Companies That Succeeded Through Clever Business Models
Business Model is quite a vague term, one that is often misused.
We’re talking about the way in which a company serves customers and makes money, or in other words, the way all of the pieces of the business work together for success.
For example, having a good product is not the same as having a good business model.
The iPod was a better MP3 player than its competitors, but it was iTunes changed the way people purchased music.
Nestle doesn’t make amazing coffee, but the model used by Nespresso has been a great business decision, since their pods are convenient and earn a huge margin.
We’re going to look at some examples of companies that succeeded by moving to a new business model. They didn’t simply improve their product or service, but rather changed the way their business operated.
There’s a bit of survivorship bias with lists like these (we forget the cases that didn’t work). Have a think about the models used by similar organisations to see what critical elements they missed.
The platform model was made possible through a few technological breakthroughs – such as smartphones, hi-res photography, GPS tracking and review aggregation.
Airbnb use a platform model to connect travellers with landlords, be it for a spare room or an entire house.
Hotels traditionally own and clean their assets, whereas Airbnb is in the business of connecting people together, and ensuring that the transaction is mutually satisfactory.
That’s the crucial steps they made behind the scenes – training photographers to take flattering photos of each property, arranging for local cleaners to come in between stays, and using a two-way ratings system to keep everyone accountable.
These differences make the model successful, because they create enough trust for complete strangers to enter into tenancy agreements.
Uber is another platform model, connecting drivers and riders through smartphones. The key to success seems to have been their tracking, cashless payments, and ratings system.
Convenience and trust became Uber’s selling point, and these were baked in to every part of the business.
eBay created a platform for keen-eyed bargain hunters with those who wanted to sell their unwanted possessions.
This allowed people to find really obscure items, and removed need for sellers to pay for retails space, paying for just the sales they made.
The subscription model has gained popularity across a number of industries, thanks to online ordering and improved internet speeds.
Dollar Shave Club ran with a subscription model that send handles and blades to men across the world, with new blades arriving every few weeks (based on your usage preferences).
This removed the need to pick up blades from the store, and therefore removed the dependence on retail brands like Gillette and Schick.
Dollar Shave Club were able to offer a good product at a discount since they owned their own means of production, rather than trying to send Gillette blades in the post for a discount.
They also have the advantage of a predictable customer need – facial hair keeps on growing at essentially the same pace for 50+ years whether you like it or not…
Netflix and Spotify used subscriptions to change the way people consume movies and music – using bigger data caps to have streaming replace physical media like CDs and DVDs.
This appears to be a single purchase each month, rather than forcing customers to pay per movie/album without having seen/heard it.
Since the risk is lower, customers are happy to try new things and find new favourites, which in turn builds their dependence on the company.
It also gives the business a very reliable revenue stream.
Amazon created Prime, a subscription that offers free 2-day shipping along with Amazon’s video content.
This lets customers “reduce” the cost of each of their purchases, which makes them feel inclined to buy more items from Amazon.
The freemium model sees a company divide it’s services into two categories; those that entice customers, and those that customers purchase. This allows people to try before they buy, which reduces perceived risk and boosts the chances of customers sticking around.
LinkedIn used a clever version of the model, letting anyone use the site for free, then paying for additional features when they are either job hunting or recruiting for their business.
This means that users don’t pay anything when they want to be passive, then when they suddenly need to be active they can use a platform they know and trust.
News sites have used this approach to varying degrees of success. The two big news sites in Australia went for different options; The Age gives readers 30 free articles per month, ensuring that heavy users are nudged into paying, while The Herald Sun lets readers access some articles for free (e.g. breaking news) whereas opinion pieces and gossip are for subscribers only.
Candy Crush, Fortnite and Farmville each used this to great effect with a “Free to play” model, that lets people become hooked on the game before having to make a financial commitment, but are then heavily encouraged to do so.
Some game companies push this into a “Pay to win” model that prevents free users from succeeding, and these approaches have been both unpopular and incredibly profitable.
Tinder is free to use, until you decide you want a competitive edge.
The app can’t make you more attractive or more interesting, but users can pay for features like “Super Likes” that make them stand out from the crowd. Alternatively, they can pay to have their profiles displayed at the top of the pile, thereby maximising their chances of matching with somebody they like.
The User Is The Product
This model sees a brands’ end user become the product for another customer.
We’ve always had this with TV and radio – viewers get free content, but then the viewers are “sold” to advertisers, who pay to get in front of millions of eyes/ears.
Facebook is a famous example, with users having their data sold and their feeds become the hunting ground for targeted advertisers.
Since users told Facebook about all of their interests, Facebook can offer their customers (the advertiser) the chance to access exactly the people they want, whereas older models like billboards captured everybody who travels past a single physical location.
Duolingo used this to great effect – one side of their market translates sentences in order to practice a new language, allowing Duolingo to sell translation services via the crowd.
This is really clever, since the by-product of the user’s education can be packaged as a valuable service to somebody else, like a carpenter selling their sawdust.
Frequent Flyer points programs are lucrative for the same reason – users receive points for swiping their cards at every purchase, and gradually built up enough to get a free flight or a fancy toaster.
Meanwhile, marketers get to access incredibly accurate and informative data, at no real expense to the person who swiped their card.
Pay For What You Use
The opposite of a subscription, this model lets each customer select only the products and services that they think they need.
More importantly, they save money on the products and services they don’t need.
Hilti created a new model around power tool hire, letting tradespeople rent specialist tools only when they needed them, rather than forcing them to buy a $900 tool to perform a $1,200 job.
Hilti earn more money from each tool, which get deployed all the time, while the customer benefits from not keeping an expensive inventory of rarely used tools.
Ryanair and South West Airlines are famous for their discount flights, whereby passengers pay for exactly the comforts they want.
That means you get to choose if you want things like checked baggage, inflight meals, allocated seats, flexible fares, etc.
Many airlines use Rolls Royce for their jet engines, through a model whereby airlines pay by the hour.
In return, Rolls Royce is responsible for the performance, maintenance and repair of these expensive machines, removing the headache for the airline.
Xerox used a clever pricing strategy for their earliest photocopiers.
Sensing that customers were too risk averse to dropping several thousand dollars on new technology, Xerox let them pay only for each copy they made.
Of course, Xerox were betting on customers becoming addicted to photocopies, which then saw a business spend a lot of money, but only for what they “needed”.
iTunes let customers pick exactly the songs they liked, using a clever combination of 30 second samples and US99c pricing.
This was just enough to take the risk out of a small purchase, and let customers avoid paying for tracks they either already owned or didn’t like.
Changing The Experience
Some businesses have succeeded by changing the way commodities are perceived, making mundane products become special experiences.
This is achieved by changing the channels used to display the product, and creating new Value Propositions that shape customers’ perceptions.
Aesop turned hand soap and moisturisers into luxury experiences, through their retail stores, physical packaging and high price points.
Customers can now add some elegance to their bathrooms through a bottle of liquid soap, or their metal tubes of lotion can add a degree of sophistication to your handbag or desk drawer.
Bonobos, a mens clothing brand, blended the benefits of online shopping and physical retail through their “Guideshops”, where customers can find their perfect sizes, and place their orders online.
This approach reduces the risk of online shopping, and makes the most of their physical retail spaces – removing the pressure of having to make a decision on the spot.
In a similar way, Cirque Du Soleil famously transformed the ordinary circus into an experience “worth over US$100 per ticket”.
Each part of the business was adjusted to change the customers’ perceptions of what a circus should be, from the price to the venues to the acts themselves.
This wasn’t just a different set of circus acts; this was a new experience that is more comparable to the ballet or live theatre.
Turning Customers Into Designers
This model sees the customer take more responsibility for the creation of the product or service, giving them a tailored outcome and a discounted price.
For example, Subway pushes customers to design every element of a meal, instead of picking from a list of 15-20 lunch options.
Customers ensure that they only have ingredients they like, so if your sandwich is terrible then it’s your own fault.
IKEA turned their customers into builders – flatpacks reduced the price of their furniture, and the customers gets to do the manual assembly of the product.
A phenomena known as “The IKEA Effect” means that customer value their furniture more, since they contributed to its creation.
Dell let customers build their own PCs, which were assembled in a factory and shipped to their door.
This model let customers save money on parts of the machine that they did not value, and upgrade the components that they felt were most important.
For Dell, the model ensured that they made a margin on each sale, and increased the happiness of their customers who weren’t forced into a compromise.
They also were able to earn revenue before they paid for the components, making this a “cashflow positive” model with fewer risks.
Two companies – Shoes of Prey and Nike – let customers design their own shoes.
Shoes of Prey gives women full creative control over every element of their ideal shoe, accounting for stylistic preferences as well as obscure sizing requirements.
Nike lets you choose the colour scheme of each part of their famous designs, whilst adding monograms to let people know that you’re a tool.
This is a great time to think creatively about how you can test a new model in your established industry.
What would it look like if you tried each of these approaches?
Could you create a platform instead of owning expensive assets?
Would customers like your products and services as a subscription?
Could a freemium pricing model remove resistance and increase revenues?
Who would value your users as a valuable product?
Can you give customers the ability to pay for exactly what they want?
What would it look like if you transformed the shopping experience?
Could customers become designers and help create their products?
Perhaps a better question would be; will someone else beat you to it?