One of the tasks that any professional business responsibilities should address periodically, whether CEO of a company in the Fortune 100, entrepreneur budding CEO of a newly created startup or CEO of an SME Director is questioning its business model, it says how it intends to operate and obtain money (or social value, in the case of an NGO). This not only analyzes the present but pose new models that provide more value.
To do nothing better to understand where we come from and, above all, what are the models that ultimately reap more successes, based on which inspire and challenge the model itself.
The business models at the beginning of the 20th century were quite simple: you fabrics something / and was selling a service and live. However, gradually were creating new alternative ways of generating income. Two of which had a greater significance in the industry were:
- Gillette: Explain the implications and steps in this business model would be extensive (often used in the master as case study), so summarize: King Gillet considered that, if it was able to offer good razors at a very competitive, customer would be happy to pay the blades (which require periodic replacement)
- Xerox: When in 1959 Xerox introduced its model 914, with features far beyond copiers that are then sold (and much more expensive), decided to innovate in their business model: Instead of selling each machine in the traditional way, the charging additional $0.04 would rent for each copy from 2000
In recent times, there is some concern about it, given the global pressures for increased competitiveness and productivity, which have resulted, along with the advent of Internet and collaborative web in a whole lot of alternative business models. Then we will see some of the most interesting (obviously not about pure models, and in many cases some have traces of other).
Models of 2 (or more) sides
This is business models in which there are at least 2 (although there may be more) groups of customers interdependent with each other (sides). This type of business model stems from the fact that one side only benefits if the other is present and is, therefore, the main objective of the company to facilitate interaction between them, acting as an intermediary and enhancing the network effect to the fullest.
The key premise for this approach to be successful it must attract and create value to both sides equally. If only offers real value to one of the two sides, the other rapidly decreases and no longer has value in itself.
To do this, usually one side is subsidized, i.e. the service you receive is a significant discount (or free) at the cost side unsubsidized.
A good example of this type of business model is and how a business model can make a sector rethink their dilemmas is the Metro newspaper (and all its derivatives): It exists a subsidized side (the public) that receives a daily free product. The side that subsidizes is advertisers, who consider attractive model while there is a large enough member on the other side basis (the general public).
Other examples of business models both sides include Google (connects advertisers with users of its products), console manufacturers like Nintendo Wii or PS3 (connect game developers with clients), manufacturers credit card (connect buyers with shops) or even the press.
Although not a “pure” business model if several sides, I found it very interesting that of Safaricom operator, described beautifully in the essential entrepreneurs blog. It is an operator of Kenya, which also operates as such, identified the need for agile banking services for much of rural Africa … so that leveraging its infrastructure and mobile invented a system so that people can afford charge and send money.
An example that perfectly illustrates these markets (specific case of a market of two sides) can be found in our youth and the hours spent in a nightclub. One side of the market (the girls, subsidized side) had free access to the disco it was assumed mainly by the other side (the guys who paid entrance, waiting to find enough customers on the other “side”) and by other means of additional income (cups).
This name was coined by Chris Anderson in his Wired article and is based on the fact that in certain businesses are finite resources that force the company / trade choose to sell only products expected sales will get better. It is called “Long Tail” model in honor of the graph of sales distribution in which a small set of references accumulates most sales (bestsellers, the rest of references sold more occasionally tail).
A classic example of a finite resource is the exhibition space and storage in a store: The owner, given its limited space, filled with references deemed to be selling (usually the most popular for the general public) … but it happens when this finite resource decreases dramatically the cost?
The answer is that rather than profit only the articles that are sold; you can get income by selling many units of a large number of items sold little.
For this to happen it is essential that happen 2 things:
- The costs associated with the finite resource (inventory usually associated with storing the goods) must fall dramatically
- It must have an effective system of recommendations to drive customers along the tail; generating sales of less sold / niche products.
One of the best examples of a business model based on the long tail is the supplier Amazon and electronic books: On the one hand, Amazon has stopped physically store a very important part of their stock of books. To do this they have digitally stored and when a client requests a copy prints on demand (all of which has much in the interest of the company to enhance the e-book). On the other hand, the recommendation technologies Amazon are absolutely gorgeous: For a customer who has placed multiple orders, the probability that guesses recommending one is very high … which makes it possible to generate sales in niche products at the end of the long tail.
BAIT & HOOK
Also called “razor and blade”, its popularity is due to the manufacturer Gillette shavers. It is based on the presence of an attractive and very cheap initial offer that customer loyalty to the brand, and later encouraged the customer to keep buying products or services. Change the obligation and complexity of selling new units every month only to have some additional recurring revenue units sold … at the expense of assuming some initial losses.
In this type of business, it is very common for the seller to start losing money with the customer, creating profit with each subsequent purchase.
In addition, to the above example, the telecommunications operators offer us another very educational fact. When we want to change mobile we went to an operator, which makes us a very attractive offer (bait, assuming all or much of the cost of the mobile) in exchange for a permanent contract of 1 or more years (hook), which is where it generates the real benefits derived from having an attached client.
Cloud and SAAS (Software-As-A-Service)
Although technologically they are not at all the same, in terms of business approach are very similar: The main value proposition of the transformation of a product into a service, and a fixed expense in a variable. The customer does not have to purchase expensive software (product, fixed cost), which must then be installed on additional hardware and pay for a subscription and support (variable, newspaper), but you pay for receiving a month service to month (or annually).
One of the examples best known is that of Sales force: This is one in which the user pays only for access software (CRM software “management customer relationship” number of users) and which modules requires use (functionalities), instead of paying for an expensive CRM you must purchase, install and maintain
Another great example of how a SaaS model can turn around a market is Business Intelligence: Companies of today have been able to put complete BI software available to any company regardless of size.
This is a specific case of the business model of both sides, in which one of the two sides receives continuously product / service completely free. For this to happen, customers who do not pay should be subsidized by another customer base or even on the other side of the business model.
The most popular choice and most Internet services are welcome today happens to offer a basic service (free) to most users while a small amount of them pays an amount to get a complete service (premium). This is possible only if the services are based on a platform that adds costs and makes it cheaper to scale them (since the ratios of users who pay vs. free users average around 1-2%)
That said, there are several additional ways to subsidize the basis of free users, who can go through the use of advertising (although usually bad choice, since the only revenue stream is left in the hands of a third party) or the search for other input channels (Bands like Radiohead have experimented with this concept, publishing free songs and making profits in concerts and merchandising).
For further information on this model, I got to influence after reading the wonderful article by Chris Anderson’s “Free! Why $ 0.00 Is the Future of Business”
Co-creation and Crowdsourcing
The crowdsourcing is a different value creation approach, and is based on involving a large crowd in solving a problem or providing a service in exchange for a reward, and we have spoken several times before.
There are multiple ways to use crowdsourcing as a basis for a business model, but in my opinion, the most interesting are:
- Pure communities (from Wikipedia or iStockPhoto to Threadless), where the crowd performs tasks typically performed by internal staff and whose business model is built based on this approach.
- Contests / Challenges: It really is an instantiation of a market of two sides with a few drops of crowdsourcing: A number of users (business side) proposes to mass a problem, and the winner (host side) receives payment to resolve the competition. A classic example is the design auction as 12designer.
- Innovative Ideas: Places where companies can “rent” a multitude to solve scientific or technological nature in exchange for a reward, or get valuable feedback from customers or users (it is a materialization of the Open Innovation). The most prestigious are WorthIdea (with presence and great ideas), InnoCentive and NineSigma
In such initiatives, they are often born revenue to capture some of the value of transactions. Some of the most important aspects:
- For the initiative to prosper the market must be large enough (the crowd)
- The problem or need to be well described and designed in a way that is understandable
- The acquisition of new members of the crowd is key, so that marketing takes a vital role, as well as encourage existing to continue to participate (community management)
- Should establish an adequate reward (not only in terms of money)
- Define a correct cash flow: If this is a business model contest / challenge type, it is important that users ‘enterprise’ pay at first, so that the company has sufficient cash until the contest is resolved.
There are many other types of business models (Auctions, Low-cost, Affiliates, Add-on, Mobile applications, Services / Consulting, Distribution, Franchising, Contests, subscription, the sale of virtual goods … etc.) if you interesting I will try to subsequent articles. Meanwhile, I recommend you see the list of business models that we have discussed and explained very clearly in this article.