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Disruptive Business Models: What You Should Know
March 05, 2021
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Disruptive Business Models: What You Should Know

Most likely, you can’t Imagine a world without successful companies Uber, Netflix, or Amazon. Yet, there was a time when these companies were selling ideas that no one had ever considered. They may have even sounded far-fetched. But eventually, they paved the way for a host of new, innovative solutions to enter the marketplace.

These are prime (no pun intended) examples of disruptive businesses. In this blog post, we’ll explain what disruptive business models are, how they work, and what the prominent pros and cons are. By learning about disruptive business models, you can learn from successful businesses that have sustained their innovations. And after some hard work, you may be the next disruptive business owner that everyone’s talking about!

What is a Disruptive Business Model?

A disruptive business presents a new concept to an already crowded marketplace, earning the attention and respect of consumers. Rather than finding its place amongst competitors, a disruptive company creates a new market and challenges other, often more established companies to follow suit or chance getting left behind.

Developing a disruptive innovation can be exciting— and potentially very lucrative, if your idea resonates with your audience. Of course, every entrepreneur knows that building a business from the ground up comes with various challenges and risks.

If you’re unsure whether to pursue your disruptive business plan, it’s important to weigh all the potential opportunities and downsides. By doing this, you’ll give your business a competitive advantage in the marketplace even before you begin. Small business owners that are prepared to start at the bottom of the market and build their operations are more likely to succeed than those that come in unprepared.

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What Are the Pros and Cons of Starting a Disruptive Business?

Pro: Competition May Be Limited

Many disruptive businesses have few or no direct competitors, because their ideas are so unique. That means if your business idea takes off, you can capture your target market share before similar businesses start to emerge. Plus, being the first business to tackle a problem or offer something new means your name will stand out, even when others try to mimic your idea.

For example, before Apple, there were no mobile touch-screen devices or smartphones. Although competitors that offer similar products have since entered the marketplace, few have earned the massive success of the original iPod, iPhone, or iPad.

Con: Earning Customers’ Trust Is Challenging

In most cases, the industry you’re disrupting already offers solutions that serve the needs of your target customer base. Although there weren’t other smartphone providers when Apple released the iPhone, a variety of other mobile phone options were available to consumers. Whether the costs are economic or psychological, it may be difficult to convince another company’s existing customers to switch to your offering. Most likely, they’ll trust an existing business model over a new-comer, which is something to consider.

Pro: It’s Better to Be the Market Disruption than the Disrupted

A Forbes Insights/Treasure Data report revealed that 51 percent of executives surveyed will see a high level of risk to their market share and revenues over the next five years. This is due to technology-driven disruption by startups or innovations from new companies.

The same survey found that 83 percent of executives who view their companies as market disruptors reported increased revenues over the past three years. This is compared to only 54 percent of executives in non-disruptive organizations. Ultimately, these statistics prove that while being a disruptor can be risky, getting disrupted by new businesses is a more difficult position to be in.

Although starting a new business is risky, you’ll gain a foothold if you set out with an innovative idea, rather than try to imitate an existing concept.

Con: Larger Companies May Try to Prevent Your Success

If your business is seen as a true disruptive innovation that’s a threat to an established market, entrenched companies may wield their power to ensure that you don’t succeed. This may include frivolous lawsuits and other obstacles that tie up your business’s time and resources. If lawsuits or other issues occur, this could eventually make it challenging (or impossible) for you to stay in business.

While entrepreneurship in general requires a thick skin, you may need to be prepared to have others want to see you fail. This is one of the downsides that can come with owning a disruptive company, so make sure that you’re prepared for potential stressful situations.

Pro: Your Business May Get Purchased at a Premium

Facebook purchased social media platforms Instagram and WhatsApp at what seemed like high prices to prevent either company from becoming their competition. If your business is disruptive enough to an established company or industry, those who see you as competition may be incentivized to acquire you — no matter the price.

Of course, you can’t start a small business solely in hopes of it getting purchased eventually. Even though that might sound like an ideal situation, you’ll need to focus on the short term first. Build your business, make it a success, and then one day, you can investigate the benefits of selling your company.

Con: Very Few Disruptive Businesses Succeed in the Long Run

Although you may feel certain that your business idea will appeal to the masses, the reality is that over 90 percent of startups don’t survive for long.

In fact, 42 percent of startups fail because there’s no need for their product or service. Before starting your business, it’s critical that you understand your market as well as how you’ll monetize your new, innovative business model. If you can’t confidently determine how you’ll accomplish this, your business model probably still needs work.

Key Takeaway: Starting a Disruptive Business Is Risky, But the Payoff Can Be Big

While starting a business always comes with risks, the potential payoff can be huge. Indeed, one in 19,550 startups will become a unicorn worth at least $1 billion. The odds may not be in your favor, but if you have an idea you believe in, it’s worth weighing the risks against the potential gain.

Are there any disruptive businesses that inspire you as an entrepreneur? Share your favorite disruptive businesses with us in the comment section below!

Editor’s Note: This post was updated for accuracy and comprehensiveness in March 2021.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].