How a business model evolves while harnessing the power of disruptive innovation? Eight examples that will inspire you

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That evening of 2007 autumn, I was digging into Chris Anderson’s book “Free” [97], searching for inspiration to support a new business model proposal. We were launching a novel offer, and it was required to revamp our original model. So, I was going to present to the innovation board a “freemium model,” which was a disruptive approach at that time for a very traditional company.

After almost 12 years, I faced the same challenge while proposing a customer move on from their initial one-set-up-fee model to a subscription model. It took me three months to convince him. I was lucky enough to have one of his biggest customers asking for it. So, in the end, he decided to give it a try. Even if he was afraid of losing his hefty setup fee models, we developed the subscription model for all his customers after a successful test. Today, his business got better customer engagement and ensured hefty long-term business.

How should a business model change while developing disruptive innovation?

There isn’t a universal answer to that question, but innovation is also about the business model. A business model describes the economic engine that will enable a company to meet its set objectives, primarily by assisting in value creation for its customers and revenue generation. Whenever a new venture is starting or an existing business is to be improved, the principal objective is to discover a business model that would make a perfect market- fit.

We had witnessed that businesses that can’t keep up with the times don’t stay afloat for long. Innovation is essential, but businesses’ optimal strategy to stay up-to-date and profitable is the foundation. Business model innovation allows a company to take advantage of these changing customer demands and expectations.

Business model innovation is not as simple as changing a policy or understanding market patterns. Further, since every business is unique, it isn’t easy to pick the right approach out of the numerous options available. There are various variables to be taken into consideration while innovating an existing business model.

We can classify business models in several ways. For instance, they are based on how companies or startups monetize their business, how they deal with their suppliers, customers, and the value proposition those companies can offer to several stakeholders.

In some cases, there isn’t a single way to describe a business model, think Microsoft or Amazon. Some companies have diversified their operations so much to generate value propositions across several stakeholders and industries.

Uncertainty is an undeniable element in the process. When we take the road of innovation, we are only trying a pattern we never tried before. We will end up making mistakes while experimenting. In this article, we will explore eight innovative business models. This is not an extensive list, but it will help you to imagine your next move.

1. Free

This model is also referred to as the ‘if-you’re-not-paying-for-the-product-you-are-the-product’ model” [1]. It is a model where the end-consumer is the product itself by serving as an “advertising eyeball” for the company. This way, the service becomes free of charge. Revenue could be generated through advertising played while using platforms, such as Facebook, Twitter, or Google.

Twitter is a platform business model, monetizing its users’ attention in two ways: advertising and data licensing. In 2020 with total revenue of $3.72 billion [2], advertising represented 86.5% of its revenue and data licensing at 13.5%, primarily related to enterprise clients using data for their analyses [3].

2. Freemium

Freemium [4] is the most frequently used business model among online products with maximum demand for essential functions. This model helps build a customer base through free services, and slowly a larger clientele is be built by creating product association.  Free can be a powerful weapon for growth

Once the customers are hooked to using the service, the service supplier starts charging for premium services. This model is also known as disruption through digital sampling. It works perfectly well where the marginal cost for extra units and distribution is lower than advertising revenue or personal data sale. Some successful examples of this model are Dropbox, Spotify, Skype, or Zoom. They offer a set of basic features for free and premium services at different rates.

Spotify is a music streaming platform that gives users access to an extensive catalog of music. It uses a freemium revenue model that offers a basic, limited, ad-supported service for free and an unlimited premium service for a subscription fee. Spotify relies heavily on its music algorithms and its community of users and artists to keep its optimal premium experience. Its premium subscriber base had grown from 10% of total users in 2011 to 45% in 2021 [5] representing 155 million premium subscribers and 345 million monthly active users,

3. Subscription

Using the subscription model, you charge for products or services for one time only for a specific period or split the fee into periodic payments. The main objective here is to get the customer on board for a longer time. It ensures that customer enjoys product improvement and extension as well throughout their relationship.

For instance, Netflix, Dollar Shave Club, and companies like Peloton are using this model. They are innovating by ‘locking in’ the customer for an extended period rather than an ad hoc purchase. The first-time customer makes a purchase is a conversion into a repeat customer through subscription.

In 2012, DSC launched its online store and quickly disrupted the overpriced men’s razor blade market. It purchased its products from wholesalers, removed the traditional physical retail channel, and sold razors and blades online at a lower price.

The Dollar Shave Club captures value by employing low-cost economics and a monthly or bi-monthly subscription model that promotes customer stickiness. In 2015 with 4 million subscribers, Dollar Shave claimed 48.6 percent of the online razor market, shaking giants Gillette and Schick [6]. Unilever acquired the company in 2016 for approximately $1 billion [7].

4. Marketplace

This disruptive business model brings buyers and sellers together at one platform, and in return, charges a nominal fee or commission. The revenue is generated through this commission or fixed transaction costs. Once the platform starts pulling traffic, it brings in another revenue stream by adding advertising. For instance, the leading players who have laid the foundation of this model are Amazon Marketplace, eBay, and Uber.

Another example is the Alibaba Group, the largest e-commerce retail company in the world. They are producing absolutely no product themselves and hence have no inventory. Alibaba’s primary relies on bringing together Chinese sellers with buyers from around the world at one platform to purchase every kind of product.

The value created by Alibaba is through the software interface, not in the products themselves. For the twelve months ending 31 December 2020, Alibaba revenue was $93.884B, a 32.13% increase year-over-year [8]. As of March 2020, Annual active consumers for the Alibaba Digital Economy reached 960 million globally, including 780 million consumers in China and 180 million consumers outside China [9].

5. Sharing Economy

The previously well-known business of renting has now taken the shape of a sharing economy model. Merchandise that can’t be purchased is made available to potential customers for a limited period of time. It can be applied to any product, whether from individuals or businesses, real estate, or even intangible goods.

A relevant prime example is carpooling as BlaBlaCar, where a vehicle is allotted to a customer for a certain period and kilometers against a specific fee. We can also mention Airbnb, enabling people to list, find, and rent accommodations against a processing fee. Airbnb doesn’t practically rent a space from the host. Instead, it only lets the host share its specifications on their portal for someone who might be looking for a place for renting. Their business model builds on the sharing economy and believes that house owners are willing to rent-free space to strangers for passive income.

The success of Airbnb’s business model is based on a resource-light cost structure. It found an innovative way to partner with idle asset owners (empty rooms) and help them monetize those assets via their matchmaking platform.

As of September 2020,  4 million hosts offer Airbnb services across 100 000 cities and more than 800M+ Airbnb guest arrivals all-time. Host average annual earning represents $7,900 [10].

Airbnb differs from other matchmaking sites like booking.com or hotels.com in that travelers associate the listed properties and rooms with the Airbnb brand as if it was a traditional hotel chain.

6. User Experience Premium

First-class brands adopt this model by creating an extraordinary service experience for the customers and charging premium prices. Apple, Tesla, and many other top-quality brands are using this model [11].

Premium makes a product with perceived higher customer value or an unmatchable service and charges extra money against it. Customers happily pay a premium for such products and services as they perceive the value extracted from them as very high in terms of experience.

Tesla creates electric cars that are easy and uncomplicated. The positive experience leads to customers endorsing the Tesla brand to their social circle. Nine out of 10-tesla customers recommend their car to their friends and family to support this premium service [12]. Tesla makes considerable investments in its infrastructure to enhance its growth.

In March 202&, Tesla has passed the $600 billion market capitalization, becoming the world’s 9th most valuable company by market cap [13]

7. Ecosystem

This model creates consumer dependency by linking customers to an ecosystem through a “locking in” system.

An Ecosystem Model [14] has disrupted industries by selling an interdependent suite of products and services that increase value as you buy in bulk. For example, both Apple and Android have created an ecosystem where the customers are bound to make purchases that would sync with their existing system. The issue of compatibility locks in the customers so that it becomes difficult for them to churn to another brand.

The difficulty in churning also creates a barrier for competitors to steal the foothold of an existing player. It only allows Apple or Google to wield enormous power in the end-to-end supply chain.

8. Donation-based model

This model is when an organization gets most of its funds in the form of donations from millions of individuals and corporations worldwide.

Wikipedia, the online encyclopedia that helps improve your general knowledge is free of cost. It is an open-source platform, some innumerable online contributors share their information without any financial gain, and their model is based on user donations.

This makes the Wikipedia business model reasonably easy to understand. The organization only focuses on handling the website, servers, and administration, and the volunteers contribute the main content for free.

Wikipedia operates on a donation-based revenue model where the organization gets most of its funds in the form of donations from millions of individuals and corporations around the world.

Wikipedia has more than 41 million users who have registered a username. Only 143 000 users regularly contribute [15]. According to its annual report, Wikipedia earned total revenue of over $109 million in 2020, but none of it came from advertisements, affiliates, or any paid service [16].

What’s next?

The recent pandemic has caused a tremendous global shift in the economy and business structures. It has questioned the conventional method of conducting business and eased management on strict reliance on traditional approaches. Many companies have learned new ways of serving customers and creating value differently. These times have taught us to move away from the usual practices, jump out of our comfort zones, and explore new avenues.

Now is the time to learn from the leading examples of business models. In the embryonic phase of a project, we should start by testing various business models and learning approaches. It is also called trial and error. This process of discovery has an element of uncertainty and risk.

This uncertainty can be handled by focusing on testing low-resolution prototypes as an experiment. Once your approach with one customer is evaluated, the validated hypothesis supports refining the problem statement, and the testing loop is repeated. Only after successful trials, you scale up and expand.

P.S. Hi there, my book is due for release in September 2021. It has been a work of passion and collaboration. I am proud of the work I have done because I know the difference it will make. This article is an extract of one chapter… more to come 😊

 

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References

[1] Quote 2010 by publisher Tim O’Reilly., 2010.

[2] Twitter Inc, “Twitter Announces Fourth Quarter and Fiscal Year 2020 Results,” Twitter Inc, 9 February 2021. [Online]. Available: https://www.prnewswire.com/news-releases/twitter-announces-fourth-quarter-and-fiscal-year-2020-results-301225278.html#:~:text=2020%20revenue%20was%20%243.72%20billion,of%207%25%20year%20over%20year..

[3] “Twitter, Inc – 10K Form,” Twitter Inc, 2020. [Online]. Available: https://d18rn0p25nwr6d.cloudfront.net/CIK-0001418091/6074f5a7-baba-42c7-8f28-31accf8f3e8e.pdf.

[4] C. Anderson, Free: The Future of a Radical Price, Hachette Books, 2009.

[5] Spotify Technology S.A., “Spotify Technology S.A. Announces Financial Results for Fourth Quarter 2020,” Spotify Technology S.A., 2 March 2021. [Online]. Available: https://investors.spotify.com/financials/press-release-details/2021/Spotify-Technology-S.A.-Announces-Financial-Results-for-Fourth-Quarter-2020/default.aspx.

[6] B. Booth, “What happens when a business built on simplicity gets complicated? Dollar Shave Club’s founder Michael Dubin found out,” CNBC, 24 March 2019. [Online]. Available: https://www.cnbc.com/2019/03/23/dollar-shaves-dubin-admits-a-business-built-on-simplicity-can-get-complicated.html#:~:text=Correction%3A%20This%20story%20has%20been,more%20than%204%20million%20subscribers..

[7] Unilever, “Unilever acquires Dollar Shave Club,” Unilever, 20 July 2016. [Online]. Available: https://www.unilever.com/news/press-releases/2016/unilever-acquires-dollar-shave-club.html.

[8] Macrotrends, “Alibaba Revenue 2011-2020 | BABA,” Macrotrends, [Online]. Available: https://www.macrotrends.net/stocks/charts/BABA/alibaba/revenue.

[9] Alibaba Group Holding Limited, “Alibaba Group Announces March Quarter and Full Fiscal Year 2020 Results,” Alibaba Group Holding Limited, 22 May 2020. [Online]. Available: https://www.businesswire.com/news/home/20200522005178/en/Alibaba-Group-Announces-March-Quarter-and-Full-Fiscal-Year-2020-Results#:~:text=In%20the%20fiscal%20year%20ended,180%20million%20consumers%20outside%20China..

[10] Airbnb, “About us,” Airbnb, [Online]. Available: https://news.airbnb.com/about-us/

[11] S. R. Johnna Montgomeriea, “Owning the consumer—Getting to the core of the Apple business model,” Accounting Forum, pp. 290-299, December 2013.

[12] I. Luck, “How Tesla Used A $0 Marketing Strategy To Dominate A Market,” Marketing Strategy, 5 September 2019. [Online]. Available: https://www.marketingstrategy.com/marketing-strategy-studies/how-tesla-used-a-0-marketing-strategy-to-dominate-a-market/.

[13] “Market capitalization of Tesla (TSLA),” Companies Market cap, March 2021. [Online]. Available: https://companiesmarketcap.com/tesla/marketcap/.

[14] M. R. M. S. Ulrich Pidun, “How Do You “Design” a Business Ecosystem?,” BCG, 20 February 2020 . [Online]. Available: https://www.bcg.com/publications/2020/how-do-you-design-a-business-ecosystem.

[15] Wikipedia, “Wikipedia: Wikipedians,” Wikipedia, 2021. [Online]. Available: https://en.wikipedia.org/wiki/Wikipedia:Wikipedians#:~:text=The%20English%20Wikipedia%20currently%20has,contributors%20participate%20in%20community%20discussions..

[16] Wikipedia, “Wikimedia Foundation,” Wikipedia Foundation, 2021. [Online]. Available: https://en.wikipedia.org/wiki/Wikimedia_Foundation.

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