Valuable Formula

formula mathThe success of a business is dependent on its business model and good business models are based on a Valuable Formula.

There are two specific aspects of the business model that you really need to understand to identify your valuable Formula. Firstly WHY do customers buy from you and secondly HOW does your business make its money? If you clearly understand these two things you have identified your valuable Formula.

WHY your customers come to you might be because … you have a convenient location, there is easy parking, your after sales service is good, you recognize and greet all your customers, you have a unique understanding of their business, your product/service is the best value for money, no one else can supply it and so on. There is always at least one reason why a customer buys from you (although it is usually a combination of reasons and these vary across different market segments).

In relation to HOW you make a profit, what is it you do that allows you to generate a margin over your costs? Do you have lower costs than your competitors, and if so, why? Is it because you are skilled at producing your products more efficiently? Do you have a source of raw materials that others pay more for? Can you command a price premium, and if so, why? Is it because your service is so exceptional that people are willing to pay a little more, or is it because you provide 24/7 service? There are always reasons, and understanding why is a vital piece of business intelligence. The WHY and HOW add up to your Valuable Formula.

In a world where the financial crisis and technology are causing rapid changes your valuable Formula can change very quickly. Consider the following classic examples: the near fatal impact of digital cameras on Kodak; the virtual demise of the beautifully bound and printed Encyclopedia Britannica as a result initially of the launch of the first online encyclopedia, Encarta, and in recent times, Wikipedia; or, the impact of direct customer access to online flight and accommodation bookings on the traditional travel agents.

Three steps for managing through a financial crisis: Your Valuable Formula, Modify Operations, and Manage for Cash.