Turning a business model on its head
This week one of my subscribers wrote to ask for some help. I didn’t have time to ask her permission to use her real name, so let’s call her Dee. Dee is based in the UK and runs a mobile day care service. The service provides day care for parents attending conferences and events, at or close to the event itself. She was stuck with pricing her services in such a way that she could compete with regular day care services, who to charge and how to make sure she could operate a profitable business even if she didn’t get enough bookings to make a specific event profitable.
Competing in a highly competitive and cost-sensitive market
Dee’s story is not unusual. She is competing in a regulated, highly competitive market that is also very cost sensitive — as anyone who is a parent will very well know.
Dee is somewhat unique in that her services are mobile. She provides the day care at or close to the event, which allows parents to bring their kids along and check in on them during the day, and avoid an extra trip to drop their children off and pick them up at the end of their outing. A little bit like day care at large shopping venues like IKEA.
Most current business models for services like this will charge the parents a fixed price, or by the hour for as long as the parents are busy. Dee has to compete with other day care services, balancing her cost with the convenience of having the kids close to the event.
So how should she charge for her services, how much and who should pay?
The usual suspects
To help Dee I went through a fairly standard thought process. There are two or three client segments; the event organizers, the parents and the children. Only the organizers and the parents play a role in the financial transactions.
I suggested that Dee start with creating a cost model to determine the lowest and highest cost she would have to bear. In the UK, regulations determine the number of caregivers based on the age of the children; babies under 2 require more personnel than kids over 4. Her major cost elements would be personnel and venue; venue would be relatively fixed and personnel costs will vary with the number of children.
With a cost range in hand, Dee could figure out what her markup would need to be to make a profit.
Simple enough so far. So who would pay—the parents or the organizers?
On the face of it the parents would have to pay; after all, they are the beneficiaries of the service. But the event organizers would also benefit if they had more attendees, so I couldn’t count them out. The downside of charging through the event organizer would be that Dee would most likely only get paid after the event. Charging the parents directly would get payment up front.
The moment of inspiration
In my head I had a cost model floating around. These numbers are entirely fictitious; I am sure they are totally wrong but the principle of pricing remains. So follow along with me here:
Let’s say an event has a capacity for 200 people and they charge £200 per attendee. That gives them total revenue of £40,000. Assume that around 10% of attendees would need and use day care services for one child. That’s 20 children. Now assume that Dee would have to charge £50 per child to make a profit, or a total of £1,000.
If each parent had to pay £50 for day care on top of £200 for the event their cost would go up by 25%, most likely making it cost-prohibitive for them.
Then lightning struck.
What if you could spread the £1,000 cost over 200 attendees? That would raise the ticket price by £5 or 2.5%, a much smaller increment - but most importantly the event organizer could now offer free day care services!
That’s huge in a number of ways. If Dee can make this model fly she would be helping event organizers get more attendees; the barriers to going to an event would be so much lower for parents with kids; and the event organizers would gain social credibility. Dee would be charging the event organizers a fixed price (up to a maximum number of children) and be guaranteed a profit irrespective of how many children shows up.
The jury is still out
There is of course a lot more to this model and whether it will work at all. The cost model is not quite that simple, organizers may not want this and not enough parents may want to bring their kids to the event.
But the model solves a number of problems and there are benefits all around, so I am hopeful that Dee will find some nuggets in here.
Dee is working on this and I hope to hear back from her soon.
Turn your business model on its head
So how do you get these moments of inspiration so you can turn your business model on its head?
I’ve been working on business design and design thinking for about 7 years now, and practice and experience certainly helps. But if you’re building and running a business you don’t get a lot of practice with this, so here are some things you can try to give you a running start:
Think about pains. In this case there are multiple parties; each has pains. Sometimes solving a problem for one also benefits the other parties, and then you have a potential winner.
Brainstorm stupid ideas. Get some wacky friends together and throw ideas around. Sometimes the wacky, stupid ideas give you a breakthrough.
Apply Blue Ocean Strategies: What can you offer for free? What can you reduce in price? What can you stop doing? What can you start doing that no one else had done before? Check out Blue Ocean Strategies for more information.
I hope this helps you think about your business model and how you can turn it on its head. Even if you don’t turn it upside down, a small change may have a big effect.