Eliminating the Pain with a Lean Business Model

DSC07289xArt3I’ve long been a student, as well as an occasional mentor, on the subject of innovative business models. As part of my continuing self-education efforts on the subject, I recently picked up a copy of Business Model Generation, written by Alexander Osterwalder and Yves Pigneur. As the promo for the book says, it is “a handbook for visionaries, game changers and challengers.

If you’re interested in business models, I strongly suggest picking up a copy of the book, but of equal interest to me was the fact that I picked it up largely because I was trying to use up my remaining gift cards at Borders, during their going out of business sale. I’d been a customer of Borders for many years, and typically found it had a better selection of the sorts of books I wanted than most competitors.

The story of the rise and fall of Borders is a sad one, with management having decided to close almost 400 stores and lay off over 10,000 employees. Many seem to think that the company was simply overcome by the dawn of the digital age and the decline of paper media. In fact, like many business failures, it seems to be a story of death by a thousand cuts, rather than by the sudden and unforeseen emergence of a paradigm shift that could not be avoided. If you’re interested, there are some nice articles on the subject, including one by Annie Lowrey in Slate. In many ways, her article could be as valuable a lesson as any in the book I bought at a discount.

Obviously, creating a “big box” business involves a huge amount of startup and ongoing expense. In essence, you are committing to building a Titanic, which typically will not be Impactable to maneuver around the icebergs that every business will face, sooner or later. Unfortunately, not everyone is a Sam Walton, who can build a big box business and keep it running, through and over most obstacles.

For several years, my favorite model has been Threadless, which is the antithesis of the big box business. You know Threadless, don’t you? It is, as an article in Inc. Magazine described it, the company that “succeeds by asking more than any modern retail company has ever asked of its customers — to design the products, to serve as the sales force, to become the employees.”

Two college dropouts, Jake Nickell and Jeffrey Kalmikoff, started the T-shirt company by running Web 2.0 type design competitions via social networking sites. When members of the networks responded with their designs, other members of the network got to vote on their favorites, thus providing free artists, proven demand for the product, and a pretty fair amount of “buzz” to buy the products, “right out of the box” (pun intended). Having created the product, essentially for free, and established the market, all Threadless had to do was turn up the pressure to “buy now.” It did this easily by making the designs a limited edition that would expire within a fixed period of time, thus increasing pressure to consummate the sale sooner rather than later.

Threadless, when it emerged, was one of the very few companies I had seen that, essentially, just had to be successful. It had very little fixed overhead, since it didn’t have to pay the artists to create the designs, nor manufacturing costs until the customers made it known (without the cost of market research) that they were ready to buy. This looked like, and still appears to be, a sustainable business model, unless somebody tweaks it in the wrong direction.

Ring-A-Ding-DingWhile I’ve not lost interest in the progress of Threadless, I’ve now got a couple of new interests. One is Exboyfriend Jewelry, a Web business where you can sell off those things left behind when a relationship ends. Their slogan is “You don’t want it. He can’t have it back.” There are several rules, including a limit of five listings at a time, items must be from an “ex.,” and you must share the story (without personal information) as to why you’re selling.

A similar concept seems to have been developed by Josh Opperman, who founded IDoNowIDont.com, when, after being engaged for three months, he came home to find that his fiancé had vacated and taken almost all of her belongings with her. The single exception was “that beautiful diamond engagement ring was sitting on the coffee table looking up at me as if to say ‘so what’s next?'” What was next for him was using this as a way to lure “motivated sellers” to his site, where buyers looking for a deal could take the “unpleasant reminder” off the hands of the jilted sellers, for a price, and a commission to Opperman’s company.

The concept of making money off a heartbroken member of a broken up couple is not totally new in the business world. My first experience with it came as a law clerk. I was discussing different law firm strategies for dealing with clients who needed a lawyer but didn’t feel they had funds available to hire one. My mentor told me about a local divorce lawyer in Louisville, where I was getting ready to hang my shingle, who had mastered this issue years earlier. He simply took the wedding ring of the prospective clients as his retainer, explaining that the soon-to-be client: (1) certainly wouldn’t be wanting it anymore; and (2) giving it to her lawyer would be one more way to get revenge on “the cad.” The strategy apparently worked quite well, because the lawyer had a safe in his office with cigar boxes full of wedding rings and file drawers full of the files of ladies who had hired him to handle their divorce.

Innovation is an interesting thing. Most of the really good innovation seems so obvious, but that is the “genius.” Not all of it is good, however, and perhaps it just seems good when you see it, because end users are spared from seeing the innovation that fails to reach the market.

Looking at “obvious” lean business models, one has to wonder why a budding entrepreneur would pursue a business model that called for large sums of money, long term obligations, including enormous fixed expenses, when there are other business models out there. For a very nice spin on this issue, check out the interview on Techcrunch.com with Eric Ries, who came up with the term “The Lean Startup.” Some of the many great points he makes are determining which elements of your innovation breakthrough are value creating – sustainable, which are creating real value vs. waste, and determining how you can create your minimum viable product, rather than the maximum final version. Lean is good.

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Posted in Applied Entrepreneurship, business, entrepreneur, Financing a business, Growing a business, Innovation, Planning for a business, Recession strategies, Social networking & media, Starting a business, Thinking about a new business
One comment on “Eliminating the Pain with a Lean Business Model
  1. […] I've long been a student, as well as an occasional mentor, on the subject of innovative business models. As part of my continuing self-education efforts on the subject, I recently picked up a copy of Business Model Generation, written by Alexander Osterwalder and Yves Pigneur. As the promo for the book says, it is "a handbook for visionaries, game changers and challengers. If you're interested in business models, I strongly suggest picking up a c … Read More […]

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