014) in an article ‘‘WHY’ Is Wrong with Your Business Model?’ had a quite interesting take and it captured the essence of this topic well. In that article McNulty (2014) made an important statement which has been rephrased in this column as a question. “WHY is the Apple mystique legendary? WHY do people line up overnight to buy Apple’s next product when they could buy electronics that do the same job for less money from other retailers and manufacturers?” WHY?

In answering those series of questions, McNulty (2014) made the point that “It’s this distinction between WHY and WHAT that makes all the difference.” “That the essential questions leaders must ask themselves and challenge their teams with are all 'WHY' questions: WHY would a customer want to do business with us? WHY would top talent want to come to work with us, and contribute their best to our efforts? WHY would suppliers want to become our long-term strategic partners? WHY would communities welcome our facilities? WHY would institutional investors want to trust their money to us?” WHY?

Let’s bring this to life with a look at some of the more common business models;

For example, for someone running a retail store at a gas and petrol filling station, it is quite clear that those type of ‘outlets’ often sell fast moving products and tend to be more pricy than the normal retail chains. WHY is that retail store able to charge much more than one on the main street?

These retail outlets, rather than being engaged in selling whatever it is that it has consciously decided to display and sell in its stores, it is in fact also selling a certain value proposition that is enabling it to price its products at premium. The question the Store Owner has to ask in setting its prices is, how much is our customer willing to pay for the value of convenience of being able to buy the bread or any other products on their way home or anywhere?

Let’s look at another example in the retail settings. There are always product promotions going on every other week, particularly, by the big chain stores,. The key question is, why those promotions and with the level of frequency? Does it mean the retail chain stores are willingly embracing losing money every week? Is it not likely that if certain segments of shopping population become aware that discounts are offered every other week, that in fact, they will only shop on those days that a discount at a loss to the retail chain, is on offer?

So why do it and with the frequency that they do? Well it turns out for the most part, that those attracting jewels, those discounted products are properly positioned right at the edges of the shelves, placed strategically at the back or where another ‘primed product is within eye shot’, where to gain access to the discounted products, one must necessarily pass those other important shelves with products figuratively shouting to catch attention of the eye of a child, or a busy mommy of this customer segment that has followed the discounted products. Those other products may be well displayed or they may be products that their kids at home have been asking for, after having watched a well-timed advert from the comfort of the living room, perhaps instigated by the very chain retail store. What is the WHY in this model?

This model would probably be rightly termed a loss leader model, but it also has features of the Bait and Hook business model popularized by the Gillette. The hook being the discounted products and the bait being the properly displayed other products. The essence of the Gillette model was to offer one product at a giveaway significantly discounted price because there was another connected product for which the customers buying the first products will be compelled to keep buying to enjoy the benefits of the discounted product. In the end and in the long-run, the company makes a profitable return. In this case, the essence of the model consists of selling the Razor, which is a basic product at a discounted price and then realising value through the repetitive sales of blades. The Razor in this case is the Bait and the blades are the hooks.

A similar example of this model was the Nespresso’s model which was premised on innovative coffee-making machines (the Hook) been sold at discounted giveaway prices and while the return is realised over time, through the sale of pods of Nespresso coffee that could only be gotten from Nespresso. To date Nespresso continues to generate significant value from a limited product range particularly because of the brand loyalty they have built over time, facilitated by this initial strategy. As the brand loyalty has increased over time the Nespresso business has evolved into a Lifestyle Experience Business Model, similar to the Apple concept.

In a Harvard Business Review Article ‘Reinventing Your Business Model, - Johnson, Christensen, Kagermann (2008)’ wrote that; “Successful companies already operate according to a business model that can be broken down into four elements; a) a customer value proposition that fulfils an important job for the customer in a better way than competitors offerings do; b) a profit formula that lays out how the company makes money delivering the value proposition; and c) the key resources and d) key processes needed to deliver that proposition.”

These elements can be analysed to distil the ‘WHY’ of the business. And with that answer a business can find a model that is suitable and more appropriate for it and which can be varied depending on circumstance.

And so it bears repeating ‘What is the ‘WHY’ in your business model’?