Business Models Matter!

A few weeks ago I came across this infographic. It isn’t an infographic as much as it is some statistics about how much cash Apple has on hand now. The most interesting little section of the graphic compares the profitability of Apple and Walmart.

The numbers are evidence that business models matter. A lot!

In the last three months, Apple has brought in four times as much profit while spending 3 times less on operations. Apple generated 13.1 billion dollars on revenue of 46.3 billion dollars. Walmart brought in 3.3 billion dollars on 109.5 billion on revenue.

Who cares? Why does this matter?

Business Models Are About Creating and Capturing Value

Walmart’s strategy is to be the lowest priced provider. In order to create the value that is lowest price, Walmart has to continually drive costs out of their business. They are arguably the best in the world at managing their supply chain. They have a reputation for ruthlessly negotiating price. And if your product sells well, they sometimes reverse-engineer it and sell it themselves.

All of this is a strategy executed to save the consumer money. The value that they add to their customer is in removing costs.

Apple, on the other hand, takes a few dollars worth of plastic, silicon, and glass, and adds value by creating products. Apple creates value for their customers by creating beautiful, functional products that provide a better experience than their competitor’s products. Apple creates more value, and they capture more of the value that they create.

On the surface, it would seem that selling price is the easier model. The reality is, dollar for dollar, it cost Wal-Mart more to operate their model than it cost Apple to operate its model.

We too often believe that it is price that wins. It isn’t.

Not every company has chosen Walmart’s business strategy. There are other business models that you can chose that are equally—or more—effective.

You Are the Sharp End of the Spear

Unless your company has chosen to be the Walmart of your space, then you aren’t supposed to be selling price. If your company isn’t driving out costs to create value by being the lowest priced provider, it is wrong to focus your sales efforts on price.

Instead, your role is to find a way to create more value than your competitors creates. This is a critical lesson for salespeople, since we are on the front line and have much to do with both the value creating and the pricing.

The sales department isn’t alone in keeping this charge. The entire organization must also be aligned around creating more value for their clients. Capturing value for your company and maintaining your profit margins requires that you first create enough to be worthy of capturing some for yourself.