Is your business model dumb?

I'm about to meet with a friend to talk about his business. After having a look at his website and doing the sums, my conclusion is his business model won't work. His business is selling a service that people pay for on a hourly basis, and it isn't a recurring service (i.e. people need it once or twice and they are done). And his pricing is too low, and the service too hard to sell to be viable in my not-so-humble opinion. It could be an interesting conversation. I'm hypothesising that he might say he is using the service as a loss leader to on-sell other stuff. This is a business model I've come across before, and I think is generally a fraught way of running a business.

My first job at 15 was at a petrol station, pumping petrol, washing windows and checking the oil and water (back in the days when you actually needed to check your oil and water more regularly than you got your car serviced). I was staggered to learn that the margin on petrol was less than 5%. After overheads, they were losing money on the petrol. A petrol station was either a general store or a mechanic that decides to sell petrol at a loss in order to attract customers. Even as a 15 year old I could see that numbers didn’t add up and that this was a dumb business model.

I have another friend, (ever since I was called "popular business coach" in the Herald Sun article, I seem to have friends all over the place) Col, who makes go-karts. Problem is go-karts are difficult and expensive to design and manufacture, and the market is very competitive. When we did the sums we saw that Col was losing money on the go-karts themselves. He'd make the money up on the accessories - luckily people crash and have to buy the parts. We reached the conclusion that losing money on the core business was a dumb business model, and Col is now redesigning his business to sell accessories without having to necessarily build the karts in the first place.

Sometimes flaws in a business model can be a little harder to detect. I am working with another client in a professional services business, and she makes a bit over 70% of her income from 30% of her clients. Not quite the 80/20 rule, but close. These 30% also have the lowest overhead to service. When we did the maths properly we discovered something quite shocking - she was losing money on the other 70%. Every time she accepted a client in 70%, she was paying for the privilege of having one of her team provide them a service. They were being subsidised by the 30%.  We could argue that we need to be willing to service the 70% to attract the 30%, or we hope the clients in the 70% will grow into the 30%. However these arguments don't justify a flawed business model.

What elements of your business model aren't working for you? Are there parts of your business model that are just plain dumb?