Innovation

The four ingredients to a great business offering

What is a business offering, an overview of the four ingredients that make a great business offering and how to use these in your business.

Much of the credit goes to Amazon, specifically the 2014 shareholder letter where Jeff Bezos lays out these four characteristics of a "dreamy business offering".

What do we mean by a 'business offering'?

A business offering is any product or service designed, developed, offered or otherwise distributed by a company.

It consists of all the business elements: operational excellence, customer experience, financials and so on.

The four ingredients to a great offering

There are four characteristics that make up a great offering:

A great customer experience

Do customers love your offering?

This is rather obvious, but sadly often ignored. Any great offering must be loved by customers, otherwise you don't win their loyalty and they will eventually shift to an offering they love.

You can measure this using metrics such as a net promoter score which will be indicative of the value for money/effort, and more directly through customer satisfaction scores.

Perhaps most important: do you know what drives the quality of your customer experience?

One of the more difficult challenges with building a business offering customers love is not understanding what drives the quality of the customer experience in the first place. It is a good management principle, to listen closely to customers - but the truth is that the customer will very rarely be able to articulate to you what the real drivers of their experience are.

Example: Ask yourself - What drives your quality of your experience for transport options? You might identify that lower prices are better, that you prefer clean transport that smells fresh, a transport option that is not packed... - we're good at identifying problems, but not the underlying drivers these relate to (price, convenience etc.).

A highly scalable offering

Can you grow the supply of your offering to meet market demand?

Scalability is often misunderstood. Fundamentally, it is your ability to grow the supply of your offering to deliver on demand as required.

We often confuse scalability with return on capital. For example, people will say to me consulting is not a scalable offering... yet, it is clearly very scalable (hire more people), it's not operationally efficient to scale and as such the return on capital is lower.

From a dollar making perspective, what we are interested in is highly scalable offerings with high return on capital. For example a software company like Instagram, which doesn't need to grow the size of its team in any significant way to service more users - this is operationally efficient to scale and so OPEX marginally increases as customer base grows and the return on capital continually gets higher.

A high return on capital

How can you increase your return on capital?

In layman terms, return on capital is the net income of an offering divided by its capital costs to establish the offering.

For example, if a company's profit equals $10 million for a period, and the total value of the shareholders' equity interests equals $100 million, and debts equal $100 million, the return on capital equals 5% ($10 million divided by $200 million).

Why do we want greater return on capital as our key profitability measure? I will paraphrase the 2004 Amazon shareholder letter on why they use free cashflow per share.

"Though some may find it counterintuitive, a company can impair shareholder value in certain circumstances by growing earnings. This happens when the capital investments required for growth exceed the present value of the cash flow derived from those investments".

In other words, when you focus on metrics like net income, you are ignoring the outlay cost of establishing that offering. So, if you spent $100 million on a machine to deliver your offering, and it was making net income of $1 million per year with a lifetime of 5 years, although each year the profit is positive, your net loss is $95 million (excluding the present value of that cash).

What we want is for every $1 put into the offering, a greater amount back. That includes the capital expenditure and operational expenditure which return on capital captures.

A highly durable offering

How strong is the competitive mote around your business offering?

A highly durable business offering is one where it is difficult for competitors to steal market share. Think LinkedIn- it has a natural network effect where the more users there are, the more content creators there are, the more content creators there are, the better it is for users. This leads to a very strong competitive mote.

Durability is a little harder to measure and it's difficult to be data-driven in improving it. Ultimately it comes down to a combination of great customer experience and creating higher barriers to substitution.

A smart example of durability development over decades: Apple.

Apple has extremely high barriers to substitution with their business offerings, one of the reasons is because you as the user must learn their unique operating system and get familiar with their offerings making it inconvenient to switch.

If you go back to Apple's shareholder reports in the early 2000s, you'll see they set out a product strategy focused on controlling the full user experience and making it such that the Apple products would provide an integrated experience - an experience that would be better for users who had all Apple's entire product suite.

So, the iPhone works perfectly with the Mac, with the Apple Watch, Air Pods and so on. This was in part a durability strategy - how to make it extremely difficult to switch off Apple products once you are on them. It plays extremely well when you are the dominant first mover in the market as well.

How to use these four ingredients in your business

The most simple place to start: use the four characteristics to evaluate your business offering.

Do you have a great customer experience? Do you have a highly durable offering? Is it highly scalable? Does it have a high return on capital?

Where you can, back it up with data, prove that it really is a great offering. Then, focus on where you are weakest and begin brainstorming how you can improve.

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