- October 21, 2019
- Posted by: Ramkumar
- Category: Strategy
The Value Potential of Business Models
- Companies develop new and innovative business models to uniquely differentiate themselves from their competitors. A Business model describes how the value is created, although a business model alone does not determine the profitability. To determine profitability, one needs to examine the complete strategy landscape.
- A Business model needs to identify the maximum potential value to customers. Hence the elements of the business model are the set of resources and capabilities required to deliver the product/service to the customer and how companies monetize the product/service. For instance, in a ridesharing business model, providing immediate transportation services through a mobile platform that utilizes other people’s vehicles by charging a percentage of a demand-driven transaction fee creates value for the customers.
- It is to be noted that multiple companies can use the same business model – Uber and Lyft are using the ridesharing business models. At the same time, a company can use multiple business models for the same customer – Taxi business and ridesharing business models target the same customer.
- In contrast, no two firms can have the same strategy. Firms pursuing the same business models as Uber and Lyft will have a specific strategy for translating the business model into their target product/customer to add value that generates a unique competitive advantage.
Job to be Done
- Clayton Christensen famously used the term, ‘Job to be done to emphasize what underlying customer’s need is satisfied by a product/service. Strategy begins with the customer regarding value potential because if a product/service does not satisfy the customer’s need, it cannot create value. The value created correlates with the consumer’s willingness to pay for the product/service and the available alternatives.
- The target customer is not defined in the business model but the strategy because customer scope is a strategic choice. So, for instance, if fitness is a business model, then the target customer strategy for a company following that business model can be either a woman in the middle age for yoga or men for weightlifting. Hence strategy defines exactly who the Job is to be done for, and based on that, the addressable market and the opportunity size are identified.
- The Job focuses on the function of the product/service rather than how the services are delivered. This separates the customer need that is being satisfied from how it is delivered. For instance, Blockbuster, which provided DVD rentals, had 5000 stores in the US but went bankrupt after the Netflix online streaming business disrupted its business. As a result, Blockbuster defined its business as a Bricks and Mortar DVD rental store rather than a business that provides personal video entertainment.
- Asset Configuration is the stocks of resources and capabilities required to deliver the product/service to the end customer. For instance, let us compare Uber and Lyft with a taxi service. All of them provide transportation to the customers. However, Uber and Lyft’s asset Configuration differs from Taxi services because they are asset-light versions of the taxi business with vehicles owned by the drivers, not the company.
- The asset Configuration includes how the service is provided to the customers – Technology choices, Distribution channels and Customer relationships. The asset Configuration creates a disruption to the incumbent companies and is an existential threat. If the incumbents cannot sustain the digital disruption, it is because of the organizational inertia that they struggle to acquire the new set of skills, capabilities and technologies.
- Revenue models become essential because it describes how a product or service is monetized. As a result, today, there is enormous attention paid to the source of the revenues and how that, in turn, affects value creation.
- For instance, consider a mobile game. Here the customer is not charged for downloading the app. Instead, the customer is drawn to download the mobile game by offering it for free and then enough user experience is provided so that the customer gets addicted to the game. The customer is then subsequently charged for in-game purchases. Some businesses use a freemium model, whereas others extract value by selling data gained in a transaction to a third party. The proliferation of alternative ways of monetizing a business makes the Revenue model an essential element in the Business model.
- When we look at Facebook’s revenue model, it monetizes its services through advertising and less visibly by selling data but does not charge any fee for using its application.
Different Revenue Models
- The traditional way to monetize a product/service is a one-time fee paid at the time of the transaction by the user. For instance, a one-time fee is paid when we take a taxi ride.
- Another dimension is structuring how we are charging revenues. For example, an airline uses an a la carte offering by charging separately for seats, luggage and meals. Another way is the subscription-based model, where a service can be used for a fixed period and needs to be renewed.
- The latest change in the revenue models is the dimension of who pays. Conventionally the direct beneficiary of the product/service is charged. Today many participants contribute to monetization. A platform provider like Google charges the advertisers a fee but does not charge any for users using its platform. Some platforms, like Facebook, sell users’ data to generate revenues. Hence, when developing a business model, the monetization scheme can radically affect the opportunity’s viability.
- The three elements of the business model – Customer willingness to pay for the Job, the Cost structure of the assets required to deliver that Job, and how the product/service will be monetized define the maximum potential value created by the opportunity. In economic terms, asset Configuration would determine the supply curve, whereas Customer willingness to pay for the Job to be done and the monetization scheme determines the demand curve. These elements underpin the competitive market outcome, whether the returns would be concentrated on a few winners because of scale economies or network effects and whether a strategy like first mover advantage will be necessary.
- The business model determines the value creation potential of the opportunity and how the resulting value will be distributed among the participants pursuing that model. For instance, WhatsApp provides a clean messaging service through the internet, thus replacing SMS, where messages must be sent through a telecom network. Facebook bought WhatsApp for $22 billion when the company had revenues of $20 million, 600 million users and less than 100 employees. The valuation was more than 1000 times revenues; since the acquisition, more than 50% of the internet population has been using WhatsApp. However, despite a vast subscriber base, WhatsApp does not generate revenue because the app is free, has no advertising and does not sell the user data to a third party.
- This clearly states that a business model can provide maximum value but need not be profitable.
- The three elements of the business model – Customer willingness to pay for the Job to be done, the Cost structure of the assets/capabilities/technologies required to deliver that Job to be done, and how will the product/service be monetized define the maximum potential value created by an opportunity.
- These business model elements shape the underlying structure of the business and determine the competitive market outcome.