Business model innovations are among the most common forms of innovation models but understanding them is not that easy. Let's try to define them:
A business model innovation is the development of new, unique concepts to support the financial viability of an organization, including its mission, and the processes for implementing these concepts.
Okay. Who got that? Let's try again with a statement from BCG (Boston Consulting Group):
“The art of business model innovation lies in improving advantage and value creation through simultaneous and mutually supportive changes to both a company's value proposition to customers and its underlying operating model.”
Now it's becoming a little clearer. Let's break this statement down into its components and first take a look at what a business model actually is. The business model describes how a company wants to generate profits or is already generating them. The simplest business model is trade, which is defined solely by supply and demand. The trading platform is the market (mobile or stationary) and the traders bring the goods, the customers bring the equivalent value for the trade.
If we didn't have business model innovations, trade would still look the same today, and in many parts of the world it actually still does. But with the introduction of money, a “value equivalent,” it suddenly became possible to accumulate value and gain degrees of freedom that allowed for purchases that would not have been possible with one's own trade offerings. In other words, if you can only exchange sugar, pepper, and curry for goats, potatoes, and jute sacks, you will not be able to acquire a field or a house anytime soon. And so the market has undergone repeated changes. Street trading gave way to the marketplace, then the shopping center, and then the internet shopping mall. The only thing that has remained unchanged are the basic rules of trade, namely “I give you something and in return I get something.” And if I wanted to be successful, my ‘something’ had to be better or more attractive than the “something” offered by the competition.
But before we return to business model innovation, let's take a closer look at the market. After all, knowing the market and understanding the customer base are crucial factors when it comes to improving or changing an existing business model. The market consists of supply and demand. As a company, we are on the supply side, which we always want to tailor precisely to our customers. To do this, it is necessary to listen carefully to customers and understand their wishes and needs in order to best meet demand. And that doesn't mean individual crazy ideas (the crazy bad ones, not the crazy good ones) but rather wishes and needs that are expressed repeatedly.
For example, if hundreds of customers complain about the parking situation in the city center or the constant traffic jams when entering the city, then alarm bells should be ringing for local businesses. One business model innovation was to move the market to the outskirts of the city to huge shopping centers, thereby reducing traffic in the city center. The introduction of shopping malls was a huge success in the US for a long time, until they themselves were hit by the next market migration: the Internet. This business model innovation had taken the next logical step. Customers no longer have to get in their cars but instead they can shop from the comfort of their own homes until their credit cards begin to glow.
Now that we have redefined the market and made it extremely easy for customers to part with their money, we come to the third and final component for understanding and implementing business model innovations: the value proposition. This value proposition is the Unique Selling Proposition or Unique Selling Point (USP) and describes why we as a company are so much more attractive than our entire competition and can therefore retain customers, and thus their capital. Usually, a good value proposition helps customers
• save money or time,
• invest more in quality or sustainability,
• learn to appreciate improvements, or
• be guaranteed greater social benefits.
© Modified from Kylliäinen, J. Viima 2018 – Innovation Strategy
So, if you want to launch a good and stable business model innovation, you have to change the existing market or perhaps even create a new one. At the same time, a new way of generating revenue or increasing existing revenue should be found, e.g., via new, technology-driven platforms. Last, but not least customers must be convinced of the newly created value propositions. Here are a few examples of the diversity of existing business model innovations:
Subscription models promote customer loyalty, as one-time purchases are converted into more predictable and, over time, larger sources of revenue. At the same time, updates ensure that the added value for customers is maintained. In addition, customers can now access the offer at a clear entry price and spread the financial burden over the coming months. Subscription models work on both the business-to-business (B2B) and business-to-customer (B2C) sides. Software-as-a-Service (SaaS) models, which provide cloud-based software packages, have become established between companies. Related models include PaaS, i.e., platforms as cloud-based services, and IaaS, in which infrastructure is provided as a service model, for example, for web services.In the B2C sector, large software providers such as Adobe have decided to switch from the traditional purchase and ownership model to a subscription model. Consumers receive products more conveniently and at a lower short-term cost, while the company in turn generates a highly predictable and calculable source of income, eliminating the need for intermediaries. Unfortunately, these mostly cloud-based solutions are only viable for customers who have full Internet access at all times. In addition, customers pay for subscription models even if they do not use the service (e.g., gym membership).
Freemium is a portmanteau of free and premium. It refers to business models in which companies offer a free version of their products, typically with certain restrictions, in order to attract users and ultimately convert them into paying “premium customers.” For most content and software companies with high customer acquisition costs, this can be a very powerful model, especially in crowded markets. This reduces customer acquisition costs and enables the company to offer a better product at a more affordable price than the competition. This model is particularly well known in the field of antivirus software, where a slimmed-down service package is offered for download free of charge. As the software is used, it reveals further vulnerabilities, which can only be remedied by upgrading, and this has to be paid for. In-app purchases are also commonplace in the gaming industry. Here, you can download the game for free, but if you want to reach the next level in the game or gain advantages, you have to pay for them.
In addition, companies that competitors are not interested in can also be served, which in turn leads to rapid growth. This allows solid margins to be maintained, which can be used to reinvest in the business, further accelerating growth. The freemium model is quite common for B2B software products such as Zoom, which are primarily used by employees at the internal company level, but also for many B2C services, such as Spotify and Apple iCloud, which are tailored directly to end customers. The downside is that freemium models without strong value creation are often discontinued due to a lack of profitability.
Nowadays, platforms are places on the internet that coordinate and/or facilitate the meeting of supply and demand. They come in many shapes and forms but are often marketplaces or intermediaries. They usually earn their money either by charging commissions for transactions or by billing the supply side for the value-added services they provide. Shopping centres and classified ads in newspapers are just a few examples of traditional platform business models. Digital platforms have copied this business model but have significantly increased accessibility while massively reducing the effort involved. This has made digital platforms much more lucrative, as the global platforms that have now been created achieve enormous economies of scale with minimal entry costs.
The usual suspects include Amazon, eBay, YouTube, Booking.com, Uber, Alibaba, and the App Store. Although it is probably not a good idea to try to compete directly with these giants, there are still many niches where platform business models could create a lot of value. The challenge is that it is often difficult to get platforms off the ground and reach a critical mass where they can become self-sustaining.
For a long time, producers of consumer and industrial goods traditionally relied on an often complicated supply chain of wholesalers and retailers to sell their goods. Manufacturing companies had a large geographical reach due to their distribution network and were able to exploit their economies of scale. However, with the advent of the internet and the introduction of e-commerce, the direct-to-consumer business model has rapidly gained in attractiveness and popularity in many categories of consumer goods. Since there are no middlemen involved, this approach enables higher profit margins and allows for greater control over the brand, customer experience, and customer relationships. It also provides additional high-quality data on demand and customer preferences. The clothing industry in particular has been quick to adopt this model.
Although the sale of professional services is nothing new, many interesting new business models have developed around them. A good example of this is the business model of open source software companies such as Word-Press, Red Hat, SuSe, and Elastic. These companies have developed very popular open source software products that they make available to other companies completely free of charge. When you make good software available for free, it can become extremely widespread, as is certainly the case with the products of the above-mentioned companies. Without the open source model, these companies would never have been able to achieve the market share they have actually achieved. Once their products have been accepted on a large scale, open source companies are obviously well positioned to either sell professional services or offer hosting services to this large user group.
The same basic logic of giving something away for free or at a loss and then selling additional products or services to this broader customer base is also known as a loss leader strategy. It has become widespread in many industries, such as retail, where stores offer a real bargain on certain attractive products to attract more customers. In general, the sale of maintenance and insurance contracts and other additional services has also become a ubiquitous business model, especially in the B2B sector, but also for more expensive B2C products such as cars.
“Razors and Blades” is a classic example of another form of the bait-and-switch strategy mentioned above but is specific to goods with a longer life cycle. The idea is that a product, such as the classic wet razor, is offered at a very affordable price - usually at a loss - and then profits are generated through the continuous sale of complementary consumables, such as blades. Other examples in this group would be printers and cartridges, coffee machines and capsules, and electric toothbrushes and brushes.
While the examples above cover some of the innovative business models that have gained popularity in recent years, there are many others: franchising, auctions, micropayments, “pay-what-you-want,” and the list goes on. There are many ways to combine different business models with different product and service offerings to maximize the value created. In summary, business model innovation is a powerful but still highly underestimated tool. Breakthroughs can be achieved quite quickly and easily, which can be decisive for the success of a company. If business results fall short of your own expectations or if you are aiming for significant market share from your competitors, business model innovations are more than worth a try.
