Business models – the way that firms make money from their products or services – can be a key way of innovating in a market. As explored below, Changing to the prevailing business model may allow firms to better meet the needs of at least a segment of customers, while differentiating the firm from competitors.
Examples of business models
While there are many permutations in business models, some of the most common approaches for selling products and services include:
- One-off purchases: The business model that everyone is most familiar with is the one-off sales of goods and services.
- Subscription service: Subscription services are the monthly recurring payments each month.
- The Razor-razorblade business mode: Provide the initial product relatively cheap, but then generate the main earnings from consumables that are purchased after the fact.
- Freemium: Giving away the product for free, but with paid features that can be purchased for an additional amount – common in mobile games and software.
- Ad-supported: Providing the product or service for free and relying on advertising revenue to generate revenues instead.
Reasons to consider a particular business model
While the ultimate reason to peruse a particular business model is that it allows you to generate the highest returns, the competitive landscape can influence this decision. Factors that may influence which business model makes sense to pursue include:
Meet a segment of customer needs
A key reason to consider a different business model is to meet the needs of a segment of the market where there is not alignment between the existing ways of purchasing a product and the needs of at least a segment of users. The one-off purchases approach to selling goods for example may not be accessible to individuals or firms that have limited upfront capital to make the purchases – selling via a subscription, without a high upfront cost, is one way of selling goods to such customers that previously may not have had the means to purchase the goods or services.
Differentiate from competitors
Business models provide a key way of differentiating yourselves from competitors: if all firms in an industry are taking a particular business model, then you may be able to disrupt the market with a different approach. As explained below, it can be very difficult for incumbents to adapt to new business models, and incompatibility between your approach and the approach that they have taken may restrict their ability to respond to your approach.
Differentiate from competitors
It is important to ensure that the business model is sustainable – not only generating initial revenues but also allowing you to continue to provide your service. For example, the cost structure of cloud computing is very different from selling software on individual PCs. While there is no ongoing cost associated with providing software, services that are hosted in the cloud have ongoing server costs that must be maintained. A miss-match between one-off revenue from individual sales, but ongoing costs to service the customers, may result in you over time not able to support your operations.
Wyze discovered this with their security cameras – while the cameras were sold as one-off purchases, cloud recordings and the identification of people in the recordings via AI, was provided without an ongoing charge. Over time the cost associated with processing the identification of individuals mounted, with Wyze, in turn, introducing a subscription element to some of their identification services.
Constant revenue stream
The choice of business model may also be influenced by the extent to which users must naturally update their offerings in the future. The software industry has gradually moved from one-off purchases as the primary way in which software is sold, to a greater focus on subscriptions. While part of this is explained by a move to the cloud (where there are ongoing costs incurred for providing the service), it also reflects the maturing of software. While at one point in time each annual upgrade cycle was associated with substantial new features added to the product, the features of many services now meet all the needs of a large proportion of users, such that there is less need to upgrade the software. The subscription offerings allow ongoing revenue in a way that one-off purchases did not guarantee.
Why business models can be hard for competitors to adapt to
Part of the reason that competitors can have a very hard time adapting to business model changes is that it fundamentally changes how they generate their revenue and may undermine existing revenue streams or make existing resources redundant.
The difficulty that Kodak had in adapting to digital cameras
If we think of Kodak’s difficulty in adapting from a film-based camera firm in the age of digital cameras, part of the challenge was because the business model underlying digital camera sales was fundamentally different from how Kodak made its money. Strong global supply chain capabilities ensuring the global availability of film and print materials were fundamentally redundant under the digital camera business model, with digital cameras not providing the continued revenue stream that Kodak was accustom to.
The challenge for Blockbuster to adapt to Netflix’s monthly DVD subscription service
Similarly, Blockbuster struggled to adapt from a pay-by-the-night DVD rental service to the unlimited rentals by mail monthly subscription service that Netflix initially offered. Although Blockbuster attempted to launch a competing subscription service, it fundamentally undermined the main part of their business. While Netflix was able to go ‘all in’ on its monthly subscription offerings, converting customers from paying each time they rented a DVD to an unlimited subscription model negatively impacted their overall revenues.
The difficulty that Blockbuster had in adapting was further coupled with the disadvantage that while Netlifix had resources entirely aligned around providing the DVD rental service, while Blockbuster was attempting to run the service while maintaining a nationwide fleet of stores – something entirely redundant with unlimited DVD rentals by mail.
Further Thoughts: Don’t be constrained by what your competitors are doing
Just because your competitors are pursuing a particular business model does not mean it is necessarily the best approach for you to take – in fact, it may be a key reason to consider a different model. Not only will taking a different approach allow you to differentiate your offerings from those of your competitors but it potentially also allows you to meet the needs of a specific set of customers that exiting business models are less suited towards.