Last month, I presented a research paper at the International Society of Professional Innovation Management’s Innovation Conference in Porto, Portugal. When looking at recent trends in innovation research, I discerned one popular topic at this year’s ISPIM conference: business model innovation. Today, let’s discuss what business model innovation means and why it’s valuable, then look at examples of “classic” innovative business models before exploring applications in a real-life innovation project.
What is business model innovation?
Business model innovation is one of roughly 15 modern innovation types that the innovation literature distinguishes. Innovation experts look at this concept either through a wider, more global lens or a narrower, more focused one:
- Through a wider lens, business model innovation is a synonym to what the majority of innovation experts (including myself) call strategy innovation. In a strategic innovation exercise, a senior-level innovation team aims to create meaningful strategic action ideas that allow for prolonged, sustainable growth, ideally in a newly emerging, uncontested market space. Their ideas typically can play on all levels: generating novel, original and meaningful value propositions; finding cost-effective processes and structures to produce these value propositions; exploring new channels, networks, platforms, and business models to deliver them to the market; and magnifying new value propositions with impactful brand, image and campaign designs.
- If you look at the concept using a narrow lens (as I do), business model innovation simply means coming up with novel, original and meaningful ways to get paid for a value proposition that you release to the market. Here the scope is more narrow: we just focus on the profit model, as opposed to the “do it all in one go” approach of a more abstract strategy innovation project. The following looks at business model innovation through the narrow lens.
Why is business model innovation useful?
Compared to using a plain-vanilla way to get paid, creating an innovative business model can help you make more money from a meaningful value proposition by increasing revenues and/or profit margins. It can also differentiate your product from those of competitors using more traditional business models. Finally, it can extend your market presence by tapping into new customer groups that —for economic, lifestyle or convenience reasons— prefer payment schemes deviating from the industry standard.
What are famous examples of business model innovations?
Many books on business model innovation describe a number of already “classic” business model innovations. Here are three examples to make you curious to look for more:
- The “hook and bait” model reverses the pricing structure between the durable and disposable parts of a product. A company sells the durable part at low cost (or even a loss) to enjoy recurring revenues from disposable parts sold at a premium. Gillette popularized this model with razors (baits) and blades (hook). Other examples are printers and cartridges, or more Nestlé’s Nespresso cheap coffee machines and pricey coffee capsules.
- The “freemium” model offers a basic value proposition for free, with access to premium offerings by charging a membership fee or premium. Example of companies using this model include the business networking platform LinkedIn and the music streaming platform Spotify.
- The “subscription” model gives you access to a value proposition (often content or services) after you subscribe and pay for a periodic membership. Think of pay-TV channel packages or Netflix video-streaming.
How can you do business model innovation for your business?
Before you begin, ensure you have a truly novel, original and —in particular— meaningful value proposition at hand in the first place. Why? Business model innovation is one of the innovation types used to leverage an existing value proposition. Leverage is a neutral agent: It can help you increase revenues and margins if your value proposition is meaningful, but can harm your finances and reputation if your value is lousy.
With a meaningful value proposition in hand, you can aim to monetize it in novel, more profitable ways:
- First, take some time to explore alternative business models used in different industries and markets.
- Then, run an ideation session to come up with ideas for the challenge: “How else to monetize this value proposition in the market?”
- Next, discover interesting ideas to design into realistic, relevant and valuable idea concepts through elaboration, combination and transmutation.
- Finally, evaluate all the concepts to find the most suitable business model, then take action to implement it.
The Business Model Matrix is a creativity technique that I’ve created for Thinkergy to support ideation in business model innovation. The matrix contains four categories related to business models:
- activities (what else could we do?);
- business models (how else could we get paid?);
- variations (how else could we charge for it? What variables can we twist in what ways?); and
- business model trends (What new models are others using?).
Each category lists many sample elements that allow you to connect the dots between different matrix elements, making it easy, effortless and enjoyable for you to come up with ideas for new business models.
For example, you may ‘organize events’ or ‘educate clients’ (activities); you may ‘auction off’ or ‘charge a reservation fee’ for a value proposition that is short in supply and high in demand (business models); you may charge a fee ‘onetime—periodic—ongoing’ that is ‘flat—increasing—decreasing—progressive—degressive’ (variations); or you may provide certain values for ‘free with a requested donation, as with shareware’ (business model trends).
To give an example, Thinkergy is planning an expansion into the US market using a licensing model with a one-time upfront certification fee, regular sales-based royalty payments, and a periodic re-certification fee.
Contact us if you want to learn more about that cater to business model innovation-specific thinking tools in X-IDEA, our systematic innovation method and toolbox. When would now be a great time to start an innovation project to create innovative business models to monetize your business?
© Dr. Detlef Reis 2016. This article was published in parallel in the Bangkok Post under the same title on 21 July 2016.