In recent years, Latin America It has become one of the fastest growing regions thanks to the emergence of new technological projects, a large amount of talent and entrepreneurs with great vision, a combination that has led to the fact that in the last three years, investment levels in the region have multiplied 18 times, reaching 15.7 billion dollars.
However, the recent global economic slowdown has shown that for companies to remain attractive to investment, it is essential that they reconsider their business priorities, being the profitability of the sameone of the main aspects to consider.
5 tips to develop a business model that makes money
There are five fundamental aspects that any company or venture can take into account for the creation and development of a business model that makes money and is profitablewhich prioritizes sustainability and soundness over growth at all costs:
1. Ensure that the business has potential
In principle, every business has a growth limit, normally, depending on the size of the market to which it is oriented. While it is true that there is always the possibility of expanding to other markets, or expanding the offer of our products and services to reach new segments, these considerations will come later if we manage to start a business with realistic and profitable prospects. from the beginning.
This foreseeable starting limit is what we call the encompassable market size (total addressable market). If we are targeting an interesting market, it is to be expected that we will find other competitors trying to capture it.
In this case, the key is to ask ourselves, what strategy will lead my business to gain a sufficient portion of this market from the competition?
To make an accurate analysis, the keys to consider are: a) the loyalty of the segment’s consumers, b) how qualified our competitors are and their ability to offer added value, as well as, c) the timing of the launch and adoption tests.
2. Design a monetization structure with unit economics positive
After we are clear about a viable target market for our product, the next step is to analyze the variable cost-income elements and determine the return on each unit sold, to ensure a positive contribution margin.
The first step is to understand our operating costs, mainly, to analyze if these will remain stable with higher volume, or if they will grow along with the business. Taking fixed costs into account, we can determine if we have a positive return per unit of sale.
It is valid to start operations without necessarily covering all the fixed costs from the beginning, but if we do not have a realistic strategy in which we can anticipate the moment in which the contribution margin will be positive, the growth in sales could even generate losses.
3. Anticipate risks
There are many factors that can alter our operating costs and some of the most important will be beyond our control: inflation, technological disruptions, changes in the economic cycle or new competitors.
However, there are factors that are under our control and that we can foresee, at least partially, such as: establish contracts for the future with fixed costs, diversify suppliers to have greater flexibility in commercial conditions, risk coverage, above all, technological adoption.
This last factor will be key to maintaining the efficiency of our operations (as well as our margins) above the rest of the competitors and avoiding delays.
Another of the most important risks that we can foresee is losses due to inefficient financial management. For this, there are digital tools such as corporate expense management platforms that enhance the visibility of company expenses, generate savings in time, resources allocated to accounting and tax obligations, in addition to the fact that they can be adopted at no cost by businesses.
4. Project profitability and measure progress
If our company must go through an initial stage without positive returns, it is important to foresee a reserve of money to support the operation during this time, as long as there is a plan for it. In this sense, it is important to define in advance the measures to react to significant deviations from the plan: cost control, investment postponement, or price increase.
5. accountability
For this, it is important that the members of the entire organization have visibility of the objectives of the company, so that they can understand the mechanisms that are needed to keep it profitable. Showing the impact of each new initiative on the financial statements is essential to keep resource allocation on point.
In the current economic scenario, talking about contribution margins rather than volume becomes essential to achieve a profitable and successful business model.
Pursuing growth “at all costs” is not the ideal approach at any stage of the business cycleand slower growth phases are the perfect time to review how we measure the performance of operations.
Taking these aspects into account to refine our business model, and incorporating all the technological advantages that underpin the profitability of our operations, will make the difference to achieve large companies in the coming years.
Rodrigo Aparicio Schlesinger Rodrigo Aparicio Schlesinger is a finance specialist with a long history at multinationals such as 3M and McKinsey, where he led strategies for financial institutions and fintechs before joining Clara as Chief Financial Officer.