Consulting firms are hired very often to help to change the Business Model. Those projects are difficult as you have to generate innovation and convince the firm to change. There is no one recipe for how to innovate. However, there are some proven techniques, frameworks, approaches that will help you find a way to innovate the Business Model.
We will discuss the most useful methods that will help you innovate your business. We will group different techniques around different elements used in the Business Model Canvas. Therefore, we will start by discussing how this model looks like.
The Business Model Canvas
The Business Model Canvas is a way to present the business model of any company in a standardized way. In this framework, we present the business model by describing the company in 9 separate areas. In many situations, it’s used to summarize how specific business looks like, what are the driving engines. Below is a short movie in which we discuss the 9 elements
Now let’s look at how the Business Model Canvas can be used in practice. We will use it to describe McDonald’s business model.
The Business Model Canvas can be also used to show the evolution of the business models. Let’s use it to show how the business model of Netflix has changed over the last 20 years
So, we already know how the Business Model Canvas looks like now we will discuss different innovation techniques. We grouped them around different parts of the Business Model Canvas. Firstly, we will discuss the Innovations in Customer Segments.
Innovations in Customer Segments.
One of the biggest sources of innovation is to play with customer segments. There are 3 powerful methods that you can use to create innovations in this area.
- The Blue Ocean Strategy. In this approach, instead of competing in the current market segmentation, you look for a niche/market where there is no competition or very little competition. Quite often, you will go for the so-called non-users that are not participating in the market at all. A great example is the low-cost airlines like Southwest, Ryanair. In the beginning, they were trying mainly to attract people who would use buses or trains for longer distances. They have designed the value proposition specific for this segment that was not using traditional airlines. Since, they were competing with buses, cars, and trains the most important thing was the price. That’s why the planes of low-cost carriers are not the most comfortable means of transportation. Still, they are usually cheaper than traditional airlines and in many cases cost roughly the same as traveling with trains, buses, or cars.
- Jobs to Be Done Framework. This framework concentrates on the fact that when we buy a product we essentially hire the product to get a specific job done. We define the “job” as the progress that the person is trying to make in particular circumstances and areas. The very same job can be done by totally different products or services. Let’s see how you can use it to innovate:
Have a look also at some examples of jobs-to-be-done defined for products that you are familiar with.
- Enabling Investments. In many cases, your demand is limited by something that you cannot control directly. In such cases, you may be interested in enabling investments. The aim of such investments is to remove the obstacles and help the demand grow, even if this is beyond your control. The same principles are used to deal with limitations in supply and distribution. Let’s see how you can do the enabling investments.
Value Proposition Innovation.
Another great source of innovation is to work on the Value Proposition. Let’s see what techniques you can use in this area:
- Expand the brand. If you have a strong brand, you can expand it by selling new products. Brand expansion can be achieved by offering, under the existing brand name, new products within existing categories, or even new categories of products. Let’s look at how Apple has managed to use its strong brand, and expand it to sell additional products.
- Expand the product. Once you are selling the basic products, you can up-sell or cross-sell related products. A great example is a car. Car firms use the purchase of the car to sell you a financing of the purchase (leasing or installments), insurance, maintenance package, etc. Without this innovation, many industries are not profitable at all.
- Simplify the product. Simplicity is quite often the key to success. There are several ways how you can simplify the product, and increase the value you deliver to the customer. We mainly do it by removing obstacles, frictions. Let’s look at some examples:
- Integrate products. Many firms, to increase their control over consumers create the whole ecosystem. In this way, customer has hardly any reason to check competitors’ offer. Integration of products means that they fit and work together. You have experienced that on many occasions if you use Google or Apple products. Thanks to that the firms keep the customer forever and can sell new products and services.
- Divide the products into smaller pieces. One of the most underrated strategies is to divide the product and sell it in smaller pieces. This gave a rise to interesting products, and even whole business models. Famous Steve Jobs has used the very same trick to revolutionize the music industry. Historically, the dominating business model loved by the music industry was to sell the whole albums. He has drastically changed that by enabling him to buy a single song on iTunes. You no longer had to buy the whole album to listen to your favorite music. Obviously, later on, iTunes was disrupted by the music offered in the form of a subscription. iTunes became the victim of Spotify and other similar business models.
- Bundle products. You can increase sales and product adoption by bundling products. This can also work as a defensive strategy. The most common bundle that you surely have come across, is the bundling of food and drinks. In Starbucks, they may offer you delicious coffee along with a sandwich or a cake. What convinces you to buy this bundle is obviously a lower price for the whole set. The modern version of the bundle, in the world dominated by tech, is for example Apple One (a bundle of Apple services).
- Digitalize the product. Another way to innovate is to turn a physical product into a digital one. In this way, you can increase the value of the customer and reach new customers. Amazon started its business by offering online physical products. It has invested billions of dollars to build infrastructure that could support them in an attempt to dominate this industry. However, once the e-books became a thing, Amazon decided to disrupt itself and invested in its own e-book branch – the Kindle. Once smartphones became mainstream, they have also invested in software that would turn any phone into an e-book reader. The second step in digitalizing the book was the takeover of Audible in 2008 for 300 million dollars. Audible is a marketplace offering audiobooks. This move, on one hand, enabled them to sell a new product to the existing customer group. On the other hand, it protected them from the potential competition from Audible. At some point, if Audible remained independent, it may have decided to add also e-books that would have competed with the Kindle.
Innovation in Key Resources.
Some firms resort to Innovation in the Key Resources department. They are 2 main techniques in this area that go opposite directions.
- Crowdsource Resources. To grow the business in most cases you have to invest in assets, resources. This obviously requires a lot of money, which in turn slows down your growth. An interesting alternative is to crowdsource the assets. A great example of applying this technique is Airbnb. Despite owning almost no hotels they provide more places to sleep than all the biggest chains of hotels combined. In a similar way, Uber acts as the biggest cab/taxi despite having almost no cars. Let’s look at how crowdsourcing resources can impact the business:
- Own Resources. Some companies invest in their own resources that allow them not only to grow but also to kill competition. Owning a scarce, key resource is a hack that can help you dominate the market, and deny opportunities to current and potential competitors. McDonald’s tries to own one of the most important resources in the fast-food business – the best locations. This enables them not only to increase their margin and defend against the competition (who cannot have the same location as they do), but also enables them to control the franchisees that operate most of the restaurants.
Innovations in Key Activities.
Key Activities are quite often neglected as a viable source of innovations. In this area you can consider 4 main techniques:
- Automate. We suffer from a lack of skilled labor. Moreover, people get more and more expensive. That’s why more and more activities are automated. Instead of cashiers we have automated cash-till. In some stores like Amazon Go, you don’t have even that – everything is charged to your account based on what you put in your baskets. In offices, we have tools like Power Bi, Power Automate, and Power Query that can help 1 person do the works of 10 people. On top of that, you have A.I. already taking over much-skilled work. Automation will be key in the coming years. Below is an example of cost-benefit analysis that you should conduct for every automation project:
- Simplify the process. Things we cannot automate we can drastically simplify by removing steps. The best example of radical simplification is the 1-click purchase that you do on the Amazon website. 5-10 steps were fully removed which helped the sales grow.
- Crowdsource processes. A lot of work can be crowdsourced. The best example is the data gathering in social media. Social media firms (like Facebook/Meta, Snap, YouTube) need data to target the right ads. They get them from users. In other words, the users crowdsource the data needed for the whole business model to make sense
- Eliminate processes. The Holy Grail is to simply eliminate processes. This is possible in many cases thanks to centralized data sets. For example,
Innovations in the Cost Structure.
Firms, unfortunately, overlook innovations that can be done on the cost side. Let’s see what techniques can be used in this area, and what has been done by some bold firms when it comes to costs.
- Transfer costs to customers. You can have a much simpler, and more efficient business if you transfer costs to your customers. The customer quite often does not notice or does not mind the additional effort. A great example of applying this concept we have in IKEA. They sell you parts that you can use to assemble the furniture. In other words, they have transferred to you the cost of assembling the furniture. Additionally, it’s cheaper and easier to transport a box with parts than assembled furniture.
- Transfer costs to suppliers. It’s time to see how you can innovate by transferring certain costs to your suppliers. Thanks to this move, you can get higher margins or concentrate on more valuable activities. Amazon has been using this innovation with sellers that sell their products via their platform. The seller has to find, test the product and take care of customer support. If the seller does not do a good job, Amazon will remove the seller from the platform.
- Turn costs into revenues. This approach is very radical. In this method, you create a business that helps you not only lower your own costs but can be also a source of revenue. Master of this technique is again Amazon. Their cost of delivering they have turned into a standalone business (Fulfilment by Amazon) that they offer to 3rd parties, including the firms that sell via Amazon. The same goes for the cost of hosting their sites. They had to pay a huge amount of money for the servers. In 2006 they have decided to build a business around that (Amazon Web Service) that currently generates more money than the core business of Amazon.
Innovation in Revenue Streams & Sales channels
Fast effects can be achieved by innovating Revenue Streams or playing with the Sales Channels. Let’s look at examples of techniques and case studies.
- Experiment with different sales channels. By changing sales channels you can reach new customers, or create different business models. Sales channels may require sometimes change in the product and your policies. Apple unlike other phone producers has concentrated on its own retail chain and has provided a totally new, compelling customer experience. By the way, Apple does not have to compete for attention in its own stores. Those who go there are enchanted with the whole experience and don’t have even the slightest opportunity to see competitors’ products. The same move was done by Tesla. It invested in its own retail chain instead of the traditional dealership model. This gave them control over the whole customer experience, and also helped Tesla preserve a bigger part of their margin and generate additional revenues from services.
- Experiment with different revenue streams. Another way to generate new businesses is to change the revenue stream. This may mean how you charge your customer and for what you charge him. By revenue streams, we mean how you charge your customer for a service or a product as well as for what you charge him. In other words how you monetize your product, how you capture the value that you deliver to customers. For example, Shopify which provides software for setting up and running e-commerce, charges fixed fees and a percentage of sales. In this way, the profit grows when the firm’s revenues grow. Mailchimp which provides software for mailing, charges per number of emails sent. Thanks to this trick it’s very cheap for small players. Bigger players see bigger value in the software and are happy to pay more as the cost scales with their revenues. Below is a short example of how to approach innovation in revenue streams. We will use milk as an example:
- One of the most interesting approaches is to move away from one big payment into smaller payments for different things. The approach was developed by mobile games, however, it has been also used in recent years by other gaming firms and software. Canva, which offers software for creating graphics has been using micropayments instead of traditional subscription fees used by most SaaS players.
- Virtual Economy. In certain situations, you can go a step further and create a virtual economy with exchange rules around your product. Brand Loyalty programs with points to a large extent are examples of that.
Innovation in Key Partners
Some industries require you, to innovate also in the area of Key Partners. Thanks to that, you can build a powerful competitive advantage.
When it comes to Key Partners we have 2 major innovations that we can consider:
- Going up or down up the value chain. In many cases, you can innovate by moving up or down the value chain. In other words, you integrate vertically. Such a move enables you to improve the customer experience and simplify operations. This innovation is used almost by every bigger firm. Tesla is producing its own batteries but also has its own sales chain. Amazon has its own chain of sales, own logistics, own products. Apple has its own stores and own chips. The move is so popular because it’s relatively easy – you have 1 part of the stick so you know where the stick will lead you and how much it’s worth.
- Enabling investments. We have mentioned this technique when we were talking about Customer Segments. It can be successfully used also for solving the problems with distribution and supply. By removing obstacles you help your main business grow faster and easier. Let’s see how Tesla has used this technique:
Innovation in Customer Relationship
In many industries, we have seen many innovations in Customer Relationships. Let’s look at some examples and techniques that may prove useful
- Free Trial. The free trial is pretty simple. The firm gives you a sample of its product, so you can test it, and decide whether it is what you were hoping for. The model was used in the beginning by firms like Estee Lauder. The founder of this cosmetic giant was offering customers free samples of creams she was producing on her own. The customer could take the sample of the cream home, test it on her skin and see the effect of the cosmetics. Today it’s widely used for digital products (Netflix, HBO Max, software).
- Freemium. In many cases, firms use the so-called freemium model to attract a big number of new customers and let them use part of their product for free. In Freemium you can use only a part of the product part forever (no time limitation). If a company uses the freemium model to get customers, it actually has 2 groups of customers. The minority of customers use the full-paid version (they generate revenues and profits). The majority uses the freemium version and have a marketing value for the firm (they promote the product and help decrease costs of customer acquisition). At some point, they may also convert into a paid user.
- Free. Surprisingly, a lot of businesses can thrive despite offering their products for free. The best examples are Facebook, Instagram, YouTube, Twitter. By using their product for free users create an inventory of potential ads that they can sell to advertisers. So, in a sense, you have 2 groups of customers: users that use the product for free and firms that you for access to those users.
Below is a short comparison of the freemium, the free trial, and the free:
- Referral programs. Referral programs pray on our human nature, and our need to give advice to other people, even if we are not asked for one. Humans are not only famous gossipers but also have the natural need to share with others things that worked. Referral programs use the natural phenomenon called the word of mouth. If you like something, you are very likely to recommend it to your friends. Especially, if it solves some problem that both of you are dealing with. People not only recommend restaurants, or movies to each other, but also employers, software, and hardware. Referral programs try to incentivize people to recommend things to their friends. They usually offer a small reward for that. The reward may be given to the person who is recommending, but also the new potential customer as well.
- Affiliate programs. Affiliate programs are similar to referral programs. In short, using them, you want to get to a wider group of people and generate bigger sales of products. That is why, you incentivize other people and firms to promote you, talk about your products. Unlike referral programs, in affiliate programs, you offer money and not your products. However, the money is given to the affiliate only if he or she sells a product or a service
That’s in short. As always I recommend checking for more examples of our online course Business Model Innovation for Management Consultants. You will find there +3 hours of content and more than 80 lectures, that will teach you all the things you need to create great charts fast as a Management Consultant.
Have a look also at our post on How to come up with new business ideas.
You can also check the post in a form of a presentation: