Jaime del Valle

Too often we hear about product innovation. Lots of funds are invested to develop new products or to improve existing ones to better match the needs of consumers.

But we don’t often hear about business model innovation. This kind of innovation fundamentally changes the way companies do business. It challenges every single part of the value chain and fundamentally changes the way companies add value to consumers.

The research that is done to do product innovation starts from the product itself and the questions that are aimed at finding new features for the product or new uses.

Other type of innovation is that one that aims at finding new ways of reducing costs or new ways to increase willingness to pay, which eventually results in higher profit.

But true Business Model Innovation goes beyond that. It starts at the customer, and tries to find out new ways to deliver value in meeting specific customer needs.

Ok, too much consultant speech. Let’s use an example.

Amazon is a clear example of business model innovation. They started as a company that sold books, then migrated to auctioning used books, then moved on to selling e-commerce solutions for small business and now they are even selling hardware (Kindle). They continuously redefined the way to add value to customers and make money while doing it.

Another example is OnStar (full disclosure: I work for GM). The initial business model was a subscription based service for GM car owners. It is a service that, when you push a button located on the rear view mirror, offers you a set of concierge services (navigation, phone calls, booking service). It is much more than this; check it through this link to OnStar site.

Just recently, they started selling rearview mirrors with the button and the service to non-GM car owners, re-inventing the way they add value to customers and earn revenue through it.

Here are a couple of examples more. A hypothetical one and a real one.

Shai Agassi’s vision for Better Place revisits, not only product innovation (electric vehicles, re-charging stations, driver experience) but also the business model around electric vehicles.

He takes the traditional business model from a different industry and applies it to the electric vehicles industry. The principle of the innovative business model mirrors the one from the mobile telecommunications industry, where the hardware is heavily subsidized and users purchase usage in the form of minutes. Agassi challenges the fact that electric vehicle owners also have to own the battery, which is quite an expensive part of the vehicle. Instead, he builds a business model around purchasing electric miles. Users own the vehicle and, instead of recharging the battery in their car, they replace it in the “Switch Stations” and they pay for the usage in the form of miles that battery will allow them to run. Simply beautiful.

As put in Wired Magazine by Daniel Roth: “Agassi dealt with the battery issue by simply swatting it away. Previous approaches relied on a traditional manufacturing formula: We make the cars, you buy them. Agassi reimagined the entire automotive ecosystem by proposing a new concept he called the Electric Recharge Grid Operator. It was an unorthodox mashup of the automotive and mobile phone industries. Instead of gas stations on every corner, the ERGO would blanket a country with a network of “smart” charge spots. Drivers could plug in anywhere, anytime, and would subscribe to a specific plan—unlimited miles, a maximum number of miles each month, or pay as you go—all for less than the equivalent cost for gas. They’d buy their car from the operator, who would offer steep discounts, perhaps even give the cars away. The profit would come from selling electricity—the minutes.

There would be plugs in homes, offices, shopping malls. And when customers couldn’t wait to “fill up,” they’d go to battery exchange stations where they would pull into car-wash-like sheds, and in a few minutes, a hydraulic lift would swap the depleted battery with a fresh one. Drivers wouldn’t pay a penny extra: The ERGO would own the battery”

A traditional business model in one industry can become a very innovative business model in a different industry. Open your mind, look for solutions outside the box.

While I was writing this post I came across this great speech by Johanna Blakley, where, using copyright laws as the red thread, she challenges highly IP regulated industries to rethink their business model taking as a reference low IP regulated industries, mainly the fashion industry, which has proved to be more profitable and creative than the music and film industries. She blames the freedom to copy and explains the constraints that traditional thinking brings to business model innovation. Very interesting and thought provoking:

In the aftersales side of the automotive industry, the business model revolves around selling service and parts at the manufacturers official service centers. The real need of a car owner is to keep his car running, not to take the car to the official manufacturer’s service center. So, if he wants to take his car to his brother’s shop, the manufacturer is not adding value, is not supporting or meeting his need: “Bring it to our official center or you are on your own, pal”. And the entire business model is designed around this.

What if, for an extra amount of money (to be determined through the normal pricing processes that take into account cost structure, elasticity..etc) the official dealer sends someone to pick up the car at the customer’s house, leaves a temporary replacement car with him, drives it to his brother’s service shop and supervises that the repair/maintenance work is done to certain standards that ensure the manufacturer’s quality? I am sure that quite a big number of customers would be ready to pay for this, creating a new revenue stream that relies on meeting a clear and focused customer need and on performing a necessary customer task while adding value. And it is an assembled solution and not a sale of an owned product or service.

It also might generate additional revenue through those independent shops that purchase more official parts from the manufacturer.

Starting with the consumer needs/problems and working around assembling solutions for those will unearth innovative business models.

This post is very related to the previous one (Owner-less) as automotive companies need to do some business model innovation if they want to remain relevant. If they want to provide transportation solutions for customers who are increasingly less interested in owning a car. If your fundamental business model relies on the revenue you generate by selling cars, parts and service, how is your business model sustainable in the long term when people will not want to own cars?

If your only revenue comes from the price consumers pay for your product, what will happen when consumers don’t want to buy your product? Innovate your business model or die.

This is just one more reason why companies need to really be customer centric, putting the consumer and its needs at the core of what they do and assembling solutions to customer problems beyond manufacturing and selling products. But I will elaborate on the whole idea of Customer Centricity in a future post.

Only when you have the consumer and its problems at the core of what you do as a company, and you identify what are the unmet needs, the tasks he needs to perform and figure out the way to add value when meeting those needs and solving those problems, you can define your business model in a robust and sustainable way.

Inherently, consumer needs and problems evolve and change rapidly, so business model innovation is vital for survival.