How Risky Is A Business Model Built On Honesty
People said I was crazy and naïve – how could you base an entire business model on the assumption that your clients would be honest? The concept for my start-up business was simple – jump online, answer a few questions about the product or service you’re looking for, and get connected with the best-fit suppliers for your needs. Suppliers pick up the tab by paying a percentage of any sales they generate from leads.
Seasoned executives loved the matchmaking service concept, but politely pointed out that suppliers would often “forget” to report if they got a deal with a matched buyer, and so the pricing model was flawed. Yet in planning for my start-up, I consulted with many suppliers of all shapes and sizes and this was the model they were crying out for. They were sick of joining fees, advertising fees, retainers and subscriptions, all with no commitment to results…they overwhelmingly wanted to pay on success for any leads we sent their way, and were prepared to pay handsomely on this basis.
Some business decisions you make with your heart, and I was determined to prove to the “seasoned executives” that people are more honest than they think. I decided to go with my gut instinct and give the market the “win-win” model they were looking for. However, I didn’t completely ignore the advice I was given, and built into my business plan a 20% factor of suppliers failing to report their wins. Now, four months later, my budgeted 20% is sitting at zero – we have close to 100 suppliers and their record of honesty is unblemished. How do I know? I have discreetly checked in with the “buyers” who have used our service by issuing a customer satisfaction survey, allowing me to track the status of deals.
Interestingly I have another pricing model, whereby suppliers just pay for a “lead”, regardless of whether they are successful turning it into a sale, and this model, while superficially cheaper, is significantly less popular. (Less than 20% of suppliers opt for it.) There is something attractive about paying only for results, and equally for me, there is something inherently fair about only being paid for results. As much as guaranteed upfront fees may be tempting to bank for a start-up, providing instant cashflow, the ongoing annuity of success fees actually makes more financial sense. It’s just a win-win for everyone.
I have come to this refreshing conclusion: honesty is more rampant than we think. And I will continue to build our business on an honour system.
By Sharon Melamed