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“How does your business make money? Are you sure?”
This question always catches unsuspecting entrepreneurs off guard but also creates a great conversation that can lead to new ideas for solving problems and taking advantage of opportunities. Many businesses focus on the product or service that they offer to the marketplace and not necessarily the problem they are solving. Common logic says that if you are the best provider of a product or service in the market that your business should be the market leader. But is this true? What makes a great product or service? The secret to every great business is that it understands the problem it is solving not the product or service it is providing. You may think this is a nuanced difference but it really isn’t. In fact, two businesses offering the exact same product or service may have two different problems they are solving. The key to profitability is being able to understand the problem that your customers or clients are paying your business to solve.
Focus on the problem being solved
The labour example:
I am part of a company that hires unskilled workers to complete physical labour tasks that others don’t want to do. Our business isn’t the specific type of service we offer, our business is attracting labour at a competitive rate and deploying it into the market at a competitive price and hopefully earning a profit. To attract labour we need to have competitive pay, a great environment, strong leadership and the ability for our team to use their skills to earn a living. If we only focused on the service we provide we would be missing out on other opportunities that require physical labour to solve. By thinking about our business as a labour management business rather than a particular service business, we immediately see where else we can deploy labour that matches the skill set of our team and the market that needs help completing work they don’t want to do.
The equipment example:
I was involved in a company that manufactures and sells equipment for the oilfield. They think of their facilities as a place of solutions to problems – not as a manufacturing facility of products. If all they did was focus on the products they build they would be missing out on the opportunity to build products that solve similar problems in other markets that leverage their existing resources. Their engineers and employees take their knowledge and apply it to other use cases that have resulted in broadening their equipment line (or “solution portfolio” as I call it) to servicing more customers and diversifying their revenue.
The Uber example:
The classic example of this concept is Uber. Uber originally built a technology infrastructure to match drivers and riders. That evolved into matching food providers with food eaters (Uber Eats). Providing the best technology to facilitate the needs of two parties on opposite sides of the same need is their business. They need to provide drivers with a great experience and opportunity to earn income while providing riders and food eaters with a great experience for getting to where they want to go or to access the foods they want to eat. They are able to make money by managing multiple two-sided market needs.
It always come down to the same thing – tell me the problem your business is solving not the product or service it offers. You can’t be all things to all people and if you view your business as a product or service business then you may find yourself unable to grow revenue or increase margin. Competition means you have to pick your niche but you can serve several niches at once to mitigate revenue concentration risk. Caveat: not every entrepreneur gets excited about this concept. I know many entrepreneurs that have simply refused to view their business as anything other than a product/service provider. This results in competing on price alone and ultimately leads to a stagnate business that has difficulty remaining solvent.
The bottom line is that you should know what business you are actually in as defined by the problem your business solves not the product or service that it offers.
