It's the biggest piece of news from last month that caught my eye: Furniture giant Ikea is expanding tests for customers to rent furniture. In doing so, Ikea is beginning to shift its business model to subscription-based leasing options.
The idea is to encourage product reuse--as much as possible before being recycled. Ikea aims to test the rental model in 30 markets next year, after making 39 billion euros ($44 billion) last year from its classic build-it-yourself model.
Ikea is clearly seeking to leverage global economic shifts in consumer behavior--specifically, that younger buyers rent assets more than buying them. It risks causing a wave of creative destruction to the company's preexisting revenue streams.
It's a bold move. The current model supports more than 208,000 employees. Why is one of the world's most recognized brands thinking about risking it all?
In short: The same reason any company decides to pivot.
Why Ikea Is Testing This Huge Strategy Shift
I define a pivot as a strategic mindful shift in one of the nine parts of a business model: customer segment, problem, solution, unique value proposition, competitive advantage, channels, key metrics, costs, and revenues.
Netflix pivoted from facilitating DVD rentals by mail to online streaming. Wikipedia pivoted when it shifted content creation and curation from internal paid employees to community volunteers.
The issue isn't knowing how to pivot, or even what business model element to pivot, the issue is knowing when.
Ikea's business model is flourishing with billion-dollar revenues. A rental model could cannibalize preexisting sales, as some customers opt out of buying. That's what caused Blockbuster to disappear--it feared that offering streaming would kill off its rental store business, and refused to adapt.
That's probably what Ikea is testing: the impact of the new model on existing revenue. It's a dominant market leader, so why now? Look no further than Blockbuster for the answer.
Five Questions to Ask Before Executing a Pivot
As an entrepreneur, you're often faced with a choice: pivot, carry on, or cut your losses. In the early days of a new venture, when the search for product market fit drives you to test and iterate on all parts of pre-existing business models, pivots happen regularly.
When you're running those business model tests, I recommend using a 40 percent benchmark. If 40 percent or more of your early adopters like the idea, you can deem the pivot a success.
If less than 10 percent say the pivot isn't valuable, you should consider that experiment a failure. Anything between 10 and 40 percent simply isn't enough evidence to decide either way. In such cases, you should keep iterating with your early adopters until you find a version they like.
Once you're past your startup's early days, the "When?" question can become much harder to answer. Here are five questions I ask founders in my investment portfolio before formally committing to a pivot:
- Why are you pivoting? Micah Rosenbloom, a venture partner at Founder Collective, put this nicely in a TechCrunch article: "Do you feel like you have a viable product, but you misjudged the go-to-market plan? Did you underestimate the complexity of the product you seek to build? These may be perfectly good reasons to pivot."
- How do you know that your current offering isn't working? What assumption didn't turn out to be true?
- What are you customers saying? Your customers are the real bosses. Before throwing anything out, make sure to fully understand what they're telling you.
- What can you pivot toward? Some innovations may not be feasible for your business. Get those off the table right away.
- What's the plan? What steps need to be taken to test the pivot? What resources need to be shifted? What costs would change? What people will be needed? If you're going to risk it all, make sure you have a calculated, well thought-out, and well-resourced plan.
Ikea's latest move illustrates the need for continuous reinvention and innovation--from the smallest startups to the biggest firms. Only the most agile survive economic evolution.
To stay ahead of the game, you must regularly revisit your business model to see if there's a business model innovation worth testing. Every venture should undergo changes as it grows and (hopefully) becomes successful. These questions will help.