Radical business model innovation
Back in the day, business models were quite simple: Buy low, sell high. It’s the basis of capitalism and the more it’s repeated, the richer you get. But with new technologies and globalisation, the world has become more complex and competitive, meaning this simple business model can’t deliver a competitive advantage needed to stay ahead of the pack. Though disruptive new business models are emblematic of our generation, they remain poorly understood. To get busy redefining your business model, here’s what you need to know.
Business model 101
Before you can innovate and refine a business model, you need to understand what and where you can tweak. Simply put, a business model is a description of how an organisation creates, delivers and captures value. This can be broken down into nine elements:
1. Value proposition
A clear description of the company’s offering and how it solves problems or creates value for customers.
2. Customer segments
The specific group of people that the organisation aims to serve.
The means that a company uses to reach, communicate with, and deliver to its customer segment.
4. Customer relationships
The methods used to maintain relationships with customer segments.
5. Revenue streams
The income generation and collection mechanism in the business.
6. Key resources
The most important assets that the company needs to make the other elements of the business model work.
7. Key activities
The most important things that a company must do to make its business model work.
8. Key partnerships
The network of suppliers and partners that make the business model work.
9. Cost structure
The major costs that need to be incurred to sustain the business model.
Now to build and refine
Through these nine elements you’re able to understand your current business, whether it can be refined to be more profitable, and where there’s room for designing a new business model. The process is relatively simple but extremely powerful.
- Understand your model
Bring together your management team and other external participants, and present a copy of your current business model. Explain the nine different components and what they mean to the business so everyone’s on the same page.
- Brainstorm new ideas
Brainstorm ideas for different ways of doing things within the business model. If you’re designing a new business model, the focus should be on how you build up the different elements to create a valuable enterprise. Ask yourself, “How can we do things differently?”, “How can we create more value?” and “How can we be more efficient?” Be sure everyone participates and all suggestions are recorded for pondering later. Draw up a business model canvas including all suggestions made, and put it up where everyone
can see it.
- Identify good ideas
Identify good ideas with the input of everyone from the group. Try using gold star stickers where participants can vote for their top picks.
- Rewrite the model
Bring the best ideas together in a coherent business model. Get each participant to rewrite the business model using the best picks. Each person can then present their new model back to the group.
- Take action
Begin implementation of the new model by creating a set of action steps and allocating responsibility for their implementation.
How to use the methodology
Here are some examples of business models that have emerged and proliferated over
the last 20 years.
- Long tail business models
In short: A company sells lower quantities of more types of products to niche groups of customers. Unlike finding a ‘hit’ product to appeal to large segments of mainstream customers, you service small, dispersed groups.
An example is book publisher Lulu.com. Instead of finding the next Harry Potter, Lulu.com is an emerging book publishing business. It enables amateur authors (read: anyone) to publish a book. They make money by providing authors with the tools to self-publish and a platform for buying and selling these books.
- Multi-sided Platforms
In short: These bring together buyers and sellers by creating a space where people can transact. The model creates value by facilitating interactions between groups of people. It gains value as more people use it.
An example is local real estate platform, Private Property that brings together buyers and sellers of real estate on the Internet. Other examples include eBay, Gumtree, Apple App Store and Google advertising.
In short: Yes it’s possible to deliver a product or service to a large customer segment for free; having non-paying customers financed by some other portion of the business. By offering products or services for free, you generate demand and create interest which then encourages a customer segment to buy additional products or services.
An example is Skype. Provided you have an Internet connection, video calls are free (except for the bandwidth you’re paying your ISP for). This gets people using the network. There are then a whole lot of additional services that are worth paying for — like group video conferencing or calling from Skype to phone. Other examples include YouTube and Dropbox.
- Bait & Hook
In short: The business model lures customers in with a relatively cheap, upfront purchase but then makes money by offering more lucrative ongoing services.
An example is BMW Financial Services. BMW retailers give customers a very good deal on cars, and then use the Financial Services package as a means to finance the car. Ongoing interest payments by the customers ensure the model makes money.