Importance of Business Models

Importance of Business
                   Models Having a clearly articulated business model is important because it does the following:
          Serves as an ongoing extension of feasibility analysis (a business model continually asks the question, Does the business make sense?)
         Focuses attention on how all the elements of a business fit together and how they constitute a working whole
         Describes why the network of participants needed to make a business idea viable is willing to work together
         Articulates a company’s core logic to all stakeholders, including the firm’s employees
                   A good way to illustrate the importance of these points is to describe a business model that didn’t work. WebHouse Club was launched by Priceline.com founder Jay Walker in fall 1999 and failed just a year later after eating up nearly $350 million of its investors’ money. Priceline.com allowed customers to “bid” for airline tickets, hotel rooms, and home mortgages. WebHouse was set up to mimic Priceline.com’s business model and extend it to grocery store items. WebHouse worked like this: A shopper obtained a plastic card with a unique number and a magnetic strip from a local grocery store or a newspaper insert. The card was used to activate an account on the WebHouse Internet site. Once an account was established, the shopper could then make a bid for a supermarket item, say $3.75 for a box of toasted corn flakes cereal. The shopper could specify the price but not the brand. In seconds, the shopper would learn whether a maker of toasted corn flakes cereal was willing to accept the price. If so, the shopper would pay WebHouse for the cereal with a credit card and would then pick up the cereal at a participating store using the WebHouse card. The cereal could be Kellogg’s, General Mills, or any other brand.
                    Behind the scenes, WebHouse followed the same formula that Priceline.com had invented to sell airline tickets and hotel rooms. By aggregating shopper demand for products such as cereal, tuna, or diapers, WebHouse could go to producers such as Kellogg’s and General Mills and negotiate discounts. The company could then pass along the discounts to consumers and take a small fee for bringing buyers and sellers together.5
                    Why didn’t the WebHouse business model work? Actually, several reasons describe the business model’s failure in grocery stores. First, it assumed that companies such as Kellogg’s would be willing to participate—not a wise assumption when you consider that Kellogg’s has spent millions of dollars over many years for the purpose of convincing consumers that Kellogg’s Corn Flakes is better than competing brands. The WebHouse model teaches consumers to select products strictly on the basis of price rather than brand identity. So why would Kellogg’s or any other producer want to help WebHouse do that? Second, the WebHouse model assumed that millions of shoppers would take the time to sit down at their computers and bid on grocery store items. It’s easy to see why a consumer might take the time to get a better deal on an airline ticket or a stay in a four-star hotel room. But how many people have the time to sit down, log on to their computer, and interact with a Web site to save 50 cents on a box of cereal without even being able to choose the brand? As it turned out, not many people were willing to do so.
                   Ultimately, WebHouse failed because its business model was flawed. The company just couldn’t motivate its suppliers or customers to participate at a sufficient scale to support the overhead of the business. WebHouse was asking suppliers to act against their self-interest and was asking shoppers to take too much time to save too little money. As busy as people are today, shoppers want to make the very best use of their limited time, meaning that they’ll likely reject a time-consuming process that doesn’t create obvious value for them.