In the modern sense, innovation means innovative, breakthrough, state-of-the art ideas. However, in economics, innovation can be called not any innovation, but only one that qualitatively increases the efficiency of the current system. The leader under whom the innovative business model is being developed must clearly understand the following:
- the results of the creation of an innovative business model include new types of activities, new activities or changes in the part of ongoing activities;
- business models rarely change within the same organization;
- innovation, insularity, complementarity, and efficiency are the main value drivers.
Let’s take a closer look at value drivers. Innovation describes the degree of novelty of the business model applied in the company’s activities. Social withdrawal implies the creation of barriers and/or incentives for participants in the business model to keep their activities within the system. So the manufacturer obliges the consumer to use original consumables when operating his equipment, which increases the company’s profit. For example, a customer who buys a Nespresso coffee machine must use coffee capsules from the same company.
Complementarity is based on the effect of increasing value due to the interdependence of the activities carried out within the business modeling. For example, eBay provides an online platform for transactions between users. EBay users can use the PayPal payment system. Without the ability to use this system, users without access to bank cards would not be able to buy and sell on eBay.
Efficiency can be attributed to the saving of resources due to interconnections in the system activities. For example, the WallMart system supports a low price strategy. One of the most important elements of this system is logistics. WallMart has developed the concept of crossdocking – the process of receiving and shipping goods directly through the warehouse, without placing them in a long-term storage area. These and a number of other WalMart-developed measures of business model examples significantly reduce costs, thereby creating a competitive advantage.
An innovative business model is important for entrepreneurs, managers and scientists for the following reasons:
- it often contains a source of future value;
- it is much more difficult for competitors to copy an entire system than a specific product or process. In addition, innovation model has a potential productivity advantage;
- since an innovative business modeling is a potent competitive tool, management must be prepared for a possible increase in competition in the industry. But the threat may also come from another industry.
There was conducted a study that showed that in today’s world, in which all processes are interconnected and resources are very limited, entrepreneurs and managers need not to get hung up on the familiar, but to focus on development by adopting innovative business models. The creation of an innovative business model can be carried out in several ways – by adding new types of activity by working in new directions or by changing one or more components of one or another existing activity. To do this, first of all, you need to answer the following questions:
- What customer’s needs will be met by the new business model?
- What new activities will help meet these needs? (content of the innovative business model)
- How can actions be connected in a new way? (structure of the innovative business model)
- Who should carry out any activity that is part of the business model? Will it be a company? Partner? Client? What new governance mechanisms can be included in the new structure? (management of an innovative business model)
- How will value be created for each of the participants?
- How does the revenue model align with the company’s business model in terms of the total value it helps create?
Answers to these questions will help managers to look at the state of affairs with a “sober” look, to identify the company in the surrounding space. Without a promising business model, a company is just a legal entity, one of many on the market. The adoption of a promising business model allows for the purposeful structuring of the company’s systems. The main task of an entrepreneur or manager is the purposeful development and structuring of the company’s business model. This activity allows you to see the source of innovation, expand the pools of partners and customers, and also identify competitors.
Examples of business models
There are different types of business models designed for different businesses. Some of the main types of business models are:
The manufacturer produces products from raw materials. It can sell directly to customers, or sell it to intermediaries, that is, another business that finally sells it to the buyer. Example: Ford, General Electric, Coca-Cola.
A distributor buys goods from manufacturers and resells them to retailers or the general public. Example: All car dealerships.
The retailer sells products directly after purchasing the products from a distributor or wholesaler. Example: Selling through Amazon, where you can even use their warehouses.
A franchise can be a manufacturer, distributor, or seller. Instead of creating a new product, the franchisee uses the parent business model and brand by paying royalties. Example: McDonald’s
This is a traditional business modeling in which retailers, wholesalers and manufacturers work face-to-face with customers in an office, boutique, or store that the business owns or leases. Example: casino.
The e-commerce business model is a modernization of the traditional business model. The main focus is on selling goods by creating an online store on the internet.
The company, which has both an online and offline presence, allows shoppers to select items from physical stores while they can place an order online. This model gives the business flexibility as it is online for customers who live in areas where they do not have brick-and-mortar stores. Example: There are many clothing companies nowadays.
In this model, the main product (service) provided to customers is very cost-sensitive and therefore priced as low as possible. For every other service that comes with this product, a certain amount will be charged. Example: all low-cost air carriers.
This is one of the most common business models on the internet. Companies offer basic services to customers free of charge, while charging a premium for additional add-ons. Thus, there will be several plans with different benefits for different clients. Typically, the basic service comes with certain limitations like in-app ads, storage limits, etc. that premium plans shouldn’t have. For example, the basic version of Dropbox comes with 2GB of storage. If you want to increase that limit, you can upgrade to the Pro plan and pay $ 9.99 per month for it. Some online image editors only allow you to edit a certain number of images in the free base plan and unlimited images in the paid plan. The free Youtube plan has ads, while the premium (red) plan has no ad interruption, plus there are other benefits as well. This model is one of the more popular models for online businesses as it is not only a great marketing tool, but also a cost-effective way to grow and attract new users.
If customer acquisition costs are high, this business model may be the most appropriate option. The subscription business model allows you to retain customers over a long-term contract and generate recurring revenue from them through repeat purchases. Example: Netflix.
An aggregated business model is a recently developed model in which a company provides various services from a certain area (taxi, rental housing) and sells its services under its own brand. Money is earned in the form of commissions. Example: Uber, Airbnb.
Online marketplaces bring different vendors together into one platform, which then competes with each other to provide the same product / service at competitive prices. The marketplace builds its brand around various factors such as trust, free and / or on-time home delivery, quality sellers, and more, and earns a commission on every sale made on its platform. Example: Amazon, Alibaba.
Advertising business models are evolving even more with the growing demand for free online products and services. As in the old days, these business models are popular with publishers like Youtube, various media, etc., where information is provided free of charge but accompanied by advertisements that are paid for by certain sponsors.
Data Licensing / Data Sale
With the advent of the Internet, the amount of data generated as a result of user actions over the Internet has increased. This led to a new business model – the data licensing business model. Many companies, such as Twitter, sell or license their user data to third parties who then use it for analysis, advertising, and other purposes.
The agency can be seen as a partner company that specializes in non-core activities such as advertising, digital marketing, PR, ORM, etc. This company cooperates with a number of other companies that delegate their non-core tasks and are responsible, keep confidentiality and the effectiveness of their work. Examples of such agencies are Ogilvy & Mathers, Dentsu Aegis Network, etc.
An affiliate marketing business model is a commission based model in which a partner builds their business around promoting a partner’s product and focuses all their efforts on convincing their followers and users to buy it. In turn, the affiliate receives a commission for each specified sale. An example of a business running an affiliate marketing business model is lifewire.com or bloggers who advertise something on their channel by giving their own promo code.
Dropshipping is a type of e-commerce business model where the business has no product or inventory, but only a store. The actual product is sold by partner sellers who receive the order as soon as the store receives the order from the end customer. These partner vendors then deliver the products directly to the customer. Simply put: an intermediary between the seller and the client.
The crowdsourcing business model implies that users contribute to the value provided. This business model is often combined with other business and revenue models to create the optimal user experience and make money. Examples of businesses using a crowdsourced business model are Wikipedia, reCAPTCHA, Duolingo, etc.
Peer 2 Peer Network
The P2P economy is a decentralized internet economy in which two parties interact with each other directly to buy or sell goods or transact without the intervention of any third party. P2P Catalyst is the platform where these users meet. Examples of P2P platforms are Craigslist, OLX, Airbnb, etc.
Blockchain is an immutable decentralized digital ledger. It is a digital database that no one owns, but everyone can contribute. Many businesses are taking this decentralized path to develop their business models. Blockchain-based models are not owned or controlled by one person. Rather, they work on peer-to-peer interactions and record everything in a digital decentralized ledger.
SAAS, IAAS, PAAS
Many companies started offering their software, platform and infrastructure as a service. The as-a-service business model operates on a pay-as-you-go basis where a customer pays to use the software, platform and infrastructure. He pays for what and how many features he used, not what he didn’t have in common.
The High Touch model is a model that requires a lot of human interaction. The relationship between seller and customer has a huge impact on a company’s overall earnings. Companies with this business model operate on trust and credibility. Example: hairdressing, consulting firms.
Unlike the High Touch model, the Low Touch model requires minimal human assistance or intervention when selling a product or service. Since you, as a company, do not need to maintain a huge sales force, your costs are reduced, although such companies also focus on improving technology to further reduce human intervention while improving customer experience. Example: Ikea, SurveyMonkey, food and drink vending machines.
Of course, most companies do not work with any particular of these business models, but with a combination of some of them. The choice of a business model depends on the needs of your business and how much value you want to create for your stakeholders.