Oliver Gassmann, Karolin Frankenberger: The Business Model Navigator

Introduction

To our surprise, we discovered that over 90 per cent of all business model innovations simply recombine existing ideas and concepts from other industries.

How to drive business model innovation

A company’s current business model becomes tangible by describing it in four dimensions – the customer (Who?), the value proposition (What?), the value chain (How?) and the profit mechanism (Why?).

What is a business model and why should it be innovated?

Today, a company’s long-term competitive success depends upon its ability to create an innovative business model. Empirical research has shown unequivocally that business model innovation carries a greater potential for success than mere product or process innovation. A BCG study has shown that over a five-year period business model innovators are six per cent more profitable than their contemporaries who were innovating products and processes. Tomorrow’s competitive advantage of companies will not be based on innovative products and processes, but on innovative business models.

We live in an era of temporary competitive advantage: success can only be maintained if its roots are continually re-examined and nurtured.

Our overall model consists of four dimensions, which we present in the form of a ‘magic triangle’x:

1. The customer – who are our target customers?
2. The value proposition – what do we offer to customers?
3. The value chain – how do we produce our offerings?
4. The profit mechanism – why does it generate profit?

In sum, a business model defines who your customers are, what you are selling, how you produce your offering, and why your business is profitable. Who-what-how-why describes a business model of which the first two (who and what) address its external aspects and the second two (how and why) address its internal dimensions.

Innovation of a business model requires modifying at least two of these four dimensions.

The goal of every business model is to both ‘create and capture value’. What is interesting is that while most business model innovators are quite good at creating value for their customers, many fail to capture it for themselves.

In 2005 Kim and Mauborgne used their ‘Blue Ocean Strategy’ approach to think outside Porter’s box for the first time. Their main message was, if you want to innovate your business model successfully, you must leave the competitive red ocean and create a blue ocean, that is new, uncontested market space. The mantra of the business model innovator is: ‘Beat your competitors without trying to beat them’.

The memory of the company’s past successes can easily block new ideas. Even very open-minded leaders tend to have a hard time breaking their industry’s dominant logic.

Any business model innovation methodology, therefore, must find a balance between the necessity of integrating outside ideas and allowing management to develop its own ideas.

To come up with ideas for an innovative business model, it is essential to overcome the dominant logic residing within an industry or company.

The true revolution is the discovery of the potential economic viability of a new technology – in other words, of the right business model.

One example of such a circumstance is the Pay As You Drive (PAYD) principle in the insurance industry.

In 2004 Norwich Union and a number of other insurance companies terminated their PAYD programme on account of insufficient custom. The problem with Norwich Union’s PAYD offer was its complexity.

The UK insurance company insurethebox is offering at this time the most innovative and promising business model on the market. insurethebox combined PAYD technology with existing patterns such as Customer Loyalty, Add-on, Affiliation and Experience Selling.

The branch offers great promise: telematics-based insurance plans are forecast to produce a turnover of some 50 billion euros in Europe in 2020 and have 44 million people insured by 2017.

Another major challenge we have identified is the absence of systematic tools that can facilitate creativity and divergent thinking, which is crucial for developing innovative business models.

The following myths about business model innovation continue to be quite pervasive among managers:

• The Initial Ascent myth: ‘Commercial success comes with ideas no one has ever had before’.
• The ‘Think Big’ myth: ‘Business model innovations are always radical and new to the world’.
• The Technology myth: ‘Every business model innovation is based on a fascinating new technology that inspires new products’.
• The Luck myth: ‘Business model innovation is just a matter of luck and cannot be undertaken systematically’.
• The Einstein myth: ‘Only creative geniuses can come up with truly innovative ideas’.
• The Size myth: ‘Big breakthrough requires big resources’.
• The R& D myth: ‘R& D departments are the source of important innovations’.

Merely supervising daily business would not warrant the high salaries that managers receive. Inspiring and driving innovation on a business level separates administrators from inspiring leaders.

The Business Model Navigator

TRIZ is a Russian acronym for the ‘theory of inventive problem solving’. The key feature of TRIZ-style problem solving is the identification, amplification and elimination of technical and physical contradictions in technical systems.

The goal of our own research was none other than to create a similar engineering methodology for business model innovation.

The innovation lies in the understanding, translation, recombination and transfer of the successful patterns to one’s own industry.

Ninety per cent of all new business models aren’t actually new. They are based on 55 existing patterns. Creatively imitating business models from other industries can empower your business to become an innovation leader in your industry.

The Business Model Navigator map illustrates how business models are connected with each other and will help you to figure out where your business fits in.

Three basic strategies have been used in the past to generate new business ideas from the pool of 55 business models:

• Transfer: An existing business model is ported to a new industry
• Combine: Transfer and combine two business models. Especially innovative companies can even use three business models simultaneously
• Leverage: A company uses a successful business model for another product range

Before you develop a new business model, you should define a common starting point and the direction in which you want to head.

Our experience at workshops has taught us that it is much harder to grasp one’s own business model than it appears. Even people with more than 20 years of industry experience often struggle to describe their business model and the underlying industry logic.

We recommend describing your business model on the basis of the four core dimensions who-what-how-why.

Successful business model innovation requires you to understand all the actors in your ecosystem. In addition to your own company, it will consist of customers, partners and competitors.

The basis for any analysis of such an ecosystem should be a thorough understanding of your customers’ needs, as they are among the most important sources of business model innovation ideas. This should not be limited to the customers you are currently serving, as you must also consider potential and future customers.

Recently, companies have been going a step further and asking their customers to give direct feedback about their products and services or even to become personally involved in product development.

In addition to customers, other important actors such as suppliers, distributors, solution providers, or those participating indirectly such as researchers, consultants or associations, contribute in some significant way to creating value for customers.

A great number of successful business model innovations have been triggered or enabled by technological advances. On the other, technological advances can also constitute an important risk factor.

Not all technologies automatically create value for the company that develops them. To create and capture value, the right innovative business model is needed.

Seven IT-enabled business trends to watch:

• Social media as a key feature to engage with customers
• Sharing community and networks
• Physical Freemium and digital Add-on
• Digitally reloaded products
• Sensor as a service
• Integrated digital and physical experience
• From analytics to big data

A company must focus on what it regards as the most important influencing factors and trends for its business model.

Peter Maas forecasts by the year 2050:

• Knowledge society:
• Networks and connectedness:
• Centralisation:
• Cocooning:
• Resource shortages:
• Pursuit for identity:
• Security:
• Self-administration:
• Demographic change:

Our findings that there are 55 different business models in all and that innovation is a matter of recombination 90 per cent of the time led us to develop a systematic methodology we have called Pattern Adaptation for Ideation.

The similarity principle starts inside and moves outside; that is to say you begin with pattern cards for business models in related industries and progress to more dissimilar patterns, which you then adapt to your own business model.

To apply the similarity principle, the steps to be carried out are as follows:

• Define your search criteria to identify related industries.
• Next, based on your predefined search criteria and related industries, select patterns from the pool of 55.
• Ideally, work with six to eight patterns.
• Now apply the identified patterns to your own business model.
• Should you fail to find a viable idea for business model innovation at the first attempt, repeat the process.

The similarity principle is more likely to lead to only slightly or moderately radical business model innovations.

The confrontation principle specifically wants to face off with extremes, that is to say you compare your current business model with scenarios in completely unrelated industries, and study the extremes in respect of their potential impact on your own current business model.

The confrontation principle is applied as follows:

• The first step involves the selection of six to eight patterns from the 55 available business models.
• Next, challenge your business model with the patterns that have been selected.
• If you do not have enough good ideas after a first run, simply repeat the above steps.
• The ideation process is a core element of the Business Model Navigator.

We first try to generate as many ideas as possible.

The workshop can be organised in different ways:

• Face-to-face or virtual workshops:
• Sequential or parallel: Patterns can be considered sequentially (one by one) or in parallel (all at the same time).
• Open or closed: You can also adjust how openly the process takes place. In the first case ideas are generated individually – using brainwriting – and then discussed as a group. In the second they are pitched immediately to the group.
• High or low frequency: Finally, you can limit the amount of time that participants are permitted to devote to each business model pattern.

You should plan on running at least two to three rounds of ideation: most participants will reach the height of their creativity during the second round. The third round is meant to unleash any final and deep-seated creative potential.

The following rules have proven to be helpful in pattern adaptation:

• Get it all out:
• No limits to creativity:
• No copyright:
• Quantity has precedence over quality:
• Avoid negativity:
• Ten seconds:
• Cast the net wide:
• Anecdotes and asking the right questions:

The above success factors should be presented as the rules of the game or even handed out on paper to participants before the start of the session.

The NABC method (Need, Approach, Benefits, and Competition) of the venture capitalists has proved to be very valuable for business model idea evaluation and selection. The group prepares a brief elevator pitch based on the four NABC perspectives, lasting between eight and ten minutes.

Venture capitalists generally make snap decisions, but in business model innovation the ideas are there to be built upon. A useful method at this point is the iterative approach used in design thinking. A cycle consists of the following four steps:

• Development: Once the above process has been terminated, the most promising idea that has emerged is developed into a concept to be presented according to the NABC principle.
• Sharing: Each group presents their ideas to the other participants in an elevator pitch style.
• Water-holing: After each presentation, the group receives give-and-take feedback. Any answers from the presenting group should only be points of clarification.
• Redesign: In the final phase, any weaknesses and challenges that have been uncovered are addressed by way of new ideas.

A successful business model innovation will not only break with the dominant industry logic, but also have a high level of internal consistency without being based on an established model.

Internal consistency may be defined as presenting a harmony between the who-what-how-why dimensions.

As a CEO once told us, ‘It’s relatively easy to change one dimension of your business model; the problem is to adapt the rest to it’. It is generally found that the product and market aspects are more malleable at this early stage, while the revenue and value aspects need to be dealt with later in the integration phase.

External consistency refers to the fit between your new business model and the company’s environment.

Once you’ve completed all the first three steps in the Business Model Navigator, you will have finished designing your business model. Next comes implementation, probably the most difficult task in business model innovation

We recommend taking a step-by-step approach when rolling out your business model innovation.

Our approach to this whole subject was shaped in large part by our cooperation with Larry Leifer, a Stanford University professor whose Design Thinking School has established itself as a forerunner in innovative product development.

As we have said, business model innovation consists of the three steps of initiation, ideation and integration. By the end of the design phase, you will normally have come up with one or two innovative business models that have coherent dimensions.

The aim of the next step is to consolidate your design. To quote the wise words of our Stanford colleagues: ‘A picture is worth a thousand words and a prototype is worth a thousand pictures’.

Testing your prototypes will determine which dimensions of the new business model work and which ones don’t.

Implementation is not a simple process, but a multidimensional one: the Design-Prototype-Test cycle will need to be completed a number of times before you can be ready to introduce your innovation to the market.

The following are the ten keys to success in the Design-Prototype-Test cycle:

• Openness:
• Courage:
• Iteration:
• Diversity:
• Change:
• Summaries:
• Failure:
• Challenge:
• Coach:
• Directions:

Business plans create elaborate dreams based on assumptions. Prototypes test assumptions and push you to learn. What you do is more important than what you think.

Managing change

Your greatest hurdle in business model innovation will be to overcome internal resistance. Only by doing so is it possible to implement an innovation successfully.

Here are the five most important ways of managing change from the top.

• Show commitment – Management’s actions are a visible sign of its commitment to change initiatives in employees’ eyes. Mahatma Gandhi has famously said: ‘Be the change that you wish to see in the world’. Business model innovation has to be implemented top-down. Otherwise it will not succeed. ‘Change processes involving employees are like hiking with a backpack. You can’t walk as quickly as you would without a backpack, but you’re carrying all you need with you. You just take a short break and you’re ready to set off again or start exploring your destination’.
• You should not direct all your energy towards the opposition. Instead, address the indifferent 80 per cent who are quietly watching from the sidelines. Politicians are well aware that it makes more sense to try to win over the undecided majority in an election rather than the supporters of the opposing party.
• Zero-risk bias: Option A, where a relatively small risk is eliminated, will be preferred to option B, where a much larger risk is drastically reduced. This is true even if the expected value of option B is greater than that of option A. In other words, we are ready to give up a whole lot for a sense of security.
• Be courageous: you can fix mistakes, but indecision keeps everyone from doing their job.
• A vision is a dream with a deadline. If you don’t define by when you want to realise your vision, it remains a dream.

Teams working on new business models do best when they are administratively and physically independent of the company’s everyday business.

In addition to your vision and a long-term action plan, specific goals in respect of inputs and outputs are also very important in change management. Setting goals too early can suffocate business model innovation. Incentives are paramount if you want to achieve a goal, so be sure not to miss out on this important mechanism when implementing your business model.

Harvard professor Michael Stern conducted a study to determine the specific traits exhibited by companies with a strong culture of innovation:

• Employees show initiative:
• Permission to work on unofficial submarine projects:
• Serendipity:
• Employee diversity:
• Communication, communication, communication:

55 winning business models – and what they can do for you

The structured set of 55 business model patterns falls right into place when trying to overcome mental barriers that may block the road towards new ideas. The key premise for a successful application of the Business Model Navigator is an in-depth understanding of these 55 patterns.

Add-on

Add-on Additional charge for extras. In the Add-on business model, while the core offering is priced competitively, numerous extras drive up the final price. The Add-on pattern generally requires a very sophisticated pricing strategy.

The Add-on business model is especially well-suited for hard-to-segment markets, where customer preferences often diverge vastly.

The exact origins of this pattern are hard to trace. Additional offers or modular products have existed for a long time.

Several years ago, Ryanair’s Irish CEO, Michael O’Leary, told us in a strategy discussion with a wry smile: ‘There are three things important in business: costs, costs, costs. The rest you leave to the business schools’.

The Add-on business model can be used by your company to help certain technologies and accessories break through to the market. Often this requires add-ons to be cross-subsidised.

This pattern will work well for your business if your customers are able to choose a basic product first, and then later add options to which they will be less price sensitive.

Affiliation

In the Affiliation business model, the company’s focus lies in supporting other parties to market products in order to benefit from successful transactions. With this the company gains access to a diversified customer base without additional sales and marketing efforts.

Affiliates usually operate on the basis of some form of pay-per-sale or pay-per-display system and generally online.

It is crucial that the customer ultimately ends up on the original vendors’ website by fulfilling this condition, the customer receives an identifier that allows the vendor to recognise the referring reseller (how?). While Affiliation greatly influences the sales channels and revenue generation of vendors, it can also serve as a business model for resellers too, for whom Affiliation is now an important element of the revenue model (why?).

According to web marketing experts at ClickZ, it is highly likely that adult sites such as Cybererotica in fact pioneered the concept in the early 1990s.

A strong ecosystem and passionate customers are a prerequisite for this pattern. Affiliation works well because it generally leads to a win– win situation for all the parties involved.

Choose Affiliation if you know what kinds of customers you want to attract. This pattern can be an excellent option if you cannot afford a direct sales force.

Aikido

Aikido is a Japanese martial art performed by blending with the motion of the attacker and redirecting the force of the attack. In terms of business models, Aikido refers to products or services that are radically different from the industry standard (what?).

In company terms this means that it seeks to occupy a position that is diametrically opposed to that of its competitors, obviating the need for direct confrontation with them (why?). We might say the Aikido principle is a form of differentiation, but a very provocative one.

Doing the exact opposite of what one’s competitors are doing and using their own weapons against them is an age-old concept. In the realm of business one of the first companies to apply the Aikido model was Six Flags, an American corporation that currently operates 21 amusement parks in the USA, Canada and Mexico.

The Aikido pattern is very seductive, but it requires a lot of courage. If you want to use your competitors’ strengths to turn the business upside down, you really need to think outside the box.

Do we have a lead customer who will follow us into the fray if we adopt the Aikido pattern? Is this lead customer representative of the target market or so visionary that others are unlikely to follow suit? Can we overcome all the obstacles we meet in order to change the rules of the game?

Auction

The Auction business model is based on participative pricing: in other words the price of a product is not determined by the vendor alone, but buyers actively influence the final price of the goods or services.

From the point of view of buyers the chief advantage here is that they never have to spend more than they can afford or are willing to pay (what?). The advantage for the vendor is that products can be allocated more efficiently across the market (why?). Auctions are age-old business models. Around 500 BCE in Ancient Babylon women were auctioned off to their future husbands.

Side by side with eBay the Auction pattern has been applied in other innovative ways to business models in recent years. Priceline, founded in 1997, is a well-known and very successful reverse auction house that focuses on travel-related services.

The Auction business model has also been used in the brokerage of intellectual-property-based transactions.

Barter

The term ‘barter’ describes a business model in which products or services are exchanged between people or organisations for products or services in kind. While similar to sponsorship, as a business model Barter goes beyond the mere promotion and financial support of third parties, to take on a form of marketing. Barter can also serve as a useful tool to boost a brand by introducing more new potential customers to certain products (why?).

The roots of Barter go back to antiquity. In Ancient Rome it was not unusual to foster culture and community with non-financial incentives.

Fast-moving consumer goods giant Procter & Gamble (P& G), based in Ohio, is probably one of the most well-known innovators of the Barter business model. In 1972, under a Barter agreement, PepsiCo offered its Pepsi-Cola drink to the Soviet Union in return for exportation rights of Stolichnaya vodka to America, for which they were granted exclusive sales rights on the American market.

This pattern is full of potential for businesses with complementary partners. Partners can include not only suppliers or customers, but also competitors, and they do not have to be doing business with one other already.

Cash Machine

The Cash Machine pattern involves running a business with a negative cash conversion cycle. As will be seen from the formula below, the cash conversion cycle is the time-span between the spending and collection of cash by a company. It defines the average storage time of inventory, including raw materials, work-in-process, finished products and delayed payment terms by customers and suppliers. In order to run a negative cash conversion cycle, a business must generate revenue faster than it has to pay its suppliers for purchased goods.

The pattern generates additional liquidity that can be used for various purposes such as settling debts or making new investments (why?). This allows the company to lower its interest payments or speed up growth (why?). The two important levers one needs to be aware of when aiming to achieve a negative cash conversion cycle are, first, to ensure that the business obtains generous payment terms of goods with suppliers and, second, to make sure that customers pay promptly (how?). A build-to-order strategy or a very short stock turnover time can help a business to realise a negative cash conversion cycle by keeping the time goods are kept in inventory as short as possible (how?).

The Cash Machine pattern has actually been around for quite some time: bankers have employed it in the form of the cheque, which is simply a document ordering the payment of money to a named person from a bank account.

Online retailer Amazon also uses the Cash Machine pattern very intelligently. Amazon typically achieves a negative cash conversion cycle for 14 days.

You may want to combine the Cash Machine pattern with the Subscription pattern since customers pay up-front, but receive products and services later on.

Cross-selling

Cross-selling involves offering complementary products and services beyond a company’s basic product and service range, with the aim of exploiting existing customer relationships to sell more goods. Cross-selling also offers an opportunity to leverage existing resources and competencies such as sales and marketing (how? why?). For customers, the primary benefit of Cross-selling lies in deriving more value from a single source, thus saving on the cost of searching for additional products (what?). A further important advantage of the Cross-selling pattern is the sense of security it instils: customers who already have a good relationship with a business will not feel they’re taking a risk trusting it again, something that cannot be said for new businesses (what?).

Cross-selling was already used by merchants in the ancient Middle Eastern bazaars. Legend has it that the practice started when a clever Kentucky Fried Chicken (KFC) franchisee opened a KFC restaurant in a Shell petrol station. Soon customers were refuelling not only their cars but also their bodies, sparking the idea of Cross-selling at Shell.

This pattern holds great potential in situations where a simple, low-margin product or service addressing a basic need can be combined with high-margin products. The pattern also finds application in the B2B sector, where highly specialised products can be bundled with other products or services.

Crowdfunding

The Crowdfunding business model involves outsourcing the financing of a project to the general public. Its intention is to limit the influence of professional investors (how?). It starts with announcements designed to raise awareness of projects looking for potential backers (how?). In return for supporting a project, backers receive some sort of project-specific reward: this may be the finished product itself developed by the project (for example, a CD or DVD) or additional special benefits such as bonus material (how?). For project creators, Crowdfunding offers a unique opportunity to broaden their circle of investors and thus increase their chances of obtaining advantageous financing conditions for their project (why?). The fact of announcing the project in advance also serves as free advertising for its creator, and may have a positive effect on the subsequent success of the product (why?).

The practice of Crowdfunding as a business model can be traced back to ancient times. Back then, funds were collected from the public to erect temples and other buildings.

Independent film production company Cassava Films was the first to employ Crowdfunding on the Internet to (partially) finance a film.

This pattern appeals intuitively to both companies and individuals. First and foremost, Crowdfunding provides access to crucial zero-interest financial resources. You should use Crowdfunding if you have an appealing idea that you believe is supported by a lot of people who will be willing to put their money where their mouth is.

Crowdsourcing

Crowdsourcing is the technique of outsourcing specific tasks to external actors, who typically learn about assignments by way of an open call (how?). The aim of Crowdsourcing is to extend the company’s sources of innovation and knowledge, and open up possibilities to develop cheaper and more effective solutions (why?). Crowdsourcing is also eminently suited to discovering more about customer wishes and preferences for future products (why?).

Although the term ‘crowdsourcing’ itself was not coined until 2006 by Jeff Howe of Wired, this business model has in fact been around for quite a long time. A historical case of Crowdsourcing can be found in the British ‘Longitude Act’ of 1714, whereby the government offered a reward of £ 20,000 to anyone who could find a practical method of determining a ship’s exact longitude.

Any company can implement Crowdsourcing in its ideation phase. However, our experience has shown us that Crowdsourcing does not work for very unimaginative companies

The market for Crowdsourcing platform providers appears limitless – ever more providers are opening up shop to serve very specific fields. At the same time few providers are able to stay competitive over time.

Customer Loyalty

In the Customer Loyalty model, customers are retained and loyalty is achieved by providing value over and above the basic products or services (e.g. through incentive-based programmes).

Today a card-based loyalty programme is generally the principal means of maintaining customer loyalty. Goods offered at discounted prices to loyal customers are designed to entice them to return to the store frequently (what?). Offering such a loyalty programme enables a company to profit from sales that it would not otherwise have been able to make (why?). The fulfilment of rewards can serve as a new source of income. Such rewards also act as an incentive for customers to make additional purchases, given that the rewards generally cover only part of the price of new products or services (why?). Another useful aspect of this pattern is its ability to generate important customer data for the business. Opening up further vast opportunities for analyses that can be applied to optimise future offerings (why?), increase the effectiveness of advertising and generate additional sales.

The Customer Loyalty pattern is over 200 years old. Towards the end of the eighteenth century, traders in the US started giving tokens to their customers, who could collect and subsequently exchange these tokens against additional products.

The American company Sperry & Hutchinson was one of the first to provide a third-party loyalty programme in the form of Green Shield Stamps.

This pattern works well in a plethora of situations. In fact, Customer Loyalty has become something of a necessity; customer-centric cultures are instrumental for the long-term success of companies.

Could we as a company interact with our fans the way sports clubs do?

Digitisation

The Digitisation business model – sometimes called Digitalisation – consists of transforming an existing product or service into a digital variant, thus providing advantages such as the elimination of intermediaries, reduced overheads and more streamlined distribution.

Digitisation not only allows an existing business to be ‘reproduced’ online and some of the business processes and functions relocated to the Internet (how?), but can also lead to the creation of entirely new offerings. Contents that could not have been produced in their present form before the advent of the Internet, are now offered to customers with a moderate amount of effort (what?).

Being heavily reliant on modern computers and communication technologies, the Digitisation business pattern still is a relatively recent phenomenon.

Digitisation is a very promising business model pattern that we will see more of in the near future. Internet businesses will be hard-pressed to avoid Digitisation, but it is also relevant for many other players: with the advent of the Internet of Things (IoT) where physical products are becoming intelligent and networked, Digitisation is becoming important for manufacturers too.

Direct Selling

In the Direct Selling business model, a company’s products are made available directly by the manufacturer or service provider, rather than via an intermediary channel such as retail outlets (how?).

This enables the company to eliminate retail profit margins and other costs. Savings can be passed on to the customer (why?). The pattern also facilitates a more personal sales experience with customers and helps the company to better understand their needs, propelling new ideas for improving products and services (what?). Direct Selling allows the company to keep more accurate control of sales information and to safely maintain a uniform and consistent distribution model (how? why?). Customers for their part experience the distinct advantage of receiving better service promptly from the company, an important point when the products in question require extensive explanations (what?).

It goes without saying that Direct Selling is one of the oldest forms of distribution. In the Middle Ages craftsmen and farmers used Direct Selling almost exclusively to hawk their wares at market and wayside stalls.

E-commerce

Within the E-commerce business model, traditional products or services are delivered via online channels, thus removing overheads associated with running a physical branch infrastructure.

According to Vladimir Zwass, editor-in-chief of the International Journal of Electronic Commerce, E-commerce is ‘sharing business information, maintaining business relationships, and conducting business transactions by means of telecommunications networks. Aside from the immediate sale of goods and services, E-commerce also includes customer service and support (what? how?). There is no problem with offering a larger selection of goods without overwhelming customers, since they can easily search, filter and navigate the product range online (what?). Customers receive individualised advertisements and recommendations, and the company is able to reach many more customers – the Internet’s reach is truly global – with minimal additional cost (why?). E-commerce can also act as a complementary sales channel through which the inherent benefits of digitised products can be exploited (how?).

E-commerce has now been around for over 60 years, in particular since the electronic transmission of messages during the Berlin Airlift of 1948– 49.

One company that has perfected the E-commerce business model is Amazon.

Just like Digitisation, E-commerce is brimming with potential. It has redefined shopping, for almost any B2C transaction can now be conducted online. In professional B2B settings, E-commerce has contributed to improving cost efficiency and reducing transaction costs.

Experience Selling

In the Experience Selling model, the value of a product or service is increased by an additional experience offered with it.

Providing customers with an encompassing experience rather than just product functionality (what?). The successful sale of experiences makes customers more loyal and willing to buy more at a higher price, given that the related experiences are included (why?). Experience Selling requires managing all activities affecting customers’ experiences in concert: these will include promotions, retail design, sales personnel, product functionality, availability and packaging (how?). It is also important that customers obtain the same experience regardless of which branch of the business they deal with (how?).

The Experience Selling pattern was described in detail by Pine and Gilmore in their 1998 book The Experience Economy. The German sociologist Gerhard Schulze left his mark on Experience Selling theory when he coined the term Erlebnisgesellschaft (‘ thrill-seeking society’) in 1992, and later Rolf Jensen contributed to the subject speaking on the ‘dream society’.

The retail industry has done exceptionally well with Experience Selling. Retailers no longer sell products; they are in a tug-of-war to win the hearts of customers. Experience Selling presents a major step towards achieving just that.

How will we get everyone in our company on the Experience Selling bandwagon? How do we clearly define the experience our product offers?

Flat Rate

With this business model, customers purchase a service or a product for a lump sum and then use it as much as they wish. The main advantage for them is unlimited consumption with full control of their costs (what?). It remains financially sound for the business, if customers who exceed the normal rates of use are balanced out by those who use the service only sparingly (why?).

Buckaroo Buffet, originating among the casinos of Las Vegas, was the name of the first restaurant to make use of the ‘all you can eat’ concept.

Switzerland’s national railway company Swiss Federal Railways (SBB) introduced an annual season ticket based on the Flat Rate concept in 1898, which is still operative over a century later.

Netflix, founded in 1999 as the first on-demand Internet streaming media provider, also serves as an important Flat Rate business model innovation.

Fractional Ownership

In the case of Fractional Ownership, customers purchase only a part of an asset rather than its entirety. Since customers have to come up with only a fraction of the full price. This gives them the possibility of purchasing products or services that they otherwise might not be able to afford (what?). Typically, a company will oversee the maintenance of the asset as well as the rules and regulations governing the association (how?). Such a company profits from Fractional Ownership, given that dividing the total price of an object into smaller shares enables it to reach a wider circle of potential customers and the total sums received are larger than Direct Selling would have brought in (who? why?). Another important advantage of Fractional Ownership is the more efficient use of assets when shared by several customers rather than owned by just one (what?).

The origins of Fractional Ownership trace back to communist ideology and the practice of collective farming in early twentieth-century Russia. One of the pioneering companies to bring this business model into the private sector was NetJets, which established fractional ownership of aircraft in the 1960s.

Car sharing is another application of the Fractional Ownership concept.

A number of models of Fractional Ownership have been implemented in the manufacturing industry. Shared investments are starting to become popular in cases where economies of scale are effective and the market is not very large or is highly specialised, but seldom-used machines nevertheless have to be bought.

Fractional Ownership works very well in industries where customers are willing to share assets.

Can we devise an appropriate sharing scheme that minimises the risks for customers when sharing assets? Have we included simple and robust exit clauses for those customers who wish to sell their ownership shares?

Franchising

In Franchising, franchisors sell the right to use their business model to franchisees. The system permits a company to expand its business geographically very quickly without having to muster all the resources itself or carry all the risk (how? why?). Franchisees benefit by getting access to a proven business model with all its performance and differentiating features (products, trademarks, equipment, processes) (what?). The entrepreneurial risk involved is much smaller than that of independently developing a novel business idea (what?). Franchisees can take advantage of the franchisor’s expertise, which may include professional development, in-depth process knowledge, and brand spill-overs (what? how?).

Franchising was originally developed in mediaeval France, where it was used primarily by kings to allow third parties to produce specific goods in their name.

The Singer Corporation, founded in 1851, is an American manufacturer and distributor of sewing machines, one of the first companies to be associated with the Franchising concept.

Fast food giant McDonald’s reached worldwide fame through Franchising with its Self-service restaurant chain.

Widely popular in the food and beverage industry, Franchising is applied by a slew of well-known restaurant chains including Subway, Pizza Hut, and KFC.

The hotel industry also employs Franchising. One of the first companies to do so was Marriott International, founded in 1993.

You should consider the Franchising pattern if you have already built-up important assets such as knowledge or brand strength and want to leverage these to grow fast with limited risk.

Are our competencies and assets attractive enough to persuade potential franchisees to play by our rules? Are we able to legally and/ or technically protect our codified knowledge to safeguard against imitation?

Freemium

The term ‘freemium’ is coined from a combination of ‘free’ and ‘premium’. As this suggests, the business model involves offering a basic version of the product or service free of charge, while the premium version is made available against additional payment (what?). The free version of the product is intended to permit the company to establish a large initial customer base, from which it is hoped that enough customers will want to make the jump to the premium version later (why?).

A key performance indicator for this pattern is the so-called conversion rate, which measures the ratio of paying to non-paying customers.

The cost of offering the basic product should be very low, ideally zero. In many cases this is the only way to ensure that ‘free’ users are supported and that the business model is likely to be profitable for the company (why?).

Venture capitalist Fred Wilson was the first to describe the Freemium business model back in 2006.

The Internet and the digitisation of services are the main drivers that have enabled the development of this business model.

This pattern is popular with Internet-based businesses with marginal production costs approaching zero and the benefit of external network effects.

The pattern works even better when coupled with a strong customer focus.

From Push to Pull

The From Push to Pull pattern focuses on the ‘customer is king’ paradigm, making it central to all decisions within the enterprise, be they related to research and innovation, new product development, production, logistics or distribution (what? how?). If a company wants to switch from ‘pushing’ a value proposition on its customers and employ a ‘pull’ strategy instead, it needs to have a flexible and responsive value chain (how?). From Push to Pull obliges a change in perspective towards producing only what customers want in as efficient a manner as possible. A pull strategy can be applied to all other aspects of the business, for example, to product development processes (how?).

The terms ‘push’ and ‘pull’ originated in logistics and supply chain management. Toyota has become synonymous with the implementation of pull strategies in production and logistics.

Strategies such as just-in-time (JIT) production, minimising of cycle times, reducing inventory by applying Kanban logistics, or total quality management (TQM) were central to customer-oriented manufacturing.

In the fashion industry, the From Push to Pull model has been embraced by Spanish apparel and accessory retailer Zara.

From Push to Pull aims to challenge your entire value chain. It will help you eliminate waste. You can use such a customer-centric approach regardless of the industry you are in.

Guaranteed Availability

The essential aim of the Guaranteed Availability business pattern, whose meaning speaks for itself, is to reduce the costs incurred by the breakdown of technical machines or equipment by ensuring almost zero downtime (what?).

Its implementation generally involves a Flat Rate contract entitling customers to all the services necessary to guarantee constant product availability. In addition to providing replacement equipment and machines, this generally also involves the provision of repair and maintenance services (how?). Because customers value such steady availability, businesses typically build up strong long-term relationships with their customers (why?).

In the private economy the Guaranteed Availability model has gained popularity through fleet management concepts: that is to say, the planning, administration, and control of fleets of trucks, cars, ships or trains.

If you are in an industry where availability is crucial you may want to make use of this business model pattern. The B2B context is particularly conducive to Guaranteed Availability.

Hidden Revenue

In the Hidden Revenue business pattern, the logic that a business has to rely exclusively on the sale of products or services is abandoned. Instead, the primary source of revenue is derived from a third party, who cross-finances the attractive free or low-priced offerings made to customers (what? how? why?).

A common application of this model is to integrate advertisements into the offering, thereby attracting customers to the advertisers who fund it (who?). The chief advantage of working with the Hidden Revenue pattern is that it accesses an alternative source of income that can supplement or even wholly replace the revenues generated by the conventional sale of products (what? why?). Normally many customers will be willing to watch a few ads if this means that they get a better deal on your goods or services (what?).

While it appears that the ancient Egyptians already resorted to advertising, the practice of using ad sales as a main source of revenue is a more recent development. The first instances of ad-based funding can probably be traced back to the bulletins that began to be distributed early in the seventeenth century with the development of the printing press.

Another type of innovation based on Hidden Revenue is free daily newspapers.

‘Targeted advertising’ is a special version of Hidden Revenue adapted to the Internet.

This pattern’s potential was systematically overvalued throughout the early years of the new economy: countless companies were valued highly but failed to generate any real revenues.

Ingredient Branding

Ingredient Branding refers to branding a product that can only be bought as an ingredient of another product, that is to say, the ingredient product cannot be bought individually.

The brand awareness created by Ingredient Branding reduces the possibility of substituting products by others and gives the company more bargaining power in its dealings with the manufacturer of the end product (how?). Ingredient Branding results in a win– win scenario where the positive attributes of the ingredient product are transferred to the end product and increase its desirability in the eyes of consumers (what?).

Managers have been using Ingredient Branding since the mid-twentieth century.

Products that enjoy high brand awareness among customers and are of high quality can benefit from Ingredient Branding.

Integrator

In the Integrator business model, a company controls most or all parts of the supply chain (how?). This approach obviates delays through dependence on third-party suppliers, with a consequent decrease in costs (how?). The firm should be able to reduce transaction costs by tailoring the value chain to the industry’s needs and processes (why?). The company will benefit from both more efficient value creation (e.g. through shorter transportation times or better coordination of intermediate products) and faster reaction times to market changes (how? why?). The downside to integration is that the company cannot capitalise on specialisation, which could be effected by outsourcing specific tasks to specialised suppliers (how?).

The Integrator pattern came into being during industrialisation in the early nineteenth century and the founding of the first large international companies.

US-based Carnegie Steel, founded by Andrew Carnegie in 1870, was an early pioneer of the Integrator model.

The Integrator model has spread to other industries too. Notable examples can be found in the oil industry where most companies own not only oilfields and drilling rigs, but also refineries and even petrol stations.

This pattern implies focusing on the downstream value chain. Integration offers two specific advantages: higher margins and a better understanding of the entire value chain.

Do the advantages of integration exceed the downsides associated with a lesser degree of specialisation?

Layer Player

A company applying the Layer Player pattern usually focuses on one or just a few activities within a value chain (how?). Such a company serves a number of market segments of several industries (what?). Its typical customer will be an Orchestrator, who outsources the majority of value chain activities to specialised service providers.

As a layer player the company benefits from its ability to specialise both in terms of efficiency gains and multiplying know-how and intellectual property rights. As such, it is often able to influence and develop standards within its specific field to its own advantage (how?).

In the Layer Player business model, the focus is on one specific step of the industry value chain, exploiting economies of scale and the benefits of superior expertise and capabilities.

In the course of the 1970s, efficiency and cost advantages became increasingly relevant for companies in many industries.

Luxembourg-based Dennemeyer. As a layer player, Dennemeyer focuses on providing complete coverage within the domain of intellectual property (IP) management and protection. The company’s services span legal advice, software solutions, consulting services and portfolio management.

Leverage Customer Data

Leveraging customer data is one major area benefiting from present-day technological progress and the possibilities it opens up in the fields of data collection and processing.

This value creation process is at the core of the Leverage Customer Data pattern and focuses on customer data as a profitable resource that needs to be tapped into with the appropriate tools (how? why?). Collected customer data are used to establish people’s profiles. Individual profiles may contain up to a thousand attributes (how?). Leveraging customer data can help to secure a competitive edge, identifying potential savings, carrying out real-time market analyses, generating more effective advertisements and discovering dependences. In short, it serves as an extraordinarily powerful tool to aid decision making (how? why?).

Growing understanding of the value of data began in the 1980s with information management. The business models of online social networks rely wholly on the analysis of user data.

The Leverage Customer Data pattern often works particularly well when combined with Hidden Revenue streams. Customer behaviour and transactions leave digital footprints that can be analysed from different perspectives.

Licensing

The Licensing business model deals with creating intellectual property, which is licensed by third parties. The focus is on the question of commercialising the rights (how?) rather than realising and capitalising on the IP. An important advantage of Licensing is that rights can generally be sold to more than one interested party. Licensing serves as a means to diversify the company’s revenues and risks (why?). Moreover, since the products and services often experience higher and more rapid rates of diffusion, the brand concerned becomes more recognisable and customers are more likely to remain loyal (why?). On the downside, licence fees are usually lower than if the IP were sold outright. On the upside, the products and services are likely to be disseminated much more quickly, leading to more sales (why?). A further advantage of choosing Licensing is that it provides the freedom to focus exclusively on research and development without requiring additional competencies in respect of the production or marketing of concrete applications (how? why?). These tasks are taken on by the purchasers of the rights.

The Licensing concept goes back to the Middle Ages, when the Pope granted licences to local tax collectors so that they could be officially affiliated with the Catholic Church.

One of the best-known companies to use the Licensing business model is probably IBM. IBM generates around US $ 1.1 billion in revenues from Licensing.

This pattern is best applied in knowledge- and technology-intensive contexts. Licensing presents an interesting option to monetise your products and technologies that do not form the core of your business. Rather than abandoning these products and technologies, you can use a Licensing model to create steady revenue streams for your company. However, keep in mind that solid patents are a necessary prerequisite for successful Licensing.

Lock-in

In this business model, customers are ‘locked in’ to a vendor’s world of products and services in such a way that changing to another provider would incur substantial costs or penalties. It should be noted that in this context the term ‘costs’ does not refer to monetary costs alone: the time needed to switch to a new option and learn how to use it may be just as relevant for customers.

The principal concern for the vendor is to prevent any interoperability between himself and the competition to keep customers dependent on the company, brand, or supplier, thus actively strengthening customer loyalty and promoting future repeat purchases (why?). The Lock-in pattern exhibits a number of different variations. Contracts mandating the use of a particular supplier, for example, are a fairly obvious version of the pattern (how?). Another, very common, form, are invested assets that require specific follow-up purchases (how?). Such dependency is frequently established by means of technological restrictions such as compatibility or even patents. The latter may play an essential part in the Lock-in concept (how?). Considerable switching costs can result from required training and classes offered by a specific provider (how?).

The complex technological advancements and increasing use of patents over the past hundred years or so have greatly favoured the rise of Lock-in business models.

‘Keeping existing customers is cheaper than creating new ones.’ This old marketing adage is the basis of the Lock-in pattern.

You can implement Lock-in in three different ways. First, legally, by writing contracts with tough termination clauses; Second, technologically, by creating product or process-based Lock-in effects; Third, economically, by creating strong incentives that make customers think twice before changing their supplier or provider.

Long Tail

The Long Tail business model concentrates on selling small quantities of a very large range of products, in contrast to a ‘blockbuster’ model (what?) offering large quantities of a small range. Although Long Tail offers narrower margins and lower volume sales of individual products, profits are significant over the wide range sold in the long run (why?). With this model, mass and niche products can generate equal shares in revenue, and in some extreme cases niche products can even bring in a larger share of the revenue than mass products (why?). The model enables a company selling niche products to differentiate itself from those offering blockbuster products and to tap into an alternative source of revenue (why?). The Long Tail pattern gives customers the distinct advantage of being able to browse among a much broader, more vibrant range, and increases their chances of finding products that satisfy their individual needs (what?). In order to succeed with the Long Tail model a company needs to be capable of handling distribution costs efficiently. More specifically, the cost of selling a niche product must not be substantially greater than that of selling a blockbuster product (how?).

The Long Tail business model, first described in 2006 by Chris Anderson, editor-in-chief of Wired magazine, benefited enormously from the Internet.

According to some estimates, Amazon generates 40 per cent of its revenue by way of books that are not available from traditional booksellers.

Can our processes and IT systems handle a massive number of products? Can we handle back-end processes such as purchasing, order processing, logistics and IT?

Make More of It

In the Make More of It business model, a company’s know-how or other resources are offered to outside companies in addition to being used in-house.

The know-how and resources are sold to third parties as a service (what? how?). Accumulated specialist knowledge and spare capacities can be monetised (why?) and new expertise built up, all of which can be used to further improve internal processes and revitalise the core business (why?). A company known to be a Make More of It user is likely to be seen by others as an innovation leader, an image that will have a positive long-term effect on sales (why?).

Today, Porsche Engineering sells 70 per cent of its services to companies outside the Volkswagen family.

The Make More of It pattern conceives of core competencies in a much more meaningful way than as a mere outsourcing mantra. You should see your core competencies as a gateway to new market opportunities. Unique, hard to imitate competencies pave the way to new markets.

Mass Customisation

Strictly speaking, the term ‘mass customisation’ is an oxymoron, since it combines the conflicting ideas of ‘mass production’ and ‘customisation’ in a single notion. In the world of business models, Mass Customisation refers to the customisation of products according to customer needs while simultaneously keeping efficiency as high as in traditional mass production (what? why?). This is made possible by standardised modular product architectures (how?). The benefit for customers is to buy bespoke products without having to pay significantly more for them (what?). For businesses, Mass Customisation of services is a means of differentiating themselves from mass-producing competitors (why?). The emotional connection customers form with their products is then projected on to the company as a whole (why?).

PC manufacturer Dell was one of the first companies to harness the potential of these developments.

Mass Customisation is relevant in all industries and can be applied to both products and services. To succeed with this pattern, you must have the necessary back-end systems to cope with the ensuing complexity.

No Frills

No Frills is as simple as this: the usual value propositions are trimmed down to their minimum (what?), with the resulting savings in costs typically being passed on to customers in the form of significantly lower prices (what?). The basic aim is to reach a much larger target audience and ideally even the masses (who?). A prerogative for success, of course, is to consistently adjust all processes to minimise costs, the only sure way to keep prices so low that you can attract a truly wide audience (how?). One effective method of keeping costs low is to standardise the offerings so as to take advantage of economies of scale and fully utilise production capacities (how?). Another is to optimise distribution by introducing Self-service for instance (how?).

Since Ford’s Model T, the No Frills pattern has served as an impetus for innovative business models in many other areas.

Markets with cost-conscious customers are made for the No Frills pattern. Extremely price-sensitive customers will only buy products and services at a price that is suitably low for them.

Open Business

Adoption of the Open Business model often marks a fundamental paradigm shift in a company’s business logic. Openness refers to the inclusion of outside partners into normally closed value creation processes such as research and development (how?). Companies pursuing the Open Business model try to leave profitable niches for potential partners within the model to enable them to engage in independently gainful business activities (why?). The aim of opening up a business in this way is to improve efficiency, gain a share of new markets and/ or secure strategic advantages (how? why?).

Henry Chesbrough (2006) was one of the first researchers to conceive of the Open Business model as an independent pattern as opposed to a closed business model.

ABRIL Moda is a fashion brand that was created using the Open Business model out of 29 small textile companies based in Costa Rica. These companies formed a consortium to unite their efforts to create a single fashion brand under which to market their products.

Opening up your business model and integrating partners into the value creation process is a key element for future growth and competitive advantage. In an increasingly connected world where industries are converging, you will need to open up to stay successful.

Open Source

Open Source denotes that products are developed by a public community rather than a single company (how?).

Open Source products are freely available (what?). This does not, however, rule out the existence of opportunities for income generation with Open Source business models: rather than earning revenues directly from the developed solution, indirect returns can be pocketed through products and services that build on an Open Source foundation (why?). Companies that wish to use this business model enjoy the advantage of not having to invest in the development of new products (why?). Open Source development is free of dependencies on suppliers (what? how?).

Open Source originated in the software industry, first being used by IBM in the 1950s. Over the past few years Open Source has moved beyond the software industry.

Open Source has found wide application in software design. While you relinquish a great deal of control over a given project, you can gain a competitive advantage by setting standards, sharing resources and risks, and creating a community of users to whom you can later sell additional commercial products or services.

Orchestrator

Orchestrator companies focus on their core competencies. Any activities in the value chain that fall outside these areas are outsourced to specialised service providers who possess the necessary skills to carry them out successfully (how?). An important advantage of the Orchestrator pattern is that it gives rise to close cooperation with external partners, whose innovative capacity can benefit one’s own production (how? why?).

The Orchestrator pattern traces back to the 1970s, when growing globalisation and resulting cost pressures

forced more and more companies to outsource parts of their value chains to countries with lower production and labour costs.

To be an Orchestrator you need to know and fully understand your company’s key strengths. This is especially true if you are active in a large number of steps of your value chain. As an Orchestrator you focus all your efforts on those activities you know you excel at and outsource the rest, thereby reducing costs and increasing flexibility.

Pay Per Use

In the Pay Per Use model, the specific usage of a service or product by the customer is metered and charged. It is employed extensively within the consumer media market (television, online services, etc.) and attracts customers wishing to benefit from flexibility.

In the Pay Per Use model customers pay for services based on their effective usage instead of a fixed rate (what?). Depending on the service, they are billed in different ways, for instance based on the number of units used or the duration of use (why?). A considerable advantage for customers is that the origins of the incurred costs are highly transparent (what?). The pattern is also a very fair one, since customers who use a service sparingly pay much less (what?).

Pay Per Use has a long history as a business model. Rentals have seemingly always been charged pro rata.

The Internet of Things is a world of smart networked products which sense and generate data and communicate them for further analysis or intelligent adaptation. The Pay Per Use pattern derives its enormous potential from this new product-founded ability to gather and analyse information.

Pay What You Want

In the Pay What You Want business model, it is the customer who sets the price to be paid for a product or service (what?). The vendor commits to accepting the price offered by the customer, even when it is zero or way below the actual value of the offering. Contrary to what might be thought, customers seldom take advantage of this business model: research has shown that prices paid for Pay What You Want services differ significantly statistically from zero (why?). Customers typically base their prices on the cost of comparable products. They often perceive such pricing schemes as advantageous since they are enabled to control incidental costs (what?). An advantage of the Pay What You Want pattern for the vendor is the likelihood of getting a positive press and thus a marked increase in custom (why?).

Pay What You Want has been around for a long time: a typical example is money given to buskers or a tip to waiters.

Pay What You Want assumes that customers understand the value of a product and will pay an appropriate amount for it.

Some consultants, for instance, allow customers to pay a share of the consulting fee based on their level of satisfaction with services rendered.

Peer to Peer

In business model terms, Peer to Peer normally refers to transactions between private individuals such as lending personal items, offering specific services and products or sharing information and experiences (what?). The organising outfit functions as a sort of intermediary responsible for the safe and efficient handling of transactions (how?), ideally becoming a nexus for community relationships. As time goes by, this function can be monetised, for example by charging transaction fees or indirectly generating revenue through advertising or donations (why?). Customers can make use of private products and services in much the same way as they would use commercial offerings (what?). A company’s success implementing this business model will hinge on whether it is able to establish a trusted image of the various offerings (how?).

The Peer to Peer business model began to develop in the early 1990s. The creation of the Internet was a central driver for this model.

Peer to Peer is most effective in online communities. The principal idea behind this pattern is to increase marginal utility. With every new user, the attractiveness of the network for other users rises.

Performance-based Contracting

Performance-based Contracting implies calculating the price of a product by considering the services it renders rather than its face value. Such services are measured as a precise output quantity for which customers pay the company a specified amount (what? why?). This amount typically includes all pertinent costs such as operation, maintenance and repair expenses, so that customers can more easily control their costs (what?). The manufacturer who distributes the products in question will frequently be strongly integrated into customers’ value creation processes (how?), passing on past experience with the product and building up new expertise with its use (why?). Integrated own-and-operate systems are an extreme variant of this pattern, whereby a company retains ownership of and operates the product another company has bought (how?). The greater financial and operational risk is offset by long-term and more cooperative relationships with customers (why?).

Performance-based Contracting derives from public sector infrastructure policies, which have been applying the concept in public– private partnerships (PPP) since the mid-twentieth century.

This pattern allows you to monetise existing knowledge and services including process knowledge, maintenance know-how and related services. Performance-based Contracting works well if you deal with complex products that also have a challenging application.

Razor and Blade

In the Razor and Blade business model, the basic product is offered at a bargain price below cost or even for free. Additional products that customers need in order to use the basic product, on the other hand, are high-priced and so become responsible for generating most of the revenues (what? why?). The principal idea of the pattern is to win the customer’s loyalty by lowering the barriers for purchasing the basic product (what?). Money will start coming in once the customer purchases complementary products (why?). This business model can be particularly lucrative when accessories are frequently used (why?). Common strategies include patenting the complementary product or building a strong brand (how?).

One of the fathers of the pattern is John D. Rockefeller, who started to sell cheap paraffin lamps in China towards the end of the nineteenth century. Purchasers of the lamps had to buy expensive fuel in order to light them, which Rockefeller manufactured in his Standard Oil Company refineries.

Rent Instead of Buy

The term ‘rent instead of buy’ speaks for itself. The chief advantage for the customers is not having to come up with the initial acquisition costs of a straight purchase, permitting them to get products that they might not be able to afford otherwise (what?). Renting avoids locking up capital for long periods of time, leaving customers with more financial leeway (what?). An important prerequisite for offering the Rent Instead of Buy option is the ability to finance the products in question in advance, as revenues will only come in at a future date (why?).

Rent Instead of Buy is an old business model. There is evidence to suggest that Romans rented out livestock as early as 450 BC.

One noteworthy pioneer of the system is Joe Saunders: he began by lending his Ford Model T to business people in 1916, using the ten cents he earned per mile driven to maintain the car.

This pattern is widely applicable. If you offer products or services at a fixed price, you can also think about renting them out instead.

Revenue Sharing

The Revenue Sharing business model refers to individuals, groups or companies working together and sharing resulting revenues (what? why?). This model is often associated with affiliate schemes commonly found on the Internet

Revenue Sharing can assist in building strategic partnerships that broaden a company’s customer base and consequently increase its income and strengthen its competitiveness. They may also serve as a means to lower distribution costs and share risks with the other stakeholders (why?).

Evidence of Revenue Sharing can be found as early as Venice’s commercial expansion around 810 bce. Two partners formed a so-called commenda contract to cooperate in selling goods. The two parties usually comprised a merchant domiciled in Venice who acted as creditor and a travelling merchant who transported goods between ports.

As value chains have become more fragmented, open and interdependent, the importance of the Revenue Sharing pattern has increased.

Can we implement simple processes and mechanisms to share financial revenue comfortably?

Reverse Engineering

In the Reverse Engineering business model, an existing technology or competitor’s product is analysed and the information obtained is used to develop a similar or compatible product (how?). Since this requires little investment in research and development, the products can be offered at a lower price than their market equivalents (why?). Because such imitations might infringe the original inventors’ and developers’ intellectual property rights, it is paramount to have a full grasp of patents and licences in order to be sure of staying within the bounds of the law and avoiding time-consuming and costly litigation (how?).

Reverse Engineering was primarily used in military contexts and, in the narrower sense of the term, applied for the first time during the First and Second World Wars.

Companies in the automotive, pharmaceutical and software industries make frequent use of this pattern. Reverse Engineering’s appeal and numerous benefits are often surprisingly intuitive. Some of these include cutting costs and reducing the time required for R& D activities, acquiring knowledge and know-how for products that have already been proven on the market, and recreating products whose manufacturers or documentation no longer exist.

Reverse Innovation

In the case of the Reverse Innovation business model, goods are first produced for the developing world, before being repackaged and resold at low cost to industrialised countries (how?). Doing business in such a tricky environment often gives rise to entirely new solutions to problems, which can be very valuable for customers in more developed markets (what?). Reverse innovation turns this concept back to front: new products are developed at locations in emerging economies or lower-income countries and then commercialised globally in developed markets (how?).

The genesis of Reverse Innovation is found in the 1990s, when many former low-income countries like India or China were turning into increasingly attractive markets.

The US-based multinational conglomerate General Electric is widely considered to have pioneered Reverse Innovation. In 2007 the company developed a portable electrocardiography (ECG) device for the Indian and Chinese markets which could be connected to a standard laptop computer and cost just about one-tenth of the price of a conventional ultrasound machine.

Reverse Innovation is a comparatively new strategy. If you have substantial R& D or innovation capabilities and are located in an emerging country such as China or India, then this pattern may be of interest to you.

Robin Hood

It would be difficult to find a more evocative title for the Robin Hood business model, whereby a product or service is sold to ‘the rich’ at a much higher price than to ‘the poor’. The bulk of the profits are generated by the rich customer base.

A primary goal is to offer access to products and services that the disadvantaged could not afford (what?). The disadvantaged benefit from this support and the well-off can have a clear conscience (what?). Becoming a Robin Hood practitioner helps a company to bolster its image (why?).

While the tales of Robin Hood have been around since the Middle Ages, the business model didn’t come into being until somewhere around the 1970s. A central driver for its development was companies’ increasing sense of social responsibility, known as ‘corporate social responsibility’.

The Robin Hood pattern works well if you serve a core market with strong and solid customers and could feasibly allocate some of your resources to providing your products or a modified version of them to lower-income customers.

Robin Hood allows you to build strong and lasting relationships with lower-income customers right now. These relationships are likely to be a significant source of competitive advantage in the future, when the same customers become part of the global consumer class.

Self-service

In the Self-service model, a part of value creation of a product or service is handed over to the customer in exchange for a lower price (how?). This is particularly suited to processes that generate high costs but add relatively low perceived value for the customer. In addition to lower prices, customers typically find that Self-service saves them time as well (what?). A Self-service business has a large savings potential and customer labour can often replace a significant number of staff positions (why?).

The Self-service business model originated in the United States, where it led to the establishment of Self-service stores at the beginning of the twentieth century.

The Self-service pattern is good for customers who are willing to take on some additional work in exchange for lower prices.

In order to successfully implement Self-service, you must analyse the potential of the pattern from your customers’ point of view.

Shop in Shop

The Shop in Shop business model refers to the practice of retailers or service providers establishing an independent store in another company’s retail space (how?). Setting up a Shop in Shop sometimes gives access to a prime site that may otherwise be difficult or impossible to come by (why?). The host company’s regulars also serve as target customers for the integrated business, and there are a number of advantages for the company that rents out its space: customers may become more loyal as a result of the added value presented by the extra products and services on offer (what?); it can generate revenues from rental income and save on the choice and presentation of certain product lines since these tasks will be taken over by the integrated business (what? how?).

This business model dates back all the way to Ancient Rome, where a variety of businesses were located and grouped together at Trajan’s Market.

You may consider the Shop in Shop pattern if you use distributors or intermediaries to sell your products. The pattern allows you to enhance your customers’ brand awareness, given that they can engage with your company more directly.

Solution Provider

A Solution Provider offers total coverage of products and services in a particular domain, consolidated into a single source (what?).

The goal is to offer the customers an all-inclusive package that takes care of their tasks and problems in a certain area. The model is particularly applicable for customers wishing to outsource a complete area of expertise, for example to an Internet Service Provider (ISP) for web services or to a transportation company for international delivery tasks. A major advantage for a Solution Provider is the possibility of building increasingly close relationships with customers (why?).

Theoretically, the Solution Provider concept can be applied in any area imaginable, but in fact it originated in the mechanical engineering industry.

If your customers believe that your products and services can and should be expanded, you may want to become a Solution Provider. A typical area in which you can apply this concept is that of after-sales services.

Subscription

Subscription allows customers to receive products or services regularly. The business enters into a contract with its customers, defining the frequency and length of service provision. Customers either pay for the services in advance or at regular intervals, typically on a monthly or an annual basis (why?). A further advantage is that the price of a subscription frequently works out lower than purchasing the same product or service several times (what?). Many firms offer their customers a discount when they take a subscription, since this constitutes a pledge to purchase its products or services repeatedly, signifying foreseeable returns for the business (why?).

German booksellers were the first to introduce the Subscription model in the seventeenth century.

Switzerland-based Blacksocks has also discovered the potential of Subscription, using the byline Sockscription: There is no easier way to deal with your sock sorrows. Customers receive between three to six new pairs of socks at specified intervals each year in return for regular payments. Other garments such as underwear and shirts can be ordered in the same way. The company was founded in 1999 and has been doing very well with its business model.

This pattern is ideal when customers need your product or service on a regular basis. A subscription should provide your customers with some additional value such as less time required to purchase your products, continued availability, or less risk when buying your offerings.

Supermarket

In the Supermarket business model, a company sells a variety of readily available products and accessories all under one roof (what?). The consciously wide range of products made available satisfies most customers’ desires and generates considerable demand (why?). Prices are generally kept low to draw customers, while economies of scope yield advantages to the company in terms of efficiency and product diversification (how? why?). Supermarkets are popular because customers typically like to be able to get everything they want or need under one roof (what?).

Supermarkets were first developed for the retailing industry. Michael J. Cullen, the founder of King Kullen, the world’s first true Supermarket,

Merrill Lynch introduced the ‘financial supermarket’. Within its umbrella company, it offers a wide range of investment products and services for private and corporate customers.

This pattern can be applied in all situations where economies of scale and scope come into play.

Target the Poor

Target the Poor specifically addresses people in the lowest-income countries at the base of the pyramid (who?) who would benefit from access to affordable products and services. Despite their relatively low purchasing power, these customers offer enormous sales potential, given that over half the world’s population belongs to this customer group (why?). A business model will normally have to be considerably modified in order to be able to reach this less well-off population (what?). Entirely new distribution and logistics concepts are also likely to be necessary (how?)

The Target the Poor pattern developed mainly during the 1990s. Strong economic growth in China, India, Latin America and elsewhere led to a rapid increase in demand in those markets.

The Target the Poor pattern aims to address the growing number of lower-income customers. The ‘base of the pyramid’ is interesting because it is a large market that provides opportunities for sustainable business development.

Trash to Cash

The Trash to Cash pattern builds on the idea of recycling and reusing old materials. Used products are collected and either sold in other parts of the world or transformed into new products. The profit scheme is based on the low or zero purchase price, so that resource costs for a company adopting this model are usually eliminated (how?). Customers receive refined products that leave a lasting impression that can be bought with a good conscience (what?). With all this, Trash to Cash results in a win– win situation for both the supplier and the manufacturer: the former’s waste disposal services are catered for at reduced or zero cost (how?), and the latter gets cheap resources or materials with which to make his products (why?). An added benefit of selling processed rubbish and by-products is an image of being environmentally friendly (what?).

In principle, Trash to Cash is not a new concept since it borrows heavily from traditional raw material and scrap metal merchants. Indeed, the origins of this business model have been traced all the way back to Ancient Greece,

This pattern taps into the concept of sustainability. The ‘trash’ in the business model refers to resources that are regarded as waste in one value chain, but are reused in another value chain.

Two-sided Market

Two-sided Markets facilitate interaction between two complementary groups for mutual benefit via an intermediary or a platform. For example, recruitment websites link jobseekers and recruiters, while a search engine attracts both users and advertisers (who?). Central to the concept are so-called indirect network effects: the more people from one group use the platform, the more attractive it becomes to people in the other group. This works in both directions (what?). It is also possible to target three or more customer groups: we then speak of a multi-sided market. Not all participants necessarily pay for involvement: in the case of search engines, for example, they are free for users to browse, but advertisers pay to be included on the website (why?).

Before a Two-sided Market can work, the chicken or the egg problem needs to be resolved. So long as there are no customers using the platform, neither group has an incentive to join it. Thus the situation calls for achieving speedy visibility of the platform by means of far-reaching ad campaigns and special offers (what? how?).

Two-sided Markets have been around for a long time. Stock exchanges were one of the first applications of the concept more than 600 years ago.

The Two-sided Market pattern is extremely versatile and has been used in a number of business model innovations, for instance in the credit card business: credit card companies bring together credit card owners on the one hand and retailers and businesses that accept the cards on the other.

A multi-sided business model that connects various parties is practically imperative for all companies. Traditional one-on-one models no longer suffice to compete in the market successfully.

Ultimate Luxury

The Ultimate Luxury pattern focuses on customers in the very top financial bracket (who?). Uniqueness and self-actualisation are values that appeal to these buyers (why?). The focus lies on branding, employment of competent and knowledgeable sales representatives to promote goods and services, and frequent memorable special events for customers (how? what?).

Ultimate Luxury actually dates back to antiquity.

The super-rich are the modern version of royalty – while they might not have a kingdom, they do have similar needs and desires.

You may be tempted to increase your prices. However, bear in mind that the market for luxury goods is a very small one.

User Design

In the User Design business model customers act as both designers and consumers (who?). The company supports its customers in their undertakings and benefits from their creativity, while customers benefit by realising their entrepreneurial ideas without having to create any infrastructure (what?). The key advantage of User Design is that a company does not have to invest in developing its own products, provided it can succeed in helping customers tap into their creativity (how?).

User Design is a fairly recent phenomenon. It has been around for only a few years and was primarily made possible by new job production techniques such as 3D printing, CNC milling, or laser cutting. These technologies now make it possible to produce products in very small batches at acceptable unit costs – a common feature of user-designed products.

Over the past few years the practice of User Design has spread way beyond the world of fashion. User Design is especially promising in industries with comparatively simple products that appeal to customers on account of their design.

User Design will provide you with access to new and innovative designs.

White Label

White Label goods are not given a specific name after being manufactured, but are sold by different companies under different names and in different market segments (what?). Producers of White Label goods bear only the product manufacturing costs: this is a significant advantage of this business model. White labels can also be used to sell a section of a company’s products under a different brand name. This is commonplace in the food industry, where products may be manufactured at one facility, packaged in various ways, and sold by retailers under different names (how? what?).

Revenues generated with the sale of no-name goods can supplement those from branded products.

Taiwanese technology company Foxconn is perhaps the biggest and most important White Label innovator, as it manufactures many electronic devices and components for well-known brands.

You may choose to opt for a White Label strategy if your customers are very price sensitive and you already have a firmly established brand.

To start with, you will most likely want to introduce a limited number of White Label products.

Finished reading? Let’s implement!

The future race for comparative competitive advantages has shifted from pure products and services to business models. Firms need to get ready for that race. Identifying opportunities is not enough; innovators and entrepreneurs have to capture opportunities and start moving. Knowing the past helps in creating the future.

10 recommendations to innovate your business model

10 recommendations to innovate your business model:

• Get top management support – business model innovation is not a walk in the park.
• Set up a diverse team – new business models shouldn’t be developed in silos.
• Be prepared for change and be open to learn from others. Keep in mind: the future is already here: it is just unequally distributed.
• Challenge the dominant logic of your firm and of your industry by using the 55 business model patterns.
• Create a culture of openness – there should be no sacred cows in the room.
• Use an iterative approach with many loops. Verify assumptions.
• Don’t overcalculate the business cases – typically they are totally wrong in the early stages.
• Limit risks by prototyping: a picture is worth 1,000 words, a prototype 1,000 pictures.
• Give your new business model the necessary context to grow successfully.
• Actively manage the change process.