Reference no: EM132210608

Don Debelak, author of Business Models Made Easy, has developed a GEL analysis for evaluating business models: Great Customers, Easy Sales, and Long Life.

• Four factors make for Great Customers:

1. Number of customers. There should be a sufficient number of customers to allow a business to reach its break-even point.

2. Easy to find. A company should not have to saturate the market or “beat the bushes,” both of which are expensive, to reach potential customers.

3. Spending patterns. A company’s customers are willing to spend freely on its products or services.

4. Ongoing sales support. Ideally, a company does not have to spend large sums of money for ongoing sales support of its product or service.

Businesses that sell organic food and beverages, a market that is growing at 15 to 20 percent a year, have access to Great Customers because they score high on all four factors.

• Three factors determine whether a business model will have Easy Sales, which Debelak says is the most important GEL factor:

1. Importance to potential customers. Unless customers perceive a company’s product as important to them, they are not likely to make buying it a priority. This is where having a clear and compelling competitive advantage makes a difference.

2. Customers are easy and inexpensive to acquire. A business that finds customers easy and inexpensive to acquire usually can reach them in many ways, including retail stores, Web sites, catalogs, home shopping networks, and others.

3. Product or service requires minimal promotional activity. Like ongoing sales support, promotional activities can require a great deal of effort and money. However, if customers are easy to find (see GEL factor number 1), a business should not have to spend disproportionate sums of money to advertise and promote its product or service.

Many companies in the pet care business have the advantage of Easy Sales because 63 percent of households in the United States (that’s 71.1 million households) have pets, and 80 percent of pet owners consider themselves to be “pet parents” who are willing to spend freely across multiple channels to indulge their four-legged “children.”

• Five factors influence a company’s capacity for Long Life:

1. Initial investment required. The lower the initial investment required to enter a business, the more attractive it is because the risk is lower.

2. Cost of staying in business. Two of the major costs of staying in business are fighting off competitors and investing in technology or product updates to maintain market share.

3. Profit margins. The most important factor in a company’s staying power is its profit margins because high profit margins can make up for deficiencies in other GEL factors. The higher the profit margins a business model generates, the more attractive it is.

4. Potential for cross selling. Acquiring a new customer costs seven to nine times as much as selling to an existing one; therefore, a business model that provides the opportunity to sell other products or services to existing customers yields a big advantage.

5. Ongoing product costs. Ongoing product costs, such as providing follow-up sales support or keeping customers informed about changes to a product or service, reduce profits and make a business model less attractive.

Debelak says that a business start-up that does not score high on the GEL factors is likely to struggle to get established and to succeed. Try your hand at applying the model by evaluating the following actual business ideas using the GEL approach. (You may want to establish a 1 [low] to 5 [high] scoring system for each factor to make your analysis more quantifiable.) When you are done, compare your answers to those of some of your classmates. Be prepared to justify the reasoning behind your scores.

Smackages

Rosilyn Rayborn is the founder of Smackages, a Web site that allows women to subscribe and receive free makeup samples sent to their homes from cosmetic companies. “Smackages is like an online makeup counter,” says Rayborn, who points out that her company eliminates the hassles of shopping for makeup in stores: pushy salespeople working on commissions, unsanitary samples, and unflattering fluorescent lighting. Rayborn forecasts sales of $360,000 in the company’s first full year of operation. “Cosmetic companies will pay us to distribute samples,” she says, “because sampling is the most effective way to get consumers to buy new products.” Cawley landed a $20,000 equity investment from the Capital Factory, a business incubator in Austin, Texas, that serves as home to her company. She already has 1,000 subscribers and is seeking $1 million in capital so that she can hire a sales team, license a skin color-matching tool that helps women select the right makeup shades, and add features to the site that allow users to post reviews on Facebook.

ERT Systems

John Ellis, a 25-year veteran firefighter, worked with Dennis Carmichael, owner of an information technology company, and Tony Mazzola, an experienced software developer, to launch ERT Systems, a company that used radio-frequency identification (RFID) tags to track firefighters’ locations during a fire. “Fire commanders need to know where their squad members are at all times in case of an emergency, such as a structural collapse during a fire,” says Ellis. However, most fire departments use rudimentary systems such as plastic ID cards or whiteboards to make head counts. “Our easily deployable system, OnSite ERT, locates firefighters in real time,” he says. The RFID tags that firefighters wear transmit signals to the commander’s laptop, which displays the identity and exact location of each firefighter. “Our system also can be used by other emergency personnel, such as SWAT teams,” says Ellis. ERT Systems’ product is in 40 fire stations, and the company generates $450,000 in annual sales. The price of a system ranges from $20,000 to $50,000, depending on the size of the fire station, and the founders say that the average sales cycle is a lengthy nine months. They are seeking $750,000 in financing to develop the second generation of the OnSite ERT and to sell to more fire departments.

1. Use Debelak’s GEL analysis to evaluate the quality of Smack-ages’s and ERT Systems’s business models. (You may have to do more research to evaluate each company more accurately.)

2. Based on your analysis in question 1, would you invest in these businesses? Explain.

3. What steps could the founders of these businesses take to improve the quality of their business models? (Scarborough 133-134) Scarborough, Norman M. Essentials of Entrepreneurship and Small Business Management, 7th Edition. Pearson Learning Solutions, 01/2013. VitalBook file.