Business Model Innovation in Practice
The concept of a business model has been around for a long time however it has only really gained popularity with start-ups in the last few decades. So much so that one of the first questions a potential investor will ask these days is what is your business model? This can be a difficult question to answer especially when you’re starting out as it’s very hard to know what model will work best. So in this blog post we will look at, what a business model is, what are some different types and different ways of viewing your business model, and some real life examples of business model innovation.
What is a business model?
A business model basically illustrates how your business plans to operate to make a profit. It involves showing how your business idea can be commercialised and which channels, processes and technologies it will use to do so. A business model will show how much and from where, revenue is coming in compared to the amount of costs that will be incurred. It is one of the first ways of knowing whether your business idea will be viable.
Many good business ideas fail to become successful enterprises simply because the owners haven’t fully realised what is needed to get it to market. Alternatively, after having entered the market, end up with smaller profit margins than their competitors because they haven’t figured out the most efficient way their enterprise should operate
To help define what your business model is or could be in the future, we will look at the different types that are currently being implemented in various businesses.
Types of business models
The following are some of the most frequent models used in some shape or form by businesses today.
Subscription Model – involves customers paying a weekly, monthly or yearly fee for access to a good, experience, or service. Examples include, satellite televisions services (such as Sky or UPC), Love Film and Fitness Clubs.
Razor-and-Blades Model – This model got its name from the company Gillette, who in the early 1900’s starting selling razor handles at a reduced cost while making money back on the repeat purchase of the blades. Other examples include Companies that sell printers and cartridges.
Mobile phone service providers such as Meteor or Three use a combination of the Razor-and-Blade and Subscription models offering a phone to bill paying customers for a relatively cheap price tying the customer in to a 12 – 18 month contract
Reverse Razor-and-Blades Model – Apple is a good example of a company that uses this type of model. In contrast to the previous model, Apple sells their main products (such as the iPhone or iPad) for a high price and their songs on iTunes relatively cheaply.
Brokerage Business Model – the model basically involves bringing buyers and sellers together. For example eBay makes its revenue from bringing people together on its platform. Other examples include sellers of real estate and auction houses.
Advertising Model – involves providing free content for users alongside advertising. An example of a company using this model is Yahoo.com. The idea is that companies (which have high traffic) charge advertisers to place ads on their site that can directly target potential customers.
Google combines a brokerage and advertising model. Their free search engine brings a high number of users to its webpage and from that they charge advertisers using a tiered pricing system.
Merchant Model – quite simply this model refers to bricks-and-mortar retailers, wholesalers and their online equivalents. Examples include Dunne Stores, Musgraves, and Amazon.
Business Models – using different lenses
To work out what type of business model suits your business best, it is important to look at the different elements that make up a business model. There are a number ways to break down the different elements and I’ve chosen the 3 I think are the most appropriate. Using one of these lenses can help you describe your business model in its entirety and identify any problematic areas for further refinement.
Business Models by Johnson, Christensen and Kagermann
Johnson (Co-founder and Chairman of Innosight), Christensen (Co-founder of Innosight and Harvard Business Professor), and Kagermann (CEO of SAP AG and author on business model innovation) breakdown a business model into four interconnected parts including:
- Customer Value Proposition – how does your business create value for your customers? Have you identified a fundamental problem of your customers and then provided a solution to solve it? How has this been done? The better your solution the higher the customer value proposition will be.
- Profit Formula – how is value created for your company at the same time it provides value to your customers? You need to look at the following:
- Revenue model – what price are you charging and how much volume are you going to sell?
- Cost structure – what are the cost of your key resources? This will include direct and indirect costs.
- Margin Model – what contribution do you need from each transaction to make the profit you would like?
- Resource velocity – how effectively do you need to utilise resources? For example, how quickly do you need to turnover inventory to achieve the profits you want?
- Key Resources – what are they key elements of the business that will create value for your customers and your company? This will include key assets such as employees, products, equipment, technology, facilities, channels and brand strength.
- Key Processes – what are the key operational and managerial processes of your business that allows you to deliver value both successfully and continually allowing increases in scale in the future?
The Business Model Canvas by Osterwalder and Pigneur
Osterwalder and Pigneur use a canvas to visually show a firm’s business model. The canvas enables you to quickly create, design and adapt your business model and communicate it easily to other people such as investors. The canvas is suited to both new and existing businesses. The canvas breaks down a business model into 9 building blocks which include:
- Customer segments
- Value propositions
- Customer relationships
- Revenue streams
- Key partners
- Key activities
- Key resources
- Cost structure
The canvas is one of the best ways to communicate and visualise your business model. It also allows you to quickly evaluate possible new alternatives in your search for an optimal model. The canvas is briefly described in the following video.
And can be checked out in more detail at
The Lean Canvas by Ash Maurya
The lean canvas (shown below) is developed from Osterwalder and Pigneur’s Business Model Canvas.
The lean canvas targets entrepreneurs and start-ups and follows a more problem focused approach than its predecessor. As can be seen in the diagram above the lean canvas contains 9 building blocks including:
- • Customer Segments
- • Problem
- • Unique Value Proposition
- • Solution
- • Channels
- • Revenue Streams
- • Cost Structure
- • Key Metrics
- • Unfair advantage
As most start-ups don’t know who their customers will be (they don’t have any products to sell yet), the lean canvas focuses more on the problem, the proposed solution, the channels to achieving the solution, costs involved and the anticipated revenue streams. It also looks at whether your business has an unfair advantage over competitors and helps you assess how to get the most out of it for success.
To try out the lean canvas check out their webpage at:
A long but great description of the lean canvas and lean start-up can be found here:
Examples of Business Model Innovation
In this final section we will briefly look at some successful companies that went against the grain and introduced a new business model into their industry.
Before Cannon’s entry into the office photocopier market, Xerox was the main player. Xerox had an excellent after-sales team in place and a highly skilled technician network that provided frequent on-site service calls and twenty-four hour support. Xerox had gained vast amounts of experience and implicit knowledge over the years and customers had come to expect high levels of service in the industry.
Cannon had two options to enter the market. They could either copy Xerox’s business model by offering the same level of service to customers or they could change their perspective on how to meet customer needs. Cannon decided to focus on the operational side of their business and went about making its components more uniform and easier to repair. This eliminated the need for highly skilled technicians and even allowed customers to repair the copiers themselves. This kept Cannon’s costs low and able to compete with Xerox at the low end of the market. Cannon has since increased its portfolio by introducing higher quality products into higher tiers in the market leaving Xerox looking over its shoulder.
Hilti, a power tool manufacturer for the construction industry introduced a business model innovation in to its industry by re-examining its value proposition and identifying its customer’s latent needs. Before the introduction of a new business model, the power tools industry could be categorised as having low margins, high inventory turnover, low cost manufacturing plants and distribution channels to intermediaries and bricks and mortar retail outlets.
Hilti realised that its customers didn’t make money by owning tools but by using tools as efficiently as possible. Hilti began offering tool use for a monthly fee and included in the price was repairs, upgrades and replacements when a tool broke. Hilti became very successful however the transition wasn’t easy. The company had to implement a highly effective fleet management system and change away from a manufacturing and distribution orientation to a service focus.
Threadless is a community – centred online store which sells t-shirts. What is unique about Threadless is that its customers design the t-shirts the company goes on to produce through crowd sourcing. Some customers submit designs to the company and these are voted on by everyone else with the top few percent voted for getting selected for printing. The people who get their designs selected receive a monetary prize.
The advantage of this is that Threadless don’t produce t-shirts that aren’t going to sell and don’t have the cost of hiring permanent designers. Threadless has been voted as one of the most innovative small companies in the U.S. and their business model innovation has led to them attaining higher profit margins than other t-shirt manufacturers in the industry.
In summary, being able to define your business model is important for two reasons:
- 1. If you’re looking for investment you need to be able to easily describe your business and how it will make a profit. A business model is the means to do this
- 2. Identifying the best way for your business to operate against competitors in a particular industry can be the difference between success and failure. A business model template like the three mentioned earlier can help to achieve this.
By putting in the ground work, you too can have an impact like Canon, Hilti or Threadless had on your chosen industry.