Article by Eshani Jain.
What is a business model?
The term business model caught the buzz only a while ago but has been in use since ages.
Business models have only recently, become so sophisticated. However the importance of a business model is only increasing day by day. Think – Uber.
How does the world’s largest taxi company which doesn’t have to own a single taxi encounter losses each year? Well, the answer lies in its business model.
Why did people keep investing at Amazon even after it kept on getting losses years on end? The answer’s again in its business model.
And, why do some companies like Kodak get wiped out from the competition of consumer cameras even though it practically invented both the chemical and digital camera!?
Yet again, the answer is in the company failing to understand its business model.
It may seem hard to comprehend all of this right now, especially since you may not know much about the term, but let’s keep this in the back of our heads and keep reading.
Michael Lewis uses the phrase ‘term of art’ to describe business model in his book The New, New Thing. A business model describes the process of creating, delivering, and capturing value by an organization in the economic and socio-cultural environment around it. It is a well-defined plan for an organization and highlights the value proposition it aims to offer.
A business model covers and represents all the core activities of a business ranging from operational processes, trading practices, business processes, targeting customers, marketing strategies, manufacturing processes, organizational structures, sourcing, and policies.
A business model defines the path a business should follow to remain afloat, sharpen its competitive edge, and succeed. However, it is implemented after a thorough competitive analysis process.
To create a good business model, you need to always be able to answer the following questions:
- What value will your business offer to your customers?
- Who are your customers?
- How will your business make a profit?
- On what basis will your business price its products?
- What is an appropriate price for the value being offered?
In the simplest of terms, a business model is how a company plans to earn money. A business model created once is not enough it needs to be constantly revised and reviewed as it should remain updated with the rapidly changing business environment, economic conditions, and the market demand.
The greatest challenge faced by an entrepreneur, manager, or director of an organization is “Innovation” in developing business models.
As simple as the word seems, it isn’t the case in real-life application.
Innovation requires the organization to think outside of the box and to break from the shackles of its primeval practices in order to get going on fresh ideas.
Innovation is an organized process that requires a business to venture out of their comfort zone and try experimenting with their already existing process, practices and policies to identify if any change in their existing business model leads to higher profit margins.
The company should be all ears for new ideas being suggested by its workforce and find the technology that would be economically viable for the company and help in transforming its business model.
A few examples out of the many companies that were capable of transforming their future through innovation are:
- IKEA, changed the scenario of the furniture industry with its cheap and stylish designs and a unique way of selling,
- Car2Go, by introducing the concept of car sharing that allowed the customers to share car by the minute changed the face of car rental industry.
Similarly, a plethora of companies tasted the fresh air, innovated their business models, and conquered their markets where they operated.
- Related Information: Need help with crafting your business model? Book a free consultation with us and learn how we can help your business find the perfect fit!
Importance of Business Models
As the business world becomes advanced, technology-driven, and competitive with every passing day, the importance of business models has gone up steadily.
A business model is like a roadmap for a company – it plans out its road to success.
As a business model describes every aspect and department of a business, it makes decision making a simpler process for managers and entrepreneurs. Business models help the decision-maker analyze the effects of their decisions on every department and activity of the business, allowing the person to make clearer and well-informed decisions.
Being creative and innovative with a company’s business model allows the company to explore new opportunities in the business world.
One of the greatest advantages of using a business model is that its central focus is value proposition which is what makes an organization successful.
A business model helps the business understand what makes it different from its competitors and makes it a profitable venture. A few types of business models are listed below which you can go through and explore if they suite your venture.
Types of Business Models
- Bricks and Clicks Business Model
Bricks and Clicks is a jargon term for business models of companies that have both online (clicks) and offline (bricks) presence.
In this model, a company has both online and off-line stores integrated in a retail strategy.
The business model allows companies to use the benefits of the internet to their advantage.
It helps them in expanding their customer base by making themselves appealing to customers who might prefer on-line shopping along with home delivery while also being preferred by customers who would like to browse through the on-line catalog and pick up the products from the company’s physical stores.
The model allows startups or already existing businesses to expand globally and create awareness about their brand and develop a loyal customer base through online presence while keeping in touch with its offline customer base.
The model is adopted by almost every retail and apparel company because of its prime benefit of satisfying customers.
Few companies which serve as examples of Bricks and Clicks business model are Zara, Walmart, Merrill Lynch, Compaq, BestBuy, etc.
Franchising is by far one of the most popular forms of business models. In franchising form of business model, an independent company known as franchisee adopts and uses the business model of the owner company i.e. the franchisor.
The franchisee pays royalty (fee) to the franchisor in exchange for its know-how, intellectual property, brand name, training, support, operational instructions and the right to sell its products and services.
There is a commercial and legal relationship between the franchisee and the franchisor, and the franchisee is expected to abide by the terms mentioned in the contract and operate according to those. Franchising has various benefits to the franchisor as it allows him to expand and grow his business without substantial amounts of money for building new units.
Also, the risk of the failure of business is transferred to the franchisee who is responsible for coming up with the capital investment.
However, this model setup is quite beneficial for franchisees since it provides them with an already established business model to follow. Some of the most popular franchises are McDonald’s, Holiday Inn, Subway, 7-Eleven, Baskin-Robbins, etc.
- Make More of It Business Model
In this business model, a company offers its know-how and other resources to outside companies while using them in-house.
The model allows companies to use their core competencies as a gateway to new market opportunities.
It lets them use their ‘slack resources’ to generate additional revenue along with the core value proposition’s returns.
In effect, the company sells its know-how to third parties, and accumulated specialist knowledge and spare capacities are monetized.
The model was founded by the Australian born engineer, Porsche a German car manufacturer affiliated with the Volkswagen Group.
Since its introduction, the model has been adopted successfully by various companies like Sulzer, MTU, Festo Group, Amazon, BASF, etc. For example, remember the Amazon Go stores that opened up in several locations in USA recently. These are unmanned stores that can help reduce substantial costs for the store owners.
Instead of using them by themselves, Amazon plans on licensing the tech used in these stores to interested third-parties.
By adopting this model, a company allows other business, retailers, and customers to benefit from their expertise, training, knowledge, data, etc.
Companies that generally adopt the Make More of It model are seen by others as innovation leaders and that creates a positive image of the image of the company and has a significant effect on its sales.
- Integrator Business Model
In this business model, the company controls and supervises all or most of the parts of its supply chain. For example, it remains involved in various parts of its production process like sourcing of raw materials, manufacturing process, distribution process, etc.
Such involvement of the firm all the way down the line is quite advantageous as it allows the organization to improve its economies of range and efficiency, reduces its dependence on third-party suppliers which also leads to a consequent decrease in costs and a more efficient value creation.
It also allows the firm to tailor its value chain as per the needs and demands of the industry and its customers. The integrator business model at use can be notably found amongst the oil industry as most of the companies in this field not only own the oilfield and drilling rigs but also the petrol stations and refineries.
The first company to popularize this model in the automotive industry was The Ford Motor Company.
Another company that has adopted this model with perfection is Zara as unlike its competitors it doesn’t outsource its garment production to Asia or other emerging economies instead it produces them in Europe itself. This practice has made Zara one of the most successful companies in the fashion industry.
- Multi-level Marketing Business Model
Multi-level marketing business model is a marketing strategy in which companies earn revenue through the sale of their products and services through a non-salaried workforce.
In this model, a company recruits independent distributors and motivates them to sell their products and recruit more distributors.
MLM companies payout to their participants in two ways. Firstly, by the way of commission on the number of sales made by them and secondly by the way of commission based on wholesale purchases made by independent distributors recruited by them.
MLM companies are focused on building and managing a sales force. MLM business model is quite often confused with the Pyramid scheme which is nothing but a con trick.
In a Pyramid scheme there are no goods in the equation and to get paid the participants are required to recruit new members by the way of scamming them. The mode of operation of this model is quite simple and cost-effective.
Some of the most popular companies that have adopted this model is Amway, Avon, Herbalife, etc.
- Peer-to-Peer Business Model
The businesses which adopt the Peer-to-Peer business model act as matchmaking platforms for individuals to connect and fulfill their wants and requirements.
Using this platform, individuals who need certain products or services can get in touch with other individuals who can provide them those goods or services.
In this model basically, the consumer provides and utilizes their services. The company is only responsible for providing the platform and issuing the guidelines, rules, and regulations and deciding upon the methods of payment and remuneration.
When a company adopts this model the value created is shared by both the company and its customers.
The customers enjoy the benefits of economies of scale, low transactional costs, assured quality, and on the other hand the business benefits by high participation. A few companies that serve as an example of this model are Airbnb, Lyft, eBay, Aristotle, etc.
- Collective Business Model
The collective business model is a business organization formed by business, professionals, small shop-owners, tradesmen who are all involved in the same field of work as their occupation.
They all come together to pool their resources and share information to benefit all. It allows businesses to tackle the common problems faced by them and collectively promote their business.
The professionals and businesses that adopt this business model have the same vision and business goals; they all undertake activities that help them succeed in their niches.
This model can be adopted by dairy producers, artists, consumer goods owners, or any association of people ready to work in harmony with others to achieve the same objectives. The collective business model is slightly similar to Franchise yet has a few key differences like members of a collective organization don’t have to pay ongoing royalties, neither are all members highly bound to each other.
A few companies which serve as examples for this model are CarQuest, Ace Hardware, etc.
- Nickel and Dime Business Model
In the Nickel and Dime Business Model, the business charges the lowest price possible for the cost-sensitive item and then charges an additional extra amount for the other services and perks offered by them complementary to the main service.
This model incorporates the lowest price strategy for the basic and main products and services.
This model is adopted by various airlines such as Spirit, Air Asia, Frontier, and other budget airlines.
These airlines charge the lowest possible fare on air tickets to increase their sales and then charge high prices for every additional service they provide like meals and beverages, seat preferences, carry-on or check-in luggage, the printing of boarding pass, Wi-Fi, etc.
- Razor and Blades Model
Razor and Blades Business Model is adopted by companies that trade in complementary goods. The strategy behind this model is that the companies offer the main product at a low cost to increase their volume sales of the necessary complementary product.
This model is generally adopted by companies that deal in consumable supplies. A few examples of this model are:
- Companies sell razors at a low price as they are a one-time purchase and sell blades that go along with it at a premium price as they have a constant sale,
- Printers are not very expensive but their ink-cartridges are highly expensive.
- Apps can be bought at a low price or even for free but in-app purchases are very costly.
- Similarly game consoles need expensive accessories and software.
Few companies that serve as examples of this business model are Gillette, Hewlett-Packard printers, Keurig Green Mountain, 3D Systems, and Stratasys.
- Reverse Razor and Blades Model
Reverse Razor and Blades business model as the name suggests is the opposite of Razor and Blades Business Model.
In this model, the company offers the main product at an extremely high price and then offers complementary products for free or at a very low cost.
For example, Amazon employs this model for selling its Kindle e-reader, it sells the Kindle e-reader at a high value but offers a wide range of e-books for free or at a price way less than the original cost.
Not only Amazon but Apple has been applying this model for ages and the results have been highly fruitful.
Apple sells all its products may it be iPads, iPhones, or Macs at a very high price and almost never at a discounted rate.
But once you make the purchase, the company supplies you with constant apps for free and even offers you iTunes at a very low price. In fact, this is what ties Apple users to the Apple ecosystem.
This model has turned out to be phenomenally successful and is employed by business giants as they lure the customer by making them realize the value of a one-time investment and the multiple advantages that come along with it.
- Hidden Revenue Business Model
In the hidden revenue business model, the fact that a user or a customer is responsible for the income of a company is abandoned i.e. in this revenue generation strategy, the users don’t pay for the product or service they use so they are out of the equation.
Instead, the organization earns its revenue by selling its ad space to the bidders who want to utilize that space to attract new customers.
Typically, in this business model, there is a ‘separation between the customer and revenue’ and generally companies finance themselves through advertising.
Tech giants such as Google and Facebook have created their viable and sustainable business models based on the hidden revenue generation as we don’t pay for using Google’s search engine or to create an account on Facebook. Few other examples of companies that have adopted this model are Twitter, LinkedIn, etc.
- Freemium Business Model
In this business model a company offers two products – one is for free which is the basic product with certain limitations and another is an upgraded version with special features that are available for a price.
In another variant of this model the product is free for a specific period and then when the period is over, the user has to start paying for continued use of the product.
It is a popular business model among software and gaming companies that provide basic software and games for free and then for additional gaming features or upgraded software features they make the users pay.
For example, YouTube’s free plan comes along with ad interruptions whereas its premium model is free of ad interruptions. This model is quite effective for companies to understand the popularity of their products among the masses and to create a huge customer base by making their basic offering free.
This model is very cost-effective and serves as a great marketing tool. A few companies that serve as examples of this business model are Skype, Dropbox, Candy Crush Saga, etc.
- Blockchain Business Model
More and more businesses have started to adopt the blockchain business model as it has made mainstream implementation very practicable.
A blockchain simply is a time-stamped series of an immutable record of data that is managed by not only one but a cluster of computers.
A single entity is not the owner of these computers.
The data in the blockchain is stored in the form of blocks and these blocks are secured using cryptographic principles.
A blockchain business model decentralizes the business platform and helps in creating a trusted network. This business model uses tokens for profit.
These tokens have a value that depends upon the prevailing market conditions any person who reaches a consensus with the blockchain is offered a token.
The blockchain business model changes the way business functions and makes sure that it keeps on improving and growing during and after the change. This model benefits both the organizations and the end-users.
Various crypto-currencies such as Bitcoin, Litecoin, and Ethereum use blockchain-based business models.
- E-commerce Business Model
E-commerce has become one of the most in-fashion business models to date.
In this model, the business avoids the pains of setting up a physical retail store and various costs associated with it.
Instead, they enjoy the benefits of targeted advertising, reduction of intermediaries, elimination of retail stores, and acquiring a large audience.
The model benefits customers as well as allows them to browse through the companies catalogs and services as per their convenience, eliminate time and travel costs, obtain lower prices, and access goods from anywhere in the world.
The companies that adopt this business model simply adopt the practice of letting customers buy and sell the products via electronic systems. Few companies that serve as an example for this business model are Amazon, Asos, Flipkart, Myntra, etc.
Note that these are just a few general forms of business models. These models are being innovated each day and companies, especially innovative startups are creating even newer forms of business models.
However, these models will provide you with a guide so as to help start you up for the journey.
How to Create a Business Model
A business model is not only about finding the ideal product for you to sell and then marketing it.
A business model is much more exhaustive and detailed covering every single aspect of a business.
Steps that you can follow to start creating your business model are as follows:
- Identify your target customers
Identifying the audience that will serve as your customer base and will buy your goods or avail your services is the first step in defining your business model.
If a company is not aware of the customer segment its product is meant to attract, then it can’t begin with its marketing and advertising strategies.
By chance, if the company starts advertising its product or service before identifying an audience, all its investment would go waste if the company would not be able to get in touch with the right customers.
As such, if you’re looking for funding your startup via investments, you need to be aware of the answer to these questions. Even if you are bootstrapping, identifying key customers is crucial if you don’t want your money to blow up.
You could have both paying and non-paying customers, and both are very essential to your business.
The business needs to identify the needs ofeach customer group and establish channels to connect with them and develop relationships. Satisfied customers are a key to success for every organization.
- Define your Value Proposition
Before launching your business, understanding what you have got to offer to the public is one of the most integral steps of a business.
A company needs to create its value proposition keeping in mind that how will it differentiate itself from its competitors.
To know if your company has a strong value proposition you must be able to answer the following question:
- Will the value offered by my company be able to survive in a highly competitive market?
- Does it have the qualities or the features that make it better than its competitors?
Analyzing the value offered by your competitors in the marketplace is an important part of making your value proposition way stronger as customers buy the product because of the exceptional value it offers.
A few elements of value proposition are:
- Convenience i.e. in which way does the value offered save the time and expenses of the customer,
- Design i.e. what are the features and design of your product for which the consumers would like to pay for,
- Brand, Cost and Risk reduction.
- Organize your Business Process and leave Space for Innovation
Identify your core business processes and organize them most efficiently so that it doesn’t turn out to be haphazard when you are launching your business.
Highlight your key business practices and processes and devote more resources to them and decide upon the process that you might want to outsource or pay less attention to. Always leave some room for innovation and creativity in your business model’s structure as the world is advancing and so will our business practices and policies.
Another way of developing or improvising on an already existing business model is by using the Business Model Canvas.
Business Model Canvas (BMC) is an invaluable tool for companies and startups.
The tool helps you get a clear understanding of your business and its operations.
It gives an insight into the value propositions your company offers, the means through which they are offered and how does your company make revenue.
Business Model Canvas breaks down the model into 9 easy understandable segments that are: Customer Segments, Cost Structure, Revenue Streams, Value Propositions, Channels, Customer Relations, Key Activities, Key Resources, and Key Partners.
This breakdown helps you in easily identifying areas that require improvement and then you simply act upon them.
This process leads to better communication within your organization and with your clients.
Analysis of the Business Models of Some Game-Changing Companies
Heck, you thought we were done? This segment is the most interesting piece of the puzzle. All talk and no-show won’t get you to create a revolutionary business model. Instead analysis of the best business models in the planet will.
So, here are the business models of some revolutionary businesses that people never thought would turn out to be the way they did.
LinkedIn, a subsidiary of Microsoft Corporation, launched in 2003, is the world’s largest professional network. LinkedIn serves as a platform for professionals to build their network and create and maintain their professional identities and profiles.
LinkedIn has successfully implemented the Multi-sided business model in which it caters to the need of and offers different solutions to different categories of its users.
Through this model, LinkedIn serves different target customers.
They are highly dependent on each other. Therefore, the business serves both sides and that’s how it earns its total value offered.
LinkedIn offers hiring services to HR professionals and on the other hand, provides a Learning and Development platform for its members to get more qualified.
As the Learning and Development platform adds to the qualifications of the professionals on LinkedIn, the value of hiring services increases.
LinkedIn generates its revenue through 3 main modes: Hiring Solutions, Marketing Solutions, and Premium Subscriptions.
LinkedIn is also a great example of Freemium Business Model since its core value is available free of cost and to access its premium tools members must pay. Premium tools available are LinkedIn InMails and Profile Stats Pro.
In order to access them the member can upgrade from the basic account to any of the three account types: Business, Business Plus, or Executive.
In conclusion, LinkedIn is a Multi-sided Business platform as it integrates its services offered to both HR professionals and other professional members to get its overall value offered.
- Uber Technologies Inc
Uber, an American multinational ride-hailing company has revolutionized the taxi industry across the world.
Headquartered in San Francisco, USA, Uber is present in 633 cities across the world and has been valued above $70 billion.
The business model behind the success of Uber is the On-Demand Business Model which has gained immense popularity amongst startups due to the prosperity of Uber.
Uber acts as a marketplace on a mobile platform for passengers and drivers to connect with each other in order to let passengers to reach their destination.
It lets users with a phone make a demand and then notifies the nearest driver about the demand then gives an option to the driver to accept or reject the ride.
If accepted the driver reaches the passenger and throughout the journey, the passenger can track the path taken, and in the end when he pays, a percentage of the payment is earned by Uber for the facility provided by it and that’s how it generates its revenue.
Through this model, Uber has to generate strong and admiral value propositions for both passengers and drivers.
According to Vladlen Shulepov , CEO at Riseapps, on-demand companies rarely offer clients a product they create themselves. An accurate description of what the business does is providing an impeccable service, which is key for the success of such an organization.
If you find a market niche where you can help customers by creating an on-demand solution to serve their needs, the only thing left is to execute the creation of such a tool properly.
Additionally, some businesses expand their operations from a single to multiple industries.
Uber is a great example of this case, too, as the company went from operating only a ride-sharing application to food delivery and even a micro-mobility service.
In recent years, Uber has entered new territories through Uber Eats and Uber Freight which are its on-demand food delivery and trucking services.
Airbnb is a two-sided online platform that connects local hosts with travelers. It enables people to list their properties available for renting and then, on the other hand, lets travelers book their homestays in any of the available properties at a cheap rate.
The business caters to the on-demand travel industry and has grown exponentially since it was launched in 2008.
Today Airbnb is present in 190 countries, 34,000 cities with over 4 million listed properties.
The venture not only focuses on affordable accommodation but also pitches for travelers to have homelike feeling anywhere they go in the world.
Airbnb has 3 major customer segments that define its business model as highlighted by Joseph, a Senior Career Advisor at Mint Resume, “There are three customer segments that define AirBnB’s business model: Hosts, Travelers, and Freelance Photographers. The Hosts are the property owners who list out their property details on Airbnb along with other factors like pricing, amenities provided, etc.
The platform then sends a freelance photographer to the property location in order to take high-quality photographs. Travelers usually search for a property online using AirBnB and browse available options according to price, amenities, etc.
Once they like any property, they make the booking through Airbnb. After the host approves the booking, the traveler gets to stay there, and finally, Airbnb pays the amount to the host after deducting their commission. So, the company basically makes money as revenue share from two different sources; Commission from Hosts and Transaction fee from Travelers.”
Airbnb builds trust within the community through its rating and reviewing system and by providing host protection insurance.
As in the words of Petra, CMO at Better Proposals, “Airbnb is perhaps the most interesting business model because they don’t own anything, and they still deal with selling something – space.
They just connect property owners and those who are interested in renting that property.
Airbnb just sells the platform where the two parties can communicate and strike a deal. I think that the key to Airbnb’s success is that it deals with trust.
There have been other ways to rent a property before, but none of them implemented the concept of reviews, ratings, and trust between the two parties as efficiently as AirBnB.”
Freelancer is a crowdsourcing marketplace website where employers and freelancers can connect with each other, employers post their jobs and then freelancers can compete to get the job done.
It is now one of the biggest platforms for freelancers to connect with varied skills worldwide.
The platform has become the go-to site for freelancers as it enables them to get work and connect with owners of projects.
The site boasts of over 16 million registered users from 240 countries and has more than 8 million posted projects spread across 850 project categories.
It is basically a two-sided marketplace where project owners get an opportunity to connect with and work with freelancers across the world and on the other hand freelancers to get an opportunity to work on projects from anywhere in the world.
Freelancer website allows employers and freelancers to chat with each other in real-time via its instant messaging system. Once a freelancer has been recruited for a project the project owner creates the Milestones Payment which is released to the freelancer after the completion of the project.
In case if the employer is not satisfied with the work he can file a dispute and get his money back.
According to Yulia, PR Manager at Chanty, “Freelancer.com is an excellent example of a marketplace. It is a platform that connects people who are looking for work to be done with people who want to find work and it takes a cut of the transaction.
Similar to sites like Upwork, Freelancer’s main investment is in the infrastructure for the website. The company itself does not sell any goods or services – it merely connects two different kinds of people and charges them both a percentage for tying them together.
It’s similar to Airbnb or Uber and it’s an excellent way to create a scalable business with minimal investments in infrastructure.”
- Telsa Inc.
Telsa is the world’s second most valuable auto company after Volkswagen.
Its business model is so innovative that it has changed the demographic of the entire auto industry. Its business model is directed to the customers.
Telsa, unlike other auto companies, doesn’t sell its cars and products through middlemen; instead it sells them directly through its own showrooms and galleries.
Its Service Plus centers which act as both retail showrooms and service centers create an exclusive customer experience which is one of the greatest strategies employed by Telsa. The company is basically vertically integrated; it controls and operates all its car manufacturing plants, physical stores, and manufacturing of other electronic products.
What sets Telsa apart from all its competitors is that it invests highly in technology and software and produces cars that don’t just not pollute the environment, but are great to drive and be in.
Its business strategy when it started out was to target affluent buyers initially by entering the luxury market and then target larger markets at lower prices.
In the words of Elon Musk “In 2006 our plan was to build an electric sports car followed by an affordable electric sedan, and reduce our dependence on oil…delivering Model S is a key part of that plan and represents Tesla’s transition to a mass-production automaker and the most compelling car company of the 21st century.”
Wikipedia is an online crowdsourced encyclopedia whose content is created and edited by various volunteers across the world using reliable sources.
It is a multilingual web-based encyclopedia that has openly editable content i.e. it can be edited by anyone and therefore one doesn’t need to be a volunteer of Wikipedia to edit its content.
It was launched in 2001 and boasts of over 5 million-plus articles. It is a non-profit organization owned by the Wikimedia Foundation which operates on money that it receives in the form of donations.
Wikipedia works on a donation-based revenue model i.e. it relies on the money donated by individuals and corporations which support its vision and cause.
It requires a minimal sum to run its activities. However, every year the organization is donated massive amounts of money.
According to Mansoor Alam of Memoir Health,“Wikipedia is a not-for-profit organization that has consistently grown revenue over the past few years, with $110M in 2019. The business model is relatively simple but extraordinarily hard to replicate – revenue is driven almost entirely by an incredibly large base of both contributors and readers.
With nearly 40 Million users the site requires a tiny conversation rate on their donation campaigns to cover their expenses.
Emerging businesses can learn a powerful truth here – the importance of customer loyalty and retention cannot be understated.”
Joe Tuan, the CEO of Top-Flight Apps has highlighted the business model of whatsapp. Here’s his quote-
WhatsApp had a genuine business model before it got acquired by Facebook. They were building a messenger that would allow people to chat across platforms. Back then, chats between iPhone, Android, Windows Mobile, and Blackberry fans practically didn’t exist.
So WhatsApp set out to provide a messaging platform that would welcome everybody on board, regardless of the device they are using.
The next step was to make WhatsApp the go-to messenger for everyday conversations people have not only with their friends and dear ones but also with colleagues.
For that, WhatsApp introduced group chats, photo & video sharing, video calls. And they never put ads in the messenger. That was crucial for messengers around those times. WhatsApp made it their point that they will never insert ads into messages and elsewhere in the app.
Even though when WhatsApp announced it’d change its free-for-all model to a paid ($1 per year) the app didn’t have all these fancy features and was mostly about texting and photo sharing, its vast user base (200,000,000) and the ridiculously low price suddenly made the whole thing financially viable.
More than 1M users chose to pay for the excellent messaging services. Of course, with the Facebook acquisition, that subscription model had to go.
Instead, WhatsApp introduced WhatsApp for Business, a messaging service aimed at SME, which introduced paid plans for businesses to communicate with consumers.
Another route WhatsApp is exploring is integrations with payment systems. The company experimented with the National Payments Corporations of India (NPCI) to field mobile payments option between WhatsApp users.
There are also plans to integrate the app with Facebook Marketplace.
It seems the original Whatsapp business model was to grow and then try to monetize the growth. However due to the acquisition by Facebook, we couldn’t see if the business model was actually sustainable.
However, it is of doubt that their business model got the company a massive and completely unprecedented growth.
How to Innovate Your Business Model?
- Raising awareness about the benefits of innovating your business model amongst your top management is important but isn’t enough.
Refer to business models of successful and creative companies from within and outside your industry.
As the understanding of various business models and their creation would let you find and create the best model that will suit your company.
- Try to set up a team as diverse as possible. Integrate employees from every department and section of your company as business models aren’t developed in isolation they are a cross-functional activity.
Keep a check that all your employees are on the same page when it comes to understanding the meaning of a business model – it is the Why, How, Who and What of a company.
Integrating outsiders such as consultants is also a key aspect of innovating your business model since they are the ones who view your organization from the outside and are keener to identify the orthodox practices that are holding you back.
- Be prepared for change and open to learning from others. Question your current practices and policies to find out if they will remain viable in the future or they might make your organization inefficient in the future.
Analysing changes within the ecosystem is a very important aspect of innovation. Also, embrace the attitude of ‘proudly found elsewhere’ in your organization instead of the ‘not invented here’ attitude.
- Go through and analyze different types of business models out there and try to find out if adopting one or more of those models or their practices benefit your organization in some way or create new opportunities for you?
Try to overcome your dominant industry practices and challenge them instead.
- Create an atmosphere of freedom and openness in your organization. Make sure your employees aren’t afraid to pitch in their ideas because of negative criticism or rejection.
Innovation is a gradual process that comes along with certain risks and failures, so create confidence amongst your employees that they are allowed to fail but must think outside the box. However, always have clearly set goals and parameters by defining your business vision and mission statements.
- Always verify your assumptions and maintain a balance between creativity and discipline. Innovation requires a lot of hard work also you shouldn’t expect to strike the most brilliant idea in the beginning.
- Don’t lose hope if your business model isn’t successful with its first customer. It happens in most of the cases.
Clearly define the thresholds your business needs to achieve in order to become successful and always be prepared for forthcoming changes.
- Limit your risks through prototyping. Prototyping is creating an early sample or model. Try to materialize your ideas into a prototype and try to engage in it to get quick feedback on the working and viability of the business model.
A prototype can be a pilot project, a detailed presentation, or customer feedback. The insights you gain from any of the prototypes should be used to re-adapt the business model to make it stronger.
- Ensure that the business model innovation becomes an ongoing process as the business is constantly challenged by its competitors and by changes in the business environment.
Invest in developing skills that your organization lacks and always set incentives for the workforce to enhance their motivation. Constantly promote understanding of the business model and benefits of its innovation in your organization and prepare them for forthcoming changes.
Strategies That Can Be Used to Develop New Business Ideas
- Transferring: An existing business model is transferred to a new industry like transferring the Razor and blade business model to the coffee industry. Various business use this strategy as an existing model serves as a blueprint you just have to follow. Also, by studying how they utilized the model you can identify the mistakes made by them and avoid them. The only challenge faced in this process is to leave enough space for innovation, experimentation, and adaptation.
- Combining: Transferring and combining two or more business models is another way businesses can make their models innovative. For example, Nestle uses 3 business models Razor and Blade, Lock-in, and Direct Selling for Nespresso. This practice makes your model difficult to be duplicated by competitors and makes your business model unique. The major challenge faced while practicing this strategy is that the process of planning and execution become overly complex.
- Leveraging: A company uses different business models for the different range of its products by doing this the company is able to capitalize on experiences and synergies, maintain a manageable risk and become one of the most exclusive and innovative business models. However, the biggest challenge faced while pulling off this strategy is to maintain a balance between change and stability.
How to Execute Your Business Model Innovation?
Once you have designed your business model using ideation, integration, and initiation, comes the most difficult part. And, that is the execution. In fact, Jeff Bezos had claimed that a lot of businesses have great ideas but most fail when it came to its execution.
Execution or the implementation involves creating contracts with new collaborative partners, creating and experimenting and tinkering with several different sales channels, specifying your go-to-market strategy, and more.
For successful implementation, a 3-step process cycle should be followed to minimize risk and create more opportunities and re-adapt the model accordingly.
The step process is as follows:
- Designing a Business Model: Creating a business model is an exhaustive and detailed process and involves integration, ideation, and initiation. The designing phase will help the business bring out some viable business models for their startup.
- Create a Prototype and Fail Forward: As we said before, creating a prototype for your business model is an extremely crucial step as it helps in quick and cheap testing of the model with manageable risk and allows your strengths and weakness to come to light.
A business model innovation prototype can take different forms ranging from detailed presentations to business plans and pilot projects in small markets. Creating a prototype is important as it is graspable and helps people trust new products.
- Test out Your Prototype: Testing your prototype will help you identify which dimensions of your model are at fault and which are perfect and don’t require any change.
Stakeholders from within and outside the company both should be invited to share their feedbacks as all the information collected will help you incorporate what you learn in your next round of prototypes.
Sometimes you might even have to discard the prototype completely and explore new avenues instead but even that is a positive and important part of the process as failure is also a source of learning.
Execution is not a simple process instead it is a multi-dimensional process and the Design-Prototype-Test cycle must be completed several times before launching your innovation into the market.
You need to think in both a divergent and convergent manner during this process. The business model becomes more realistic with the time.
Executing upon the Model
To successfully run a business model, you will require appropriate capabilities that are built up from repeatedly applied knowledge. However, having the right knowledge isn’t sufficient to build capabilities, its correct application is equally important.
In simple words, the team must stay with the organization from the beginning until the launch of the business model.
To build capabilities, the first step is having the right team.
Every person in the team should be determined, have a clear vision, and understand the purpose of the initiative.
A person should be selected in the team based upon his or her personal qualities such as professional knowledge, working style, and sociability.
While selecting the team members one must pay attention to not only the talent of the individual but also their creative thinking ability, work ethics and most importantly whether or not they fit in the culture of your startup.
As an entrepreneur, since you are the founder of your business, you will remain the most important person of your business. Therefore, you need to find out the type of entrepreneur that you are so that you can properly define the work culture of your startup.
Now, innovation is an interdisciplinary and highly interactive process in which as many perspectives as possible must be included starting right from the R&D department to the marketing, sales, logistics, and manufacturing department.
Every member should make a creative contribution to make the process of innovation the most productive.
While working on your business model you will identify that there might be certain capabilities you would be lacking to implement the project. However, there are a few ways in which you can overcome them.
For example, you can either develop the capabilities internally, partnering with others, or by buying capabilities or businesses.
Capabilities can be developed internally by recruiting new employees, organizing training sessions, or learning on the job.
However, this process is highly time-consuming and requires a great deal of patience.
The second option for building capabilities is to Partner with Others.
Partners can bring in all the capabilities you lack in and it is an easier option rather than hiring employees.
Another way of building capability is by Buying Capabilities or Businesses.
To overcome your lack of capabilities you can buy other business or business units.
Although, it is one of the most rapid strategies for acquiring capabilities but it is also risky and costly.
For example, Lufthansa recently acquired GermanWings to compete with the low-cost carriers as it couldn’t build its own low-cost carrier airline owing to its cost-structure.
But now, it is straining to juggle the demands of its low-cost airline and with those of its premium business.
Wrapping it Up
Building a business model and executing on it is tough work. But it is among the few steps that produce revolutionary businesses.
Now, that you have gone through this article, you have pretty much become quite well-versed on this topic and I believe you will be on your way to creating great companies.
But, of all these business models, which do you think is the best? Which models do you think can be innovated upon and which models are you going to use for your business?
Do let me know in the comments and if you liked the article, share it with all your employees and business partners.
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Author Bio: Eshani Jain, the author of this article is a student of Bachelor of Commerce (Hons) at Kamala Nehru College, DU. Connect with her on LinkedIn.