Business Models
Business models represent the way to collect revenue from operations. If you look around, there are thousands of successful businesses with completely different models, in the same industry.
Uber's business model was already in use by other successful companies. Still, a few years ago, nobody thought of being a driver in their free-time. But Uber was a success. Not by inventing something new, but by exploring a different model in a well-established market. There are no right or wrong models. But it surely helps to understand which options you can choose from.
The book Business Model Generation details incredible tools to understand, design, rework, and implement different models.
The Long Tail
Competition is fearful in many markets and launching best-sellers is a very complex task. But you don't need any best-seller to be profitable. If you adopt the long tail model, you will focus on a variety and diverse range of products, none of which sell too much, but when combined create a lucrative enterprise. This model, popularized by Chris Anderson, shifts the attention from hits to a large volume of items sold and is particularly lucrative in the media industry, where the costs of distributing 10 products, are not much different from distributing 1,000. Netflix is a great example. Instead of providing a few bestsellers, that would quickly make customers abandon the subscription, they offer thousands of different options. They now distribute their productions, which allows for an integration of operations.
Amazon Self Publishing allows writers to publish their books in less than 5 minutes. They don't focus on finding a few best-sellers, like most traditional publishers, but on offering customers a vast library of reads. They already have the platform and the customers, so offering more books does not add significant costs to the equation.
Multi-Sided Platforms
A multi-sided platform brings together two different customer segments, and its value proposition relies on connecting both groups. Video game consoles are a great example: on one side, we have game developers. On the other, we have users excited to play. Sony's focus, besides selling the console, is getting both segments satisfied. Still, the success and interest of the developers depend on the number of players, and the interest of players on the console depends on the games available.
Airbnb attracts two different groups of customers by providing a platform where renters can find a place to stay, and landlords can finally make their houses lucrative. The company adds value when joining both groups.
Free Model
The free model consists of having one segment financing the other segment that benefits from a free offer. Metro, the free newspaper, is available for public transportation commuters and is financed by the advertisement space it sells. Facebook is also an example of this model.
The insurance business is a particular case. Instead of having a small group paying for the other, we have a large group paying small fees, to subsidize the few who claim.
“The demand you get at a price of zero is many times higher than the demand you get at a very low price”
The zero price effect makes us react emotionally to a free offer, and you can learn more about it in this post. It is, indeed, more than possible to have a lucrative business using the free model, as long as you have one segment that finances the other(s).
Unbundling Business Model
The concept behind this model is that each corporation focuses on satisfying a different type of business: product innovation, infrastructure, or customer relationship. Corporations can focus on more than one business, but ideally, they should unbundle them into separate units. Telco companies outsourced network operations and work with smaller innovative companies, and focus exclusively on building customer relationships. The key is to delegate activities in which a company does not have a competitive advantage, in order to release resources to the core business.
Open Business Models
This type of model relies on partnerships inside-out and/or outside-in, and takes advantage of collaborating with other organizations. Procter & Gamble is a great example, as they went from an internal Research and Development process to an open one. For this, they built channels that (1) connected the company with researchers in universities, (2) exposed problems on the internet to promote a solution among thousands of problem-solvers through InnoCentive’s and (3) established relationships with experts through YourEncore.com. The company saw the productivity of innovation rise significantly, while only raising costs by a small percentage.
Understanding and recognizing the differences between these models allows you to think outside the box and experiment with new ways of doing business. Recent innovations came from business models that already existed but were never before implemented in that market.