Innovative Business Models?One of the tasks that any professional with business responsibilities should deal with periodically, be it CEO of a Fortune 100 company, budding entrepreneur, CEO of a newly created startup or CEO of an SME is questioning their business model , is say, how you intend to operate and obtain money (or social value, in the case of an NGO). This not only means analyzing the current one but proposing new models that provide more value.
For this, nothing better than understanding where we come from and, above all, which are the models that ultimately reap more success, a basis on which to inspire and question the model itself. This is one of the greatest idea of Innovative Business Models.
The business models at the beginning of the 20th century were quite simple: you manufactured something / you lent a service and you sold it live. However, little by little, new alternative ways of generating income were created. Two of those that had a greater draft in the industry were:
Gillette: Explaining the implications and previous steps of this business model would be extensive (it is usually used in the master’s case as a case study), so we will summarize: King Gillet considered that, if he was able to offer good razors at a very reasonable price. Competitive, customers would be happy to pay for the blades (which would require periodic spares)
Xerox: When Xerox introduced its 914 model in 1959, with features well above the photocopiers that were sold then (and much more expensive), it decided to innovate in its business model: Instead of selling each machine in the traditional way, the I would rent by charging an additional $ 0.04 for each copy after 2000 monthly.
In recent times there is a certain concern in this regard, given the global pressure to increase competitiveness and productivity, which have led, along with the advent of the Internet and the collaborative web in all kinds of alternative business models? Then we will see some of the most interesting (obviously they are not pure models, and in many cases some have traces of others). This is one of the greatest idea of Innovative Business Models.
These are business models in which there are at least 2 (although there may be more) groups of customers interdependent with each other (sides). This type of business model is born from the fact that one of the side’s only benefits if the other is present, being therefore the main objective of the company to facilitate the interaction between them, acting as an intermediary and maximizing the network effect.
The key premise for this approach to succeed is that it must attract and create value to both sides equally. If it only offers real value to one of the two sides, the other rapidly decreases and ceases to have value by itself.
For this, usually one of the sides is subsidized, that is, the service received has a significant discount (or is free) at the expense of the non-subsidized side.
Newspaper A good example of this type of business model and how a business model can make a sector rethink its dogmas is the newspaper Metro (and all its derivatives): In it there is a subsidized side (the general public) that receives a free product daily. The side that subsidizes is the advertisers, who consider the model attractive while there is a sufficiently large base of members from the other side (the general public).
Other examples of two-sided business models include Google (connects advertisers with users of their products), console manufacturers such as Nintendo Wii or PS3 (connect video game developers with customers), credit card manufacturers (connect buyers with stores) or even the press.
Although it is not a “pure” case of multi-sided business model, I found the operator is very interesting, described superbly in the essential Gurus blog. It is a Kenyan operator that, in addition to operating as such, detected the need for agile banking services for a large part of rural Africa … so that by leveraging its infrastructure and mobiles, it invented a system for people to pay, collect and send money.
An example that perfectly illustrates these markets (specific case of a two-sided market) we can find in our youth and the hours spent in a nightclub: One side of the market (the girls, subsidized side) had free access to the disco which was assumed mainly by the other side (the guys who paid entrance, waiting to find enough customers from the other “side”), as well as by another route of additional income (the cups).
His name was coined by Chris Anderson in his wired article, and is based on the fact that in certain businesses there are finite resources that force the company / business to choose to sell only the products that are expected to obtain better sales. It is called “Long Tail” to the model in honor of the sales distribution chart, in which a small set of references accumulates most of the sales ( bestsellers ), with the rest of the references being sold more occasionally ( the tail ). This is one of the greatest idea of Innovative Business Models.
A classic example of finite resource is the space of exhibition and storage in a store: The owner, given its limited space, will fill it with the references that it considers will be the most sold (usually the most popular for the general public) … but that happens when this finite resource dramatically decreases its cost?
The answer is that, instead of obtaining benefits only from the most sold items, it is possible to get income by selling many units with a large number of items that sell little.
For this to happen it is imperative that 2 things happen:
The costs associated with the finite resource (usually of inventory, associated with storing the merchandise) must fall dramatically
An effective system of recommendations should be available to drive customers along the queue , generating sales of the least-selling / niche products.
One of the best examples of a business model based on the long tail is the Amazon provider and electronic books: On the one hand Amazon has stopped physically storing a very important part of its stock of books. For this he has stored them digitally and when a client requests a copy he prints it on demand (all of which has a lot to do with the company’s interest in promoting e-books). On the other hand, Amazon’s recommendation technologies are absolutely magnificent: for a customer who has placed several orders, the probability of correcting a recommendation is very high … which makes it possible to generate sales in niche products at the end of the long tail.
Also called “razor and blade”, its popularization is due to the manufacturer of razors Gillette. It is based on the presence of an attractive and very cheap initial offer that builds customer loyalty with the brand, and that subsequently encourages the customer to continue buying products or services. It changes the obligation and complexity of selling new units every month only to have additional recurring income to the units sold … at the cost of assuming initial losses.
In this type of business it is very common for the seller to initially lose money with the customer, creating the benefits with each subsequent purchase.
In addition to the previous example, the telecommunications operators offer us another very didactic: When we want to change our mobile phone we go to an operator, who makes us a very attractive offer ( bait , assuming the total or a large part of the cost of the mobile) in exchange for a contract of permanence of 1 or several years ( hook ), which is where it generates the real benefits, derived from having a customer tied. This is one of the greatest idea of Innovative Business Models.
Although technologically they are not at all the same, at the business approach level they are very similar: The main value proposition starts from the transformation of a product into a service, and from a fixed expense into a variable one. The client does not have to purchase expensive software (product, fixed cost), which must subsequently install on additional hardware and pay for a subscription and support (variable, periodic), but pays to receive a service month by month (or annually).
One of the best known examples is that of Sales force: it is a CRM (customer relationship management) software in which the user only pays to access the software (number of users) and by which modules it requires to use (functionalities). ), instead of paying for an expensive CRM that you must buy, install and maintain.
Another great example of how a SaaS model can turn a market around is Business Intelligence: Companies like LiteBi have been able to put complete BI software within the reach of any company, regardless of its size. This is a type of Innovative Business Models.
It is a particularization of the two-sided business model, in which one of the two sides receives a completely free service / product continuously. For this to happen, customers who do not pay must be subsidized by another customer base or even on the other side of the business model. This is a good type of Innovative Business Models.
The most popular option , and to which most of the Internet services are nowadays offered, is to offer a basic service ( free ) to the majority of users while a small number of them pay an amount for a more complete service. (Premium) This is possible only if the services are based on a platform that adds costs and makes it very cheap to scale them (given that the ratios of users who pay vs. free users are usually around 1-2%)
That said, there are several additional ways to subsidize the free user base, which can go through the use of advertising (although it is usually a bad choice, given that the only income stream is left in the hands of a third party) or by the search for other income channels (bands like Radiohead have experimented with this concept, publishing their songs for free and obtaining benefits in concerts and merchandising). This is one of the greatest idea of Innovative Business Models.
The crowdsourcing is a different value creation approach and is based on involving a large crowd in solving a problem or providing a service in exchange for a reward, and we have spoken several times (here and here)
There are multiple ways to use crowdsourcing as the basis of a business model, but in my opinion the most interesting are:
Pure communities (from Wikipedia or iStockPhoto to thread less), where the crowd performs tasks typically performed by internal staff and whose business model has been built based on this approach.
Contests / Challenges: It really is a particularization of a two-sided market with a few drops of crowdsourcing: A series of users (business side) proposes mass to a problem, and the winner of the contest (crowd side) receives the payment upon resolution of the competition. A classic example is that of design auctions like 12Designer.
Places where companies can “rent” a crowd to solve problems of a scientific or technological nature in exchange for a reward, or obtain a very valuable feedback from customers or users (it is a materialization of Open Innovation). The most prestigious are WorthIdea (with presence in Spain and some great ideas), Innocentive and NineSigma. This is one of the greatest idea of Innovative Business Models.
In this type of initiatives, revenues tend to come from capturing a part of the value of transactions. Some of the most important aspects:
For the initiative to thrive the market must be big enough (the crowd)
The problem or need must be well described and designed in a way that is understandable
The acquisition of new members of the crowd is key, so that marketing takes a vital role and encourage existing to continue to participate (community management)
An adequate reward must be established (not only in terms of money)
Define a correct cash flow: If it is a business model of the contest / challenge type, it is important that the “company” users pay at the beginning, so that the company has enough cash until the contest is resolved.
There are many other types of business models (Auctions, Low-cost, Affiliates, Add-on, Mobile applications, Services / Consulting, Distribution, Franchising, Contests, Subscription, sale of virtual products …) If you find it interesting I will try successive articles. Meanwhile, I recommend you see the list of business models that Javier Martin explains very clearly on his website. These all are the things of Innovative Business Models.