Business Model: Stay Ahead of the Game
Organising Business Creativity: Blog 3 of 6
What makes a company work? To answer this question we should take a look at the anatomy of a business: the business model. Essentially, what a business model addresses is how the company competes, uses its resources, structures its relationships, what interfaces it has with customers, and finally, how it creates value (Spivack, 2022).
So when you are running a company and you want to know whether your business model is working well or is in need of change, ask yourself these three questions:
First, what makes your existing model successful, i.e. what customer problem does it solve and how does it make money for you firm? Secondly, what signals are you observing that indicates a need for change (e.g. tough new competitors are entering the market)? Last but not least, is reinventing your business model worth the effort? (Johnson, Christensen, & Kagermann, 2009)
If we are looking at the best practices of startups, we can clearly see a difference in how they operate compared to traditional enterprises. The so-called “Lean Startup” methodology has completely changed the game for most startups’ approaches. The key difference is that while existing companies execute a business model, startups look for one. The lean definition of a startup sums it up the best: a temporary organization designed to search for a repeatable and scalable business model. (Blank, 2013)
In the past, like during the dot-com boom, startups used to operate in “stealth mode” to avoid competitors copying them. However, the lean philosophy is against this notion as constant customer feedback is valued more than secrecy and held to lead to success more likely. (Blank, 2013)
Keeping a watch on one’s business model is crucial because of new strategies used by competitors and new possibilities enabled by technology. For instance, what should an established company do if a new entrant in the market is offering an attractive product similar to yours but is charging nothing for it?
How much of a threat this poses to your company depends on three factors: 1. the entrant’s ability to cover its costs quickly enough, 2. the rate at which the number of users of the free offering is growing, 3. the speed with which your paying customers are defecting. (Bryce, Dyer, & Hatch, 2011)
According to studies, your business might be in serious trouble and in need for a response if the competitor’s user base with its free product is growing by 40% or more a year, or your customer defection rate is at least 5% a year (Bryce et al., 2011).
What to do? If your defection rate among paying customers is high but the entrant’s growth rate is low, you have an immediate threat because your revenues are breaking away. Thus, to tackle this problem, you should start launching a free offering yourself. (Bryce et al., 2011)
But why are managers hesitant when it comes to launching free products? Admittedly, it seems counterintuitive to offer something for free when your objective is to make a profit. The deeper reason is that it is common belief that products must generate revenue and profit on its own, and that the profit-center structure and accounting system that are employed reflect and strengthen this mindset (Bryce et al., 2011).
Because the free-product strategies seem so counter-intuitive, experimentation and risk-taking are almost inevitable. Rather fearing it, managers should embrace it! A cultural change might be necessary. (Bryce et al., 2011)
Embracing cultural shifts as needed and being up to date with the latest trends are more important than ever. For instance, not only the freemium strategies have become a big trend, there is also the trend of a “24/7 contact with customer”, i.e. always being connected with the customer, enabled by today’s technology. Imagine what a printer & ink company could do if it knows exactly when a customer needs a new ink cartridge? The company could suggest to the customer to order a new cartridge or perhaps even automatically order it for the customer. Both sides can benefit. (Siggelkow & Terwiesch, 2019)
Such concepts can completely upgrade the business model of a company. On this final note, I want to encourage you to think about what a business — be it your own or any other company that comes to your mind — could change in its business model to stay ahead of the game.
This is part of a blog series on “Organising Business Creativity”. It is a course I am currently attending as an exchange student at the triple-accredited Hanken School of Economics in Helsinki, Finland. As I go through the various topics of the course, I will write short blogs on them while referencing at least three of the assigned readings. Enjoy!
Blank, S. (2013). Why the Lean Start-Up Changes Everything. Retrieved from https://hbr.org/2013/05/why-the-lean-start-up-changes-everything
Bryce, D. J., Dyer, J. H., & Hatch, N. W. (2011). Competing Against Free. Retrieved from https://hbr.org/2011/06/competing-against-free
Johnson, M. W., Christensen, C. M., & Kagermann, H. (2009). Reinventing Your Business Model. Harvard Business Review. Retrieved from https://www.academia.edu/5433660/Reinventing_Your_Business_Model
Siggelkow, N., & Terwiesch, C. (2019). Is Your Business Built for 24/7 Customer Relationships? Retrieved from https://hbr.org/2019/05/the-age-of-continuous-connection
Spivack, A. (2022, February 2). Business Models. Organising Business Creativity, Hanken School of Economics. Retrieved from https://hankenfi-my.sharepoint.com/personal/spilapra_hanken_fi/_layouts/15/onedrive.aspx?id=%2Fpersonal%2Fspilapra%5Fhanken%5Ffi%2FDocuments%2FRecordings%2FWeek%203%20Business%20Models%20Recording%2Emp4&parent=%2Fpersonal%2Fspilapra%5Fhanken%5Ffi%2FDocuments%2FRecordings