Business model innovation is essentially about rethinking your business around your customer needs. Business model innovation is complex and it can be difficult to execute, however when it’s done successfully it can create a significant competitive advantage.
I’m a big fan of the “Three Horizons of Innovation” from Baghai, Coley and White — their thinking supports business model innovation and breaks innovation down into three simple-to-understand horizons. The ‘horizons’ range from making incremental improvements to existing operations, all the way through to the higher-risk invention of future growth engines. You can explore the concepts more here, and in the diagram below.
The 'Digital Age'
The ‘digital age’ has led to a rapid increase in business model innovation, with large organisations investing in new areas to compete in a world of changing customers and competitors. Technology has dramatically changed how organisations operate and service their customers, and there’s a huge opportunity for them to leverage this and become far more focused on the customer.
- Blockbuster failed
- Compact camera sales declined rapidly in 2014 due to the convenience and quality of smartphone cameras.
- Large hotel chains are now more focused than ever to win back revenue from OTAs (online travel agencies) by innovating around their customers.
Nowadays, organisations need to be more responsive; if they don’t respond to change, then to put it simply, they will fail.
An example of a business who have adapted is Graze, who launched as a subscription based business back in 2008. Since then they’ve grown rapidly, now sending out over 300k boxes per week in the UK and US. Graze also recently ventured into two new areas; selling through offline channels (e.g. supermarkets – which now generate 10% of their sales) and most recently through an online shop . They’ve kept up with their ever-changing customers and have reacted to changes in the market.
’Digital Disruption’ Business Models
There’s a huge amount of content out there about changing business models, but I personally found Caudron and Van Peteghem’s most relevant; so here they are, all 10 of them (from their book Digital Transformation), and I’m going to delve deeper into each of them.
All of the models are extremely successful in their own way and have all been validated by global organisations.
The subscription model has been adopted by several super successful companies including the likes of Netflix, Birchbox and Graze. These companies have taken a product or service that was traditionally purchased on an ad-hoc basis, and have locked in repeat custom by charging a subscription fee in return for continued access to something. Over the last couple of years I’ve seen so many startups launching subscription based businesses, yet they don’t seem to be focusing on why people would hire them – does the product or service provide genuine utility?
Facebook operate a free model, which effectively means, if you’re not paying for the product or service then they are going to sell your personal data and provide advertisers with direct routes to your eyeballs.
The freemium model seems to be getting more and more popular with the likes of Dropbox, LinkedIn and InVision operating this model. They are disrupting through digital sampling, basically, so users pay for a basic product or service with their data, rather than money, and then they are charged to upgrade to the full product or service offering. This works extremely well for them in terms of scale — it’s far easier to embed a product or service into someone’s life so much that they need the premium version, than to create a lot of noise through advertising where the cost to acquire new users is a lot higher.
Since 2012, Tesla have launched a range of vehicles, to massive acclaim. Tesla adopt an experience model — they offer a superior experience that people are prepared to pay for. What’s more they have a purpose beyond manufacturing cars, their mission is to ‘accelerate the world’s transition to sustainable transport’.
Amazon and Apple are recognised globally, they have a great deal of market power and scale, which allows them to operate a hypermarket model. They can quite easily crush their competition through their brand power and financial stability. They’ve built up such strong relationships with a range of audiences, that they can launch new businesses and immediately create trust. Take examples like Amazon Prime (Sep 2015 80m paying customers) and Apple Music (Jan 2016 10m paying customers).
Despite some people’s views of Uber, they’re growing rapidly. Uber successfully operate an on-demand business model (as well as others) — they monetise time and sell instant access at a premium. It’s amazing that it doesn’t own any vehicles, yet it’s the fastest growing ‘taxi’ firm in the world — this article sums up Uber’s virtuous circle really well.
Facebook is a great example of the free model; the users do the work, while brands send traffic & revenue.
AirBnB operate an access-over-ownership model — they have disrupted the likes of hotels and lodging companies by providing temporary access to services that are traditionally only available through purchase.
The marketplace model is utilised by eBay, iTunes, App Store, AirBnB and Etsy, to name a few. This model facilitates interaction between buyers and sellers, and in return they take a fee or commission. All of these organisations are serious about creating better experiences, and have dedicated product teams that are working hard to continuously improve their platforms.
Companies such as Amazon, Microsoft and Dropbox operate a pyramid model to sell their products and services through others. They essentially recruit resellers and affiliates who they pay through a commission-only model. This allows them to scale rapidly through building a global network.
If you’ve got the brand, the customers and the vision, the ecosystem model is extremely attractive. Apple have this locked down. They sell an interdependent range of products and services that create consumer dependency. Remember the Bose speakers you had for Christmas in 2011? And that time in 2012 when you wanted to listen to music that was on your iPhone 5? Yeah, that.
It was rumoured that AirBnB went from from 40m to 80m bookings in 2015, validating the fact that you don’t need to own the assets to generate revenue.
Thoughts On Getting Started
There are a tonne of organisations successfully doing business model innovation, and equally, there are a load more that aren’t doing it very well or even at all. I believe that there are four key areas to focus on:
It’s not just about sitting in a room with some post-it notes and coming up with ideas, it’s about getting closer to your customers; understanding their end-to-end journeys, jobs they need to do, problems they’re experiencing and their aspirations. Where do the frictions exist? How could you add value? Take a look over the three horizons and figure out what that looks like for your organisation.
You think you know your competitors inside out, you know why you’re different, and why someone hires you over them (or do you know that?). It’s not just about looking at those around you, it’s about peripheral vision, indirect competitors are as much of a threat these days, along with startups, and you need to get smarter.
Technology is not the answer to everything, and it certainly shouldn’t be the first thing you think about when you’re exploring new business models – organisations must put people first and technology second. Just because VR is on the radar at the moment doesn’t mean that it’s going to add value to your customers or your business, so place people at the heart of your decisions and innovate around them.
Within every organisation there are individuals that are creative, great at building relationships, willing to work hard and get things done; sometimes they are referred to as intrapreneurs. Identify a few people from within the organisation and provide them with the time, resources and trust to take on the responsibility to surface new ideas and opportunities by working closely with departments, customers and external partners to start innovating across the three horizons.
Enjoyed this post? Read Chanade’s follow up post on the specific tools and methodologies that you can utilise to begin innovating on existing or creating new business models.