One of the things that I learned is that there are a few retail spaces in Brisbane that have some of the highest rental rates in the country. Andrew said that a few of these places had been courting them, but that he was pretty happy with where they ended up.

He then said something very perceptive: “If your rent triples, what other parts of your business model have to change?”

This is a critical question, and it raises a very important point about business models – all of the various parts of your business model are interconnected, and interdependent.

This is part of what makes changing a business model hard, but it’s also what makes business model innovation difficult to replicate.

Greg Satell pointed to this great talk by Matt Howell of Modernista! today, which makes a similar point. Howell is talking about how advertising can successfully incorporate digital channels into an overall strategy – an undertaking that requires fairly substantial business model innovation.

The whole talk is excellent, but I’m going to focus on slide 19, where he says:

A simple fact. Maintaining the same team structure + process while expecting a markedly different work outcome is, well, crazy.

In business model terms, when advertising integrates digital into the workflow, it creates a different value proposition, it requires a different network of support and alliances, and as Howell points out, this in turn requires different internal processes and structures.

If you change one part of a business model, the rest has to change too.

Which brings us back to The Cloakroom and expensive retail space in Brisbane. If your rent triples, what new value proposition for your customers does the new location enable? In most cases, probably none.

Just from observation, it appears to me as though all of the stores that are rushing to place themselves in the most expensive locations downtown aren’t changing their business models at all as their rents go up.

These shops are making a common error. Which of these statements is true:

I’m cool because I wear Brand X.

or:

Brand X is cool because I’m wearing it.

It’s funny how many people answer this incorrectly. Your brand isn’t what you tell people it is, your brand is the cumulative impact of your interactions with people. This means that good brands are good because of the value that they create for people, and it is the people that determine what this value is.

In the retail example, when a store chases the most expensive space, that’s a pretty good sign that their business model might be messed up. If where you are determines your brand, then your brand isn’t very strong, is it? If you are clearly creating value for people, then you can afford to pass on the spaces where the rent triples.

A good business model is built on a strong value proposition. Everything else follows from this. Focus on how you can create meaningful, lasting value for people, then build your business model around this idea. If you stay true to this idea, you can create a strong brand, even if you’re small, like The Cloakroom.

(Photo from Phil Long, under a Creative Commons License.)