Principles For Designing Good Businesses
Before we can start designing strong business models, we should first agree on what makes a good business.
If we have a shared understanding of these core principles, we can help strengthen each other’s ideas.
These are guidelines and discussion points, not rules or laws, but they’ll help us design something sustainable and powerful.
Most will seem obvious to you, but at least we’ll end up on the same page.
Margins Are Everything
A margin is the gap between your prices and your costs – your entire operation lives in this this gap.
Every business makes a margin, or else it would go bankrupt.
Some call it a profit, some call it a surplus, the terminology isn’t important as long as there’s money in your accounts to get you through a rainy day.
This margin is what makes your mission possible, buying you the freedom, resources, staffing, assets and risk tolerance to do important work and create positive impact.
By ensuring that the business has a healthy margin, we also ensure our ongoing impact.
Profit, Not Profiteering
We can win without someone else having to lose out.
Our profits come from selling great products and services to happy customers.
We don’t believe in profiteering, where people or the planet have to pay a huge price for us to make money.
We don’t apologise for making money, because we’re proud of how it’s made and how it’s distributed.
There’s More To Life Than Shareholder Value
If you go back a few millennia, you’ll see that most foundational businesses were established for the benefit of the public.
Banks and insurers were originally designed to help people, rather than extract money from them.
There’s more to business than creating shareholder value.
We now have the tools, models and a more sophisticated understanding of impact, all of which allow us to return to the roots of business with a new approach.
We Treat Our People Well
A good business model thrives on good people; customers, staff and partners.
Customer service isn’t enough, we also need to take good care of the team who make it happen, and the suppliers, referrers and allies who support us.
By treating these people well, we’ll end up reducing our long term costs and building a great reputation.
We don’t want to rely on penny pinching and unconscionable practices to make a margin.
A Business Should Do Something Good, Even At Breakeven Point
The test of a social enterprise is what happens when it breaks even – does it make a positive or negative contribution to the world?
The vast majority of new businesses don’t break even in the first three years, so it’s risky to rely on big cash surpluses that can be given away.
Instead we can create change through beneficial products and services, recycled/recyclable components, or employment for marginalised groups.
If the business harms people or the planet at breakeven point, then we need to rethink the impact model.
Defending Achilles’ Heel
Most businesses, like so many things in life, have weak points.
These vulnerabilities, if attacked, could sink the whole enterprise, much like Achilles and his heel.
For a business this might be a dependency on a single customer, a staff member, the founder’s presence, thin cashflow, fickle partners, a change in legislation, a new competitor or a problem becoming obsolete.
Each of these seem unlikely, but the threat they present is very real – and very costly.
We want to identify these weaknesses in our businesses, so that we can either create alternatives or put safeguards in place.
The work you’re doing is too important to be risked.
Business Models Have Expiration Dates
Your business, if stagnant, will be usurped.
You can take that as a threat, or as inspiration.
Perhaps no business deserves to last forever, and instead it is the proactive companies that earn their longevity.
For this reason, we don’t make huge forecasts and premonitions, but rather use constant experimentation and prototyping to stay as relevant as possible.
The Best Growth Comes Through Happy Customers
While it’s possible to grow through investment, a better option is to grow from customer demand.
It’s much easier to find funding when there’s a line out the door, rather than trying to use investor funds to create a line out the door.
Better still, these happy customers will give us a continuous cashflow, which we can use to grow the business.
Almost All Skills Are Learnable
When you break down the skills of great entrepreneurs, it’s clear that most of them can be learned.
That said, there is often a great cost involved.
This might be a 10 year apprenticeship, lessons learned from failures, a series of tangents that eventually led to an unexpected outcome, or resources spent on self-improvement.
We don’t want to discount the sacrifices entrepreneurs make by claiming that “they were born with those talents”.
We can follow in their footsteps, so long as we’re also willing to make similar tradeoffs.
We Delight In Paying Staff A Living Wage
In the early days of a startup, founders might take “sweat equity” instead of a salary.
However, there comes a point when the business should be able to pay its staff a living wage.
Not the founders necessarily, but certainly the people who are putting in the shifts to serve customers (which is sometimes the founders).
You might not be drawing a salary for your business development work, but each crucial role in the business should be receiving fair compensation.
This means that if a crucial team member needs to be replaced, you are confident that you can find another qualified person to take over the role.
If you choose to forego that salary in favour of reinvesting into the company, great.
At least you know there’s enough money in the business to pay staff a living wage.
If You Can’t Go On Leave For A Month, You’ve Built A Job Not A Business
Founders pour themselves into new businesses, through hard work, sacrifice and repeatedly going the extra mile.
The resulting company should grow into something that does not depend on the founder’s presence – otherwise this is essentially a job.
A founder should eventually be able to step back from the business for a month at a time without it falling over, and this is only possible with a capable team and well-designed business systems.
This is what makes it possible for a business to expand and potentially be sold, since we don’t yet have the technology to clone the founder.
Choose Between Lifestyle And Performance
Lifestyle businesses are designed to create a great deal of freedom for the founders – giving them flexibility, control and a higher quality of life.
Performance businesses are designed to rapidly grow, make as much money as possible, and aggressively dominate a market – creating a valuable, sellable asset.
Both of these are great.
You’re probably going to have to choose one or the other, based on your circumstances and your goals.
It’s important to be honest about what you really want, since each type of business has quite different goals, milestones and priorities.
Know Your Customer
For a business to be sustainable, it needs to have a constant stream of customers, who it can serve and delight.
Customers bring in the revenue that powers the business model, which will in turn create sustainable positive change.
Without these customers, revenue dries up and so does your impact.
For this reason, we pay great attention to our customers, their needs, desires and circumstances.
If we don’t look after them, someone else will.
You Either Love What You’re Doing, Or You Lose To Someone Who Does
There’s usually too much competition for a half-hearted business to remain sustainable.
It’s never been easier for someone to spot a gap in the market, and start a competing brand to an existing business.
The ones are in danger are the dinosaurs, the ones who aren’t all that serious about keeping customers and staff members happy.
They’re often run by dispassionate managers, who have no love for the industry or the people they serve.
If you’re not obsessed about the business you’re building, you’ll be beaten by someone who loves the game.
You get what you design for, and we’re designing for a business with the best possible chance of success.
Now we’re on the same page, we can talk business models.