Elements of Business Models and Value Creation

The Value Potential of Business Models

  • Companies come up with new and innovative business models to uniquely differentiate itself against its competitors. A Business model basically describes how the value is created, although a business model by itself does not determine the profitability.In order to determine the 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 to 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 like Uber and Lyft will have a specific strategy on how they translate the business model into their target product/customer to add value that generate an unique competitive advantage.

Job to be Done

  • Clayton Christensen famously used this term, ‘Job to be done’ to basically emphasize on what underlying customer’s need is satisfied by a product/service. Strategy begins and ends with the customer in terms of value potential because if a product/service does not satisfy the customer’s need, it cannot create value.The amount of value created is correlated 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 in the strategy because customer scope is a strategic choice.For instance if fitness is a business model, then 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 size of the opportunity is identified.
  • The Job to be done focuses on the function that product/service provides rather than how the services are delivered.This seperates the customer need that is being satisfied from the means by which it is delivered. For instance, Blockbuster which provided DVD rentals had 5000 stores in US, but went bankrupt after Netflix online streaming business disrupted its business.This is because Blockbuster defined its business as a Bricks and Mortar DVD rental store rather than a business that provides personal video entertainment.

Asset Configuration

  • 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.Uber and Lyft asset Configuration is different from Taxi services because they are the asset light versions of the taxi business with vehicles owned by the drivers and not the company.
  • The asset Configuration includes how the service is provided to the customers – Technology choices, Distribution channels and Customer relationships. It is the asset Configuration that creates disruption to the incumbent companies and is hence an existential threat. If the incumbents are not able to sustain the digital disruption, it is because of the organizational inertia, struggle to acquire the new set of skills, capabilities and technologies.

Revenue Models

  • Revenue models become important because it describes how a product or service is monetized.Today there is enormous attention paid to source of the revenues and how that inturn affects the value creation.
  • For instance consider a mobile game. Here the customer is not charged for downloading the app.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 ingame purchases. Some other businesses use a freemium model where as others extract value by selling data gained in a transaction to a third party.The proliferation of alternative ways of monetizing a business makes Revenue model an important element in the Business model.
  • When we look at Facebook’s revenue model, it monetize its services through advertising and less visibly by selling data but does not charge any fee for using its application.

Different Revenue Models

  • The classic way to monetize a product/service is an one time fee paid at the time of transaction by the user.For instance, when we take a taxi ride, an one time fee is paid.
  • Another dimension is structuring how we are charging revenues.An airline use an a la carte offering by charging seperately for the seat, luggage and meals.Another way is the subscription based model where a service can be used for a fixed period of time 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 the monetization.A platform provider like Google decides to charge 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 choice of monetization scheme can have a radical effect on the viability of the opportunity.

Value Creation

  • The three elements of the business model – Customer willingness to pay for the job to be done, Cost structure of the assets required to deliver that job to be done and how will the product/service be monetized define the maximum potential value created by the opportunity.In economic terms, asset Configuration would determine the supply curve where as 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 important.
  • 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 provide a clean messaging service through internet thus replacing SMS where messages needs to 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 and since the acquisition, more than 50% of the internet population is using WhatsApp.Inspite of a huge subscriber base, WhatsApp does not generate any revenues because the app is free, has no advertising and the company does not sell the user data to third party.
  • This clearly states that business model can provide maximum value but need not be profitable.

Conclusion

  • The three elements of the business model – Customer willingness to pay for the job to be done, 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 elements of the business model shape the underlying structure of the business and also determine the competitive market outcome.
Advertisements

One Reply to “Elements of Business Models and Value Creation”

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.