10 Questions to Ask Before You Believe in a Business Model
Some business models are inherently more attractive than others, yet investors and other stakeholders often don’t ask the obvious questions. Here’s a checklist that makes sure you are not one of them.
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People like to make thinking about business models really complicated. While that can sometimes have its place, for those looking for a quick overview of what makes one model superior to another, this might be a good place to start. Let’s walk through some key questions.
Question 1: Are we able to create switching costs once we have a customer working with us?
Some of the most powerful business models in use today depend on the fact that it is inconvenient, expensive or time-consuming for customers to switch to another provider. For years, this was a fundamental driver of the success model for retail banks — once you have filled out all the paperwork, established your credit rating, set up all your direct deposits and transfers, to do that all over again to work with another financial institution is a real pain, so most people don’t bother.
Network effects are another form of switching cost. Once all my friends and family are on a social network, for instance, to port all that information somewhere else is difficult or even impossible. Facebook (or Meta, or whatever they are calling themselves these days) is a poster child for a company that tries to take advantage of this effect.
Of course, switching costs can be undermined by adroit competitors. The company now known as Wise (formerly Transferwise) undermined switching costs for foreign exchange transactions by making all the barriers involved in Forex unnecessary, eliminating banks’ dominance for many customers. Instead of actually transferring money from one place to another, they broker transactions of funds within geographies, making low-cost, low-effort transactions available to everyone.
