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Netflix displaced Blockbuster by changing the fundamental economics of making money from movies. In other words, they transformed the business model.
The interesting thing is that Netflix started by renting DVDs just like Blockbuster did. It was only after a series of innovations that they moved to an online subscription model that created that direct link with movie lovers.
Certainly, this is a great example of business model innovation.
Business model innovation is the art of enhancing advantage and value creation by making simultaneous—and mutually supportive—changes both to an organization’s value proposition to customers and to its underlying operating model
Boston consulting group
It’s never really easy to innovate on products and services. Not to talk of a whole business model.
That’s why inspiring an existing organization to transform its business model is not a trivial undertaking, but given the current business environment, it’s a critical one.
Well, I’m about to show how you can innovate on your business model to achieve a more lasting competitive advantage, especially during these disruptive times.
Firstly, let’s define a business model
A business model describes the rationale of how an organization creates, delivers, and captures value.
Simply put a business model is all about how you make money.
And it’s popularly represented with a business model canvas tool.
Now, let’s get into each box to see what questions you should answer.
1. Value Proposition
- What core value do you deliver to the customer?
- Which one of your customer’s problems are you helping to solve?
2. Customer Segments
- For whom are you creating value?
- Who are your most important customers?
3. Customer Relationships
- What relationship does the target customer expect you to establish?
- How can you integrate that into your business in terms of cost and format?
4. Distribution Channels
- Through which channels do your customers want to be reached?
- Which channels work best?
- How much do they cost?
- How can they be integrated into your customers’ routines?
5. Key Partners
- Who are your key partners/suppliers?
- Which key resources do you acquire from them?
- What activities do they perform?
6. Key Activities
- What key activities does your value proposition require?
- What key activities are most important for your Distribution Channels, Customer Relationships, and Revenue Streams?
7. Key Resources
- What key activities does your value proposition require?
- What key activities are most important for your Distribution Channels, Customer Relationships, and Revenue Streams?
8. Revenue streams
- For what value are your customers really willing to pay?
- For what do they currently pay? How are they currently paying? And How would they prefer to pay?
- How much does each revenue stream contribute to your overall revenues?
9. Cost Structure
- What are the most important costs in your business model?
- Which key resources/activities are most expensive?
- Which costs are fixed, and which are variable?
In fact, your responses to the questions above reveal how your company creates, delivers, and captures value. And that’s your business model.
To clarify, let’s check out some examples.
Secondly, a Shortlist of Successful Business Models
What do you say when someone asks you to describe your business model?
Actually it’s easier to describe any business model simply by specifying the revenue model.
That’s to say you don’t necessarily have to detail the partners you work with, or your cost structure. Most importantly your focus should be to answer the question: “how do you make money?”
Likewise these are the revenue models with successful track records in the world today.
- Subscription/”Club”. Charge a fee that provides access to a product or service over a period of time. For instance, Magazines, Salesforce, etc.
- Transaction Fees. Receive a per-determined percent of a transaction. This is the revenue model that powers the platform business model used by giant like eBay, Alibaba, Airbnb, Uber.
- Razor/Razor Blade. Make low margins on device (razor) and high margins on consumables (blades). For instance, Gillette, iPod, Kindle device.
- Bundling. Offer different pieces of a solution together. For example, McDonald’s happy meal, cellphone plans
- De-bundle. “Break apart” a product into smaller pieces (opposite of “bundling”). For example, iTunes and $0.99 songs
- Advertising-supported. Sell advertising to companies interested in reaching an audience of users. Like Facebook, Google, Newspapers
- Freemium. Offer free “basic” service with paid add-ons. For example Skype is free for PC-to-PC calls but charges for calls to phones.
Thirdly, Business Model Innovation with digital technologies
On their own, Artificial Intelligence, Blockchain, Internet of Things, and other digital technologies are not intrinsically disruptive.
As I explained in this article about disruption, it’s only when technologies are deployed relative to a given business model that we can say whether they enable disruption or not.
And so there are two ways digital technologies can help you innovate your business model: either you completely transform the business model, or you upgrade an existing one.
i. Transforming the business model
Here you want to completely change the rationale through which you create, deliver and capture value.
And so you look out for where digital technologies can help to completely change your activities, or to remove intermediaries between your products and customers, or even to create new sources of revenue.
I strongly encourage you to ask these questions:
- Could Artificial Intelligence help automate processes and change some of your activities? Or could you use it to build a matchmaking platform that connects people to do business?
- Could the Internet of Things help to create new processes and replace inefficient ones? Can what about creating a new revenue stream by connecting disparate businesses and collecting useful data to analyze and sell?
- Can you use Blockchain technology to create an ecosystem of partners that will create more value for your customers? Or can it help you create a completely decentralized structure for the organization?
- How can you use big data technologies to create a new revenue stream by analyzing large volumes of unstructured data?
- Could you use cloud technologies to create new channels and expand your offering to new customer segments and geographies?
ii. Upgrading an existing business model
Here the focus is to maintain the same business model, but improve it so it can be more efficient.
In other words, you use digital technologies to eliminate inefficiencies like decision-making bottlenecks and customer experience, but the rationale for creating and capturing value stays the same.
In the same way, I strongly encourage you to ask these questions:
- Could Artificial Intelligence help you customize the customer experience around existing products? Can it help you add capabilities to your analytics platform?
- Could the Internet of Things help you connect existing but broken processes to make them more efficient? Can it help you enforce controls around your resources?
- What about using Blockchain smart contracts to build and enforce trust among your partners?
- Can big data technologies help strengthen your analytics capabilities by making sense of all types of data generated in your system – structured and unstructured?
- Can you leverage Cloud technologies to improve the availability of your products and services?
And finally, to Conclude…
Make sure you innovate your business model around your customer needs.
In addition, you should go beyond replication. That is to say it’s not enough to simply digitize your existing business. You have to make sure that every component of your business model helps you achieve strategic advantage in some specific way.
Therefore, digitizing activities and maintaining the same business model may instead lead you to more problems.
So think hard about how you bring innovations to each component of your business model.
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