12 most successful types of business models (Part 1)

I would like to review 12 business model innovations that play a key role in making new technologies and processes sustainably profitable.

Business model innovation is a source of sustainable competitive advantage.

Relevance of business model innovation

There are many successful cases started with using the right business model:

• Amazon became the largest online store in the world without traditional brick-and-mortar retailers.
• Apple is the largest music seller without a single studio or physical record store.
• Skype is the largest telecom provider in the world without network infrastructure systems.
• Netflix was one of the first to quit the DVD rental business and let people rent videos online.
• Starbucks is the world’s largest coffee chain that sells regular coffee at premium prices.

Of course, product quality and processes play a huge role, but they don’t determine the company’s future success or failure. The fate of the entire company rests on the ability to develop an appropriate business model innovation to generate revenue and earn profit, as well as to differentiate from mediocre competitors. It is proved that 14 of the 25 most innovative companies in the world are using innovative business models and changing them twice as often as lagging companies.

It has been identified that 55 repetitive business models patterns form the core of many successful business models.

Before embarking on the journey towards new business models, it is important to define a starting point and rough direction. Describing the current business model, its value logic, and its interactions with the outside world is a good exercise to get into the logic of business model thinking. It also builds a common understanding of why the current business model will need an overhaul, which factors endanger its future, or which opportunities cannot be exploited due to the current way of doing business.

By answering the four associated questions and explicating the target customer, the value proposition towards the customer, the value chain behind the creation of this value, and the revenue model that captures the value, the business model of a company becomes tangible and a common ground for its re-thinking is achieved.

Business model definition — the magic triangle

I’ll review the following business model patterns that were a major influence on the markets.

• Freemium
• Long Tail
• Lock-In
• Crowdfunding
• P2P (Peer-to-Peer)
• Rent Instead of Buy
• Auction
• Fractional Ownership
• Subscription
• Two-Sided Market
• Aikido

Stages and principles

There are three steps pave the road to a new business model:

1. Initiation, analysis, creativity
2. Moving into new directions (re-combining existing concepts)
3. Completing the picture

The business model innovation loop

Main principles of business modeling:

1. Overcome the dominant industry logic
2. ‘Beat your competitor without trying to beat your competitor’
3. Thinking outside the box
4. Bringing in outside ideas
5. Don’t be afraid of being mistaken

Freemium

A business model in which the basic offering features are given away for free in the hope of eventually persuading the customers to pay for the premium version.

The basic version of an offering is given away for free in the hope of eventually persuading the customers to pay for the premium version. The free offering is able to attract the highest volume of customers possible for the company. Premium customers generally finance the free offering.

Innovative companies

• Hotmail (1996)
• SurveyMonkey (1998)
• LinkedIn (2003)
• Skype (2003)
• Spotify (2006)
• Dropbox (2007)

Where and how to apply this pattern

Does it make sense in your value proposition to implement something for free to attract the client?

Think about the costs of the free version, is it possible to minimize them? You can calculate customer acquisition cost for the paid version. If customer cost will decrease, this is a clear signal that the pattern is right for you.

This pattern is especially popular with Internet companies when the marginal cost of producing tends to zero. Also, this pattern is used by software developers to test their designs.

Long Tail

The basic principle is to sell little by little. It rejects Pareto Principle (80/20 Rule), which states that 20% of blockbusters generate 80% of the revenue. On the contrary, the main bulk of revenues is generated through a ‘long tail’ of niche products.

If a vast variety of these products are offered in sufficient amounts, the profits from resultant small sales can add up to a significant amount. It requires small costs of providing storage facilities and fast delivery service.

Innovative companies

• Amazon Store (1995)
• eBay (1995)
• Netflix (1999)
• Apple iPod/iTunes (2003)
• YouTube (2005)
• LEGO (2005)
• Lulu.com (2006)

Lock-In

Customers are locked into a vendor’s world of products and services. Using another vendor seems to be impossible without incurring substantial switching costs, and thus protecting the company from losing customers.

The central idea is to win over customer confidence by removing barriers to buying a basic product. After having bought a Gillette razor, you will be forced to buy blades from the same brand. Switching is very expensive.

Innovative companies

• Standart Oil (1860)
• Gillette(1904)
• Lego (1949)
• Microsoft (1975)
• Hewlett-Packard (1984)
• Nestlé Nespresso (1986)
• Nestlé BabyNes (2012)
• Nestlé Special.T (2010)

Crowdfunding

A project, product or entire start-up is financed by a crowd of investors who is willing to support the underlying idea. Nowadays crowdfunding is a great opportunity to completely substitute or complement a conventional form of funding coming from regular financial organizations.

In exchange for financial support, investors receive special benefits, usually proportionate to the amount of money they provided.

The process of funding follows all-or-nothing logic: the project goes live only after compiling minimum capital requirements.

Unlike traditional investors or bankers, crowdfunders are less interested in investment income. They are more attracted by the idea. For example, you can get funding for your movie or music album, and in return send your creation to everyone who participated in fundraising.

The most popular crowdfunding platforms: Kickstarter, Indiegogo, GoFundMe.

Innovative companies

• Marillion (1997)
• Cassava Films (1998)
• Diaspora (2010)
• Brainpool (2011)
• Pebble Technology (2012)

Pebble Case

In 2015, startup Pebble raised over $1 million in an hour on the crowdfunding website Kickstarter from people eager to get their hands on its latest products — a new smart watches with heart-rate sensors, a faceless little square device that’s aimed at runners and called the Pebble Core, streams music and tracks your location. A week later, Pebble was still raking in the dough, with over $9.5 million raised.

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