Understanding how businesses work is the first step to initiate any business model innovation process. If we can’t grasp the essentials of what makes a proper business model it would be very difficult, if not impossible, to change the way our company works. For that purpose, we need some tools that help us to focus on what really matters and avoid cognitive traits and misunderstandings. In this post we would like to show a glimpse to BMI Lab´s method for business model innovation. We will explain how you can define any business model and we will give you some examples of successfully used business model patterns.
Defining business models
Defining a business model requires a framework to address the basic elements that make it. In BMI Lab we have developed an analysis framework, which shows the four key elements we need to keep in mind: Who?, What?, How?, and Why?.
At the center of this framework we can find the Who? This element refers to the customer. To define them we have to answer some questions: Who are they? What do they demand? What needs do they have? What are their pains and gains? Can we properly define them, or do we have an information bias we need to overcome? The fact that the customer is at the center of this framework leads us to a customer-centered approach, phasing out the, regularly used, company-centered perspective.
The What? element refers to the value proposition and the products or services on offer. It is important to note that there is a difference between the value proposition and the products and services. The value proposition defines the value we create for our customer; how we fulfill their needs, facilitate gains or solve problems. Products and services help us with this, they make the value we create tangible and distributable.
The How? refers to the value chain, the process we run to deliver our value proposition. Simple or complex, we have to define it in order to fully understand our business model. This includes not only in-house operations, but also partnerships and outsourcing helping us to deliver our value to clients.
Finally, the Why? is about explaining why our product or service is commercially viable. We might ask ourselves several questions: How do we determine our pricing strategy? Where do we sell? How do we do marketing? How do our clients pay? Together with the other three elements, this Why? completes our understanding for every business model. It also addresses a fundamental issue for every business model: how value is captured by the company.
Obviously, the more detail we can provide, the better analysis we can achieve. A good exercise for that is explaining our business to an outsider or layman. People from other sectors can help us to point out the essential elements for new business models. If we only do this exercise with work mates, we could probably forget to define some key elements that are already part of our industry’s common knowledge. The point of view from an outsider is always desirable.
Introduction to BMI Lab´s 55 business model patterns
At this point, a seasoned professional may wonder how many business model patterns we can define. At BMI Lab we have identified up to 55 patterns that count for 90% of all business models. These patterns can help us to identify our current model, but also to inspire us to change it. We would like to show you some examples, so you can understand how to define and understand a business model in practice. The examples in question are: Shop in Shop, Robin Hood, Pay What You Want, and Fractionalized Ownership. Each of these patterns focus on at least two core dimensions of the business model, as shown in the following chart:
“Shop in Shop”
The Shop in Shop business pattern focuses on the What?, How? and Why? dimensions. This means that any company willing to implement it might change its value proposition, value chain and revenue model in a particular way. In other words, instead of opening new branches, a partner is chosen whose branches can profit from integrating the company’s offering in a way that imitates a small shop within another shop. The hosting store can benefit from access to more customers and is able to gain constant revenue from the hosted shop in form of rent. The hosted company gains access to cheaper resources such as space, location, or workforce.
A real world example for this business model is Tchibo, a 60 year-old German chain of coffee retailers and cafés known for its weekly-changing range of products. The company offers a wide range of products, always trying to better serve their customers: true coffee lovers. Their range includes not only coffee but also electronics and household items.
Along with their shops, Tchibo has more than 22,000 so-called Frische-Depots in bread shops and supermarkets, with shelves bearing the company's "brand" selling packaged coffee (with customer-operated coffee grinders provided in some locations) together with non-food articles. With this “Shop in Shop” business model, Tchibo can reach much more clients, without opening more physical shops, which involve big investments in space and a workforce to run it.
“Pay What You Want”
The Pay What You Want business model pattern focus on the What? and Why? dimensions. Therefore, if we want to implement this model, we will change the value proposition and the revenue model. The customer pays a desired amount for a given product or service, sometimes even zero. In some cases a minimum floor price might be set, and/or a suggested price may be indicated as guidance to the customer. The customer is allowed to influence the price, while the seller benefits from higher numbers of attracted customers since individuals’ willingness to pay are met.
An excellent example of this business model is Radiohead´s album In Rainbows. The worldwide known music band decided to directly sell their music album through the Internet, asking people to pay whatever they wanted for it, even zero. The benefits for the band were remarkable. By removing the middlemen (in this case, music record companies), the profit margin for every unit sold increased significantly. The band also got a greater number of people listening to their music. In the end, much of these music fans would purchase another album from Radiohead, or pay for live shows, the greatest source of revenue for any rock band.
“Robin Hood”
The Robin Hood business model focus on three elements: Who?, What? and Why?. Hence, every company willing to implement it should will make changes on the client side, value proposition, and revenue model. In this case, the same product or service is provided to “the rich” at a much higher price than to “the poor” to subsidise the lower price for the poor. Thus, the main bulk of profits are generated from the rich customer base. Serving “the poor” in not profitable per se, but it creates economies of scale which other providers cannot achieve. Additionally, it has a positive effect on the company’s image.
Tom’s Shoes is a good example for this business model pattern. The company designs and sells shoes based on a typical Argentinian design called alpargata, together with eyewear, apparel, and handbags. The company has a very clear proposal for their clients: When Tom’s sells a pair of shoes, a new pair of shoes is given to an impoverished child, when Tom’s sells eyewear, part of the profit is used to save or restore eyesight for people in poor or developing countries. Purchases of Tom’s Bags help provide training for skilled birth attendants and they distribute birth kits containing items for safe childbirth. This approach has been successful, and also sustainable. As Toms Shoes’ CEO Blake Mycoskie says: “I think [that this approach] it's incredibly sustainable. Built into our cost structure is the intention to provide great benefit to our customers because they feel like they're getting to be part of something more than just a transaction”. So, Tom’s Shoes can subsidise their free products because the cost is shared with customers that pay for them. The “buy one, give one” is a powerful claim for the company, and their customer appreciates the effort that Tom’s Shoes is doing to supply people living in poverty with essential products. This approach has been taken by many entrepreneurs to create new products and brands with a social approach.
“Fractionalized Ownership”
Finally, the Fractionalized Ownership business model pattern has influence on the four key elements of a business model. When applying this pattern, we will change our client base, deliver a new value proposition, change the way we deliver this value, and capture it with a new revenue model. Fractionalized Ownership describes the sharing of a particular (typically a capital heavy) asset class amongst a group of owners. While the customer benefits from the rights as an owner, the entire capital does not have to be provided by one party.
One excellent example of this business model is car sharing. Car sharing companies offer a mobility service, renting their users cars for a certain amount of time, often paid per minute of use. To achieve this, the company could invest in and maintain a fleet cars, but many times a partnership with a car maker is made to save on capital investments. End-users receive a convenient and flexible mobility service without having to own a car. Several companies, such as DriveNow (BM), Car2Go (Daimler-Benz) or Zipcar are already running this business model in Europe, Asia and North America, allowing urban dwellers to save money while giving them access to an on-demand and flexible urban mobility solution. Moreover, the European Union is supporting car-sharing businesses as part of a major policy to preserve the environment from pollution and resource wasting.
Business Model Patterns and Innovation
All the models explained above are just a glimpse of all business model patterns identified by BMI Lab. These patterns are useful to understand how we can define a company’s business model by analysing the four core dimensions that constitute and define it.
Business model patterns can also be useful for innovation, though. In the ideation stage of BMI Lab’s innovation process, we use them to create ideas that lead to new and innovative business models. By applying the patterns of an industry other than your company’s, you force yourself to think how the logic behind this pattern can be applied to your own industry and company’s business model. This exercise helps to identify new customers to serve, innovative value propositions, new ways of delivering value, and unexplored revenue streams. How the BMI Lab does this will be explained in one of our next blog posts.