What’s Your Business Model?

According to Mark Johnson, co-founder of Innosight, a business model is simply this: “The way a business creates and delivers value for a customer while also capturing value for itself in a repeatable way.” It’s a straightforward concept, but important enough that academics and consultants alike talk about it frequently.

For example, in my work with entrepreneurs — both established and “would-be” (i.e., students at the Questrom School of Business at Boston University) — I often leverage something called the “Business Model Canvas,” created by training firm Strategyzer. This framework is useful in ensuring that all the relevant elements and their interconnections are considered before going to market.

The interconnections are particularly critical, since changes in one can wreak havoc on the rest.

Consider digital music. Apple’s iTunes disrupted the music industry by enabling downloads of individual songs at only 99c each, upending a once fabulously profitable record industry and forever changing how music was purchased. But it wasn’t long after that when the next tech innovation arrived — cellular broadband — which allowed for music streaming (via Spotify and others), changing the game once again, as music ownership was eclipsed by an unlimited library and a monthly subscription.

Note that renting rather than owning is not, in itself, new; people have had the choice of leasing cars instead of buying them for decades, as one example. But the application of the “rent rather than own” business model to music, was… enough to disrupt an entire industry.

Creative Thinking Is An Innovation, Too

Not all business model innovations require new technology; some just require creative thinking — thinking that can apply both to for-profit and nonprofit organizations.

For example, the typical business model for a museum combines several revenue streams. Admission fees, of course, often supplemented by revenues from memberships, onsite retail facilities, and philanthropy. Many times, however, it’s still not enough, a reality that prompted one highly specialized museum that was not generating a lot of visitors, to make a change: free admission for everyone.

But wait, doesn’t free admission reduce revenue? At the front door, absolutely. But the removal of the entry fee dramatically increased visitation, resulting in an equally dramatic increase in retail sales, more than making up for the admission fee loss. As an added bonus, the additional attendance was a plus for the museum’s mission.

Putting It Into Practice

When thinking about how best to thrive in a world of shifting business models, three approaches often yield significant results:

1. Serve a specific customer segment.

Think carefully and creatively about your value proposition; what audience are you seeking to serve and what are its needs?

Club Quarters realized that business travelers who are not on an expense account — but who need to stay several days in a major city — have few options. The high-end hotels downtown are expensive, offering many luxuries and services. Avoiding those high prices often meant staying outside the city — but then requiring costly, time-consuming travel back and forth.

By focusing only on what business travelers really need and eliminating elements that are not critical to that specific audience, Club Quarters significantly reduced operating costs and has been able to provide center-city business accommodations for low prices to a cost-sensitive segment.

Or how about auto insurance? Allstate now offers insurance by the mile. Enabled by a device in the vehicle that tracks mileage (and presumably many other things — like how fast you drive!), this model appeals to low-use drivers, saving them money while encouraging them to drive even less in the process.

2. Separate your pricing from your costs.

Since pricing needs to support cost structure, it’s natural to use the latter to construct the former. That’s a mistake, however, if you don’t also consider the value proposition through the customer’s eyes.

Years ago, I co-founded an Internet-based startup that enabled marketing companies to digitally share large files with suppliers and production partners, something made new at the time with the introduction of broadband. Our costs were driven by the size of the digital files — storing, uploading, and downloading them. Foolishly, we based our pricing on these same elements.

But our prospective customers didn’t think in those terms. They couldn’t understand why some things cost more than others or what they would actually have to pay. It wasn’t until we shifted (very late in the game) to a more fixed pricing model that we began to get market traction. Our initially flawed business model was the result of our not appreciating our prospects’ point of view.

3. Fix or replace what’s broken.

Several years ago, I worked with a nonprofit focused on raising money to seek a cure for brain tumors. For over 15 years, they had followed a traditional business model for a disease-based field: first raise money, then fund scientific efforts in search of a cure. And for 15 years, they made little progress.

The business model was broken. That’s because once a lab is funded, research begins and a number of things that are tried, fail. That’s to be expected. The problem, however, is that these organizations don’t tell anyone — there are no incentives to do so. Their goal is to either discover something they can patent or write a peer-reviewed scientific paper about their work.

Both of those outcomes require a process of keeping any findings — positive or negative — secret, until the paper is published or the patent is filed. Meanwhile, other scientists also may have the same idea. But, since they are unable to learn what doesn’t work, they raise funds and set off on exactly the same path.

So, we changed the business model. Labs agreed to collaborate with other cancer research organizations by sharing notes on what was working and what wasn’t (not to mention intellectual property legal advice), and Defeat GBM was formed. Since then, many useful discoveries have occurred, saving time, money and duplicate effort along the way.

Reflections

Business models are not static — the world is littered with companies that went from market leader to historical footnote, thanks to any number of innovations, both large and small. Often, these are what create opportunity for new companies, while damaging existing leaders that don’t understand or appreciate the change.

Staying alert and curious, and paying attention to innovations around you may open your eyes to new approaches — approaches that you may benefit from or that your competitors may use to your detriment.