Evolving Business Models
Published on : Monday 03-10-2022
Innovators and entrepreneurs must start innovating business models with changing technology and trends, says Suresh Pasumarthi.
Business model is all about how you create, deliver, and capture value to your customers as well as to yourself through your product or service; and, how you generate revenue for your company in the process. The business model acts as the blueprint for the business and a roadmap for its success. It describes how a company does its business.
In the initial stages of business, once your Business Problem is fully defined, one should have in mind what Business Model approach you want to take as it helps how to get business from customers and thus contributing to the success of the company. To start with, companies should explore and check under what category their business comes from and what the proven business models in that category are. And learn from their success and failure. And look for different patterns of Business Models in different industries, check and map if that can be adapted to their industry. That would help where the company would fit in the market.
Business model is at the end of the day is:
i. Who is the target customer?
ii. What is the value proposition it brings to the customer?
iii. What is the revenue model that captures the value?
Business model should be an iterative process especially if it is a new category of product launch or if it is the initial days of customer reach. It should be continuously improvised along with the maturity of the product. Business model plays a huge role in the competitive market and success of the product. Probably as the business grows one can start innovating on the existing models.
Every company needs a Business model Strategy. It is very important for companies to have dedicated business model innovation units and institutionalise them. Product and Process innovation is worthless if they don’t have a corresponding Business model. Business models play a great role in the success of a product or service. Even if the product or service is great but addresses a market with the wrong Business Model business will fail. Business models help companies to unlock values from products/process innovations.
Business model should not be all about pricing; rather on what and how it brings value to your customer in the long run. Successful Business Model would be the ones which will have low entry barriers and create soft lock in effects and create trust with customers.
With fast changing technology trends like Cloud, Artificial Intelligence and AR/VR, the way products and services are developed, built and deployed is changing. In the process the way consumers are trying to consume the existing products and services are evolving and changing rapidly. With every new generation of people, there comes some new set of problems and sometimes they look at existing problems with a different lens and mindset. Hence, the way they would like to consume the solutions to existing problems and solutions to the new problems would change. And companies should adapt to their needs. Thereby leading and forcing companies to think, build and customise the existing model to satisfy their needs.
This is leading to new business models. Every company is becoming a Technology/Software company. I see the following four trends in technology that are leading ways for companies to do their businesses.
1. Digitisation: Everything is digitised. It helps in reducing time to get things done and improving performance. And generating a lot of data is getting generated in silos.
2. Connected world: Things are getting connected. All the digitised silos are getting integrated from process flows to data flows. (Desktop Smartphones Smart sensors connected machines to the external world). Companies are building digital twins and tracking the data through sensors.
3. Intelligent world: Everything that is connected is getting intelligent with a lot of data from connected flows and processes. Machine Learning and Artificial Intelligence is making Intelligent and automating the processes.
4. Scale: Means of production are no longer with bigger companies. Smaller companies are scaling faster than Enterprises. Things are getting scaled much faster.
With the above four technology trends of Digitisation, Connected, intelligent and Scale, companies are forced to innovate new Business models. Below you could see over the period, the way Business models have evolved.
Pipeline model → Platform model → Service Subscription model → Consumption model → Outcome based model
Pipeline Business model
It is how traditional industries used to work. It was centred around the core process. Production→Assembly→Distribution. It was also called the Linear model. Everything from start to end was done within the company from one after the other in sequence. Success was measured by producing more out with minimum cost.
Platform Business model
Business acts as Infrastructure for enabling producers, suppliers and consumers to connect through the ecosystem. It is centred on core interaction. Its role is to enable interactions thereby creating ecosystems. In the software world, it is done by providing an API which enables to extend and build new applications by leveraging the services provided by the platform. For example: Uber and AirBNB work on a platform model. They provide an echo system for consumers and drivers (in case of Uber), Hotelier (AirbnB) connects with each other. Success for Platform Company is measured by the quality and quantity of interactions.
Services subscription model
Companies want to share excess capacity that they have when not in use. That led to the whole cloud ecosystem in the software world. Consumers pay for a fixed period of time like number of hours days, quarters or years irrespective of the amount of usage. They may decide to renew the service based on their need at the time of expiry. Success for a service provision company is measured by maximising the capacity utilisation whereas for Consumer Company it is measured by efficiently using the service based on the need for the required period.
Consumption based
In this model customers pay for the resources consumed for the subscribed model. It is also called the pay as you go model. For example, in the case of Uber, consumers pay for distance, hours travelled, or the number of hours used by the service. In the case of software API Customer pays the number of transactions or amount of data consumed or number of transactions. Consumer companies can Upscale and Downscale based on their needs.
Outcome based
This is the latest trend in the enterprise market especially where customers pay based on the outcome or expected output which is agreed before subscribing to the service. It is a high risk and high reward paying for the supplier company. This helps best run producer and platform companies to work with the customers based on their strengths and customers success metrics. And consumer companies give the option to go for the best quality service providers based on their respective success metrics.
Most of the new Business Models are getting evolved from the combinations and innovations from existing patterns of Business model across industries talked above. To name a few:
i. Adaptive manufacturing, build to order, and rather mass customisation
ii. White labelling: A white label producer allows other companies to sell their product under their own brands as if they were made by them, e.g., Foxconn.
iii. Revenue sharing: App store
iv. Freemium to premium, and
v. Support for Open-Sourced products: Money is earned through support. Software is sold free. And also, anyone can contribute to the software.
I cannot end without mentioning the new buzz of Metaverse and NFT’s, with different avatars for work and avatars for play, will lead to new Business models.
In the future I see, competition between companies will not depend just on innovation in products and services, but also will depend on new business model innovations. Identifying the opportunity is not enough; innovators and entrepreneurs must start Innovating Business models with changing technology and trends. In retrospect, companies will need to carefully consider their business model portfolio in order to stay on top of the market. Going forward Business Models would give customers an edge to choose products and services over others in the market.
The views expressed in this article are those of the author and may not reflect those of SAP.
Suresh Pasumarthi is Director, Product Management, SAP Labs India. Suresh has worked extensively in Analytics, Mobile BI, building SAAS services and API Platform in multiple domains. He has been associated with Business Objects and SAP Labs for 18 years now, with an overall 22 years of software industry experience. He is passionate about Artificial Intelligence and Machine learning and working with customers. He has 9 patents approved at USPTO to his credit.
