Your business model is a depreciating asset

9 March 2018
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Most people recognize that markets don’t stand still.  Customers, competitors, and technology are constantly changing.

Although most people recognize that, many don’t appreciate the imperative that that dynamic places on them as leaders.  The simplest way I’ve learned to describe that imperative is this…

Your business model is a depreciating asset.

In other words, the way you do business – whether that’s how you find customers, how you produce what you offer, how you deliver what you sell – is losing value every day.

Like other depreciating assets you have – your house, car, refrigerator, computer – you have to maintain it simply for it to keep working the way it’s supposed to.  And you have to more-fundamentally change or replace it on some kind of predictable cycle – 3-4 years for a computer, 5-10 for a refrigerator.

How quickly your business model depreciates is mostly a function of the degree of change in your market.  And, since there’s more change in every market these days, we all need to put our leadership teams on notice that we’re going to have to reinvent our business model sooner than we’re used to.  Rule of thumb:  the cycle is probably half what it used to be.  (So if the model used to last 10 years, it’s best to plan for it to last 5.)

If your leadership team is skeptical when you tell them this, offer the following true story.  I know a smart, tech-savvy teenager who has a nose for online businesses.  He found an opportunity last Fall that he liked.  Here’s how that played out:

  • Week 0 – discovered opportunity
  • Week 1 – supply chain set up
  • Week 2 – open for business
  • Week 5 – profits to date:  $200K
  • Week 11 – profits to date $500K
  • Week 13 – rejected offer to purchase business for $100K
  • Week 16 – competitors raise cost of advertising to a level that the economics no longer work, business model no longer profitable, business closed

To summarize, that’s a business model that was able to net $500K in 4 months – I know $15MM businesses that aren’t generating that profit for the year – but whose value depreciated to $0 in that same 4 months.

If you talk about markets changing, it seems like something “out there” that may not impact you.  If you talk about your business model depreciating around you week by week, it gets much clearer that you need to act with some urgency.