Reason 1: Market Problems
A major reason why companies fail, is that they run into the problem of their being little or no market for the product that they have built. Here are some common symptoms:
- There is not a compelling enough value proposition, or compelling event, to cause the buyer to actually commit to purchasing. Good sales reps will tell you that to get an order in today’s tough conditions, you have to find buyers that have their “hair on fire”, or are “in extreme pain”. You also hear people talking about whether a product is a Vitamin (nice to have), or an Aspirin (must have).
- The market timing is wrong. You could be ahead of your market by a few years, and they are not ready for your particular solution at this stage. For example when EqualLogic first launched their product, iSCSI was still very early, and it needed the arrival of VMWare which required a storage area network to do VMotion to really kick their market into gear. Fortunately they had the funding to last through the early years.
- The market size of people that have pain, and have funds is simply not large enough
The observation that you have to be able to acquire your customers for less money than they will generate in value of the lifetime of your relationship with them is stunningly obvious. Yet despite that, I see the vast majority of entrepreneurs failing to pay adequate attention to figuring out a realistic cost of customer acquisition. A very large number of the business plans that I see as a venture capitalist have no thought given to this critical number, and as I work through the topic with the entrepreneur, they often begin to realize that their business model may not work because CAC will be greater than LTV.
The Essence of a Business Model
As outlined in the Business Models introduction, a simple way to focus on what matters in your business model is look at these two questions:
- Can you find a scalable way to acquire customers
- Can you then monetize those customers at a significantly higher level than your cost of acquisition
Thinking about things in such simple terms can be very helpful. I have also developed two “rules” around the business model, which are less hard and fast “rules, but more guidelines. These are outlined below: