An Introduction to Business Model Innovation

Posted by Fernando Solano on Jul 23, 2019 12:52:08 PM
Fernando Solano

People's ability to innovate never ceases to amaze us as many companies develop excellent and sophisticated products. However,  companies often lose their competitive advantage, why? Think of companies that dominated their industries and today struggle to maintain themselves. Some cases such as Nokia, Kodak, American Airlines, Motorola, among others, fell asleep in the commodity of success and ultimately failed because they did not adjust their business models to the changing environment.

Today, the competitive success of a company depends on its ability to create innovative business models. Analyze the following success stories from innovation in your business model instead of an individual product:

  • Apple is the largest seller of digital music in the world and does not produce any songs.
  • Pixar has won multiple "Academy Awards" without a single human being in its movies.
  • Netflix reinvented video rental without having one physical store.
  • Amazon is the largest bookseller, yet it has no bookstores.

Research by BCG and MIT in 2013, showed that innovation in the business model is key to the sustainable success of companies and that 60% of the companies that implement this innovation report increases in their income.

We collect common patterns in business models of various industries. The key premise is to understand the models and adapt them according to our business context. We advise the following:

 

  • Do not try to reinvent the wheel, apply and adjust any of the business models that have already been proven successful in at least one industry.
  • The key to innovation is to find a way to apply each business model in a context that has not been used before.
  • Consider patterns as a starting point to as you think about your business model and try to create a completely new one.

 

Some patterns seem similar but if they are analyzed carefully, they have differences or are complements of the models they resemble, for example, the knife and blade with the lock-in.

Consider the business model patterns:

  • Peer to peer (P2P)
The P2P model consists of connecting more than one segment of equal clients; that is people with people or companies with companies. It is important that you consider a value proposition for each customer segment. In this model, the development of the channel is very important since the model is a meeting point between equals. Some examples: Airbnb, Uber, eBay, Kiva.

  • Freemium
This model consists of offering a free version to a segment of customers that require the basic functionality of the product/service and a premium version to a segment that requires premium functionality. Relations with customers is a barter because the basic version is given free of charge hoping to generate other businesses, for example, propaganda, or that later on, the customer will upgrade to the premium version. Some examples are Spotify, LinkedIn, Skype, and online newspapers.

  • Lock-in
It's a typical model of interacting with customers and consists of "enclosing" customers in the business model. Using another provider is not possible unless the customer is willing to incur costs for the change. The "confinement" can be generated by physical, technological or legal mechanisms.

  • Long-tail
The long-tail model is based on the Pareto law or 80/20 rule where 20% of the products generate 80% of the sales. This model seeks to bring customers to the queue (that is, 80% of the products generated by 20% of sales)  using recommendation systems. The model is widely used by electronic businesses and requires developing organizational skills such as Data Science. Some examples are Youtube, Itunes, Amazon.

  • Razor and Blade
The model consists of making a transactional sale by selling a base product (at cost) and generating recurring sales through consumables that are required for the operation of the base product. This model is recommended to use when there are sales of frequently used products or services. We recommend using the Lock-In model as a complement. Some examples of companies that use this model are P&G (Gillette), Apple (Itunes), Nestlé (Nespresso), Cannon, Pandora, Amazon (Kindle).

  • Sale of Extras

This model is useful when the customer makes a rational purchase. At the time of purchase, you are offered some extras to give in to your emotions and make impulsive purchases of extras. Typical examples are the purchase of vehicles and airline tickets.



The table below identifies the blocks of the Canvas that impact the different patterns of the most well-known and used business models that will undoubtedly support you in the task of innovating your business model. It is important to clarify that there are other patterns and that the list is updated.


Screen Shot 2019-07-25 at 7.16.42 PM

 

 

Topics: business models, strategy

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