Business models are the way you offer your products or services to the market. They include elements like pricing and packaging, terms and conditions, and added-value elements that increase differentiation.
In most markets, having the right products is not enough. Selling books against Amazon is really tough. Selling consumer electronics against Best Buy is too hard for most of us. One strategy to increase your differentiation and therefore to separate yourself from competitors is to find a new business model.
When Netflix started, their business model was an online version of the traditional video rental business. $4 / rental, with $2 for postage and additional fees if you returned the movie late. Their value proposition was their broad line of product, and an element of convenience – you could shop from the comfort of home. But their model also had a downside – less immediate gratification. So ultimately, it wasn’t that differentiated.
In late 1999, Netflix introduced their distinctive business model – no late fees, flat rate monthly charge. The rest is history. Recently they shipped their billionth DVD. The appeal of the business model is that you don’t have to worry about anything. If you keep a disk for a long time, that’s fine. You just can’t get more until it goes back. Depending on the monthly fee, you can alternate and overlap the shipping.
Netflix represents just one example of a business model innovation that really created powerful differentiation in customer terms. It also helps Netflix predict cash flow, which is valuable for a public company, and this is another important reason for business model innovation.
In the commercial software market, there have been a number of different licensing models – perpetual licenses, term licenses (that don’t allow upgrades), subscription licenses (that allow some level of upgrade), and a variety of pre-payment methods. Each of these has different implications for the customer’s payment schedule, and also for predictability of revenue, which is a primary concern for public companies that must hit their targets every year.
Amazon is another company that is constantly innovating in its business model – associates programs, bulk shipping programs, partner stores, selling compute power and online storage to take advantage of their massive server farms.
No business is immune from business model innovation. Where will your next innovation come from?