06 Game Changing Business Models
Be disruptive! Create a dilemma
Contributed by Michael Skok:
In the tech industry, it’s not uncommon for entrepreneurs to become so singularly focused on the novelty of their product that they forget to innovate sufficiently around their business model. A disruptive business model can be at least as critical as discontinuous innovation.
As an investor, the perfect scenario is:
- A discontinuous innovation
- Wrapped in a disruptive business model
- Targeting a significant new market opportunity or underserved target segment
- Where there is real pain and need.
That’s the perfect storm.
But too often, the business model is left to the end, as an afterthought. Of course, as market observers, we’ve heard countless examples of superior products that failed to capitalize on the market opportunity that was their due. We’re almost conditioned to understand the implications of this. Still, the problem persists as business models fail to generate the attention they deserve.
Here’s a simple framework of 3 initial steps to take:
1. Be disruptive, create a dilemma
Don’t simply recycle someone else’s business model. That’s squandering an opportunity to change the game by defining new rules in your favor. In redefining a category, your overarching goal should be to cause someone else to have an innovator’s dilemma. Take the conventional and look at its inverse. Turn established business models inside out. You rarely win by following the pack, so figure out where the incumbents are vulnerable and exploit that as the basis for taking market leadership. For example, Google gives away tools with powerful utility because their interest isn’t selling technology; it’s collecting data as the basis for an advertising business model. This has been highly disruptive to players like Microsoft whose original business model was licensing software. Facebook is repeating this model, disrupting other online players who can’t compete with “free” and even “better” as they collect rich data profiles to monetize.
2. Identify your C.O.R.E. differentiation
As you think through how you can disrupt the status quo, do so by identifying your Capabilities Of Really Exceptional value. What is it is that makes you exceptionally valuable? Think hard about this one. It’s the foundation upon which you’ll build your business model. Is it software? Services? Or perhaps it’s data or content generated by your community or even a process you’ve crafted? For Facebook, it’s data. For Yelp, it’s user-generated content. Perhaps like Red Hat or Acquia, which is one of my portfolio companies, you’re selling services on top of open-source software. Identify your core value, why it’s profoundly better than incumbents or alternatives and, finally, how you’ll monetize and use it as a competitive weapon for an unfair advantage.
3. Use Multipliers and Levers around your CORE
Once you’ve defined your core, identify multipliers and levers to help accelerate and economize the proliferation of your value proposition.
Multipliers for rapid market expansion
Multipliers help you drive revenue, reach and coverage, which is vitally important when you consider amortizing and then profiting beyond the cost of customer acquisition. Take a close look at the P&L of a traditional software company and you’ll notice something potentially surprising: On average, sales and marketing expenses are 2X research and development in a steady-state model.
That’s why it’s so important to find multipliers that will help you drive revenue at the lowest possible cost. Examples of this include freemium or tiered pricing models that allow you to seed the market with a low- or no-cost offering as the basis for paid conversion over time.
As one basis for making products more digestible and achieving tiered pricing, I use a technique that I call “Russian doll packaging.” Here, your base product is free or nearly so to encourage viral adoption. As you build a community around the free version, you can convert to paid usage by upselling and cross-selling paid “editions” layered on top of the free version.
Aligning with well-established technology stacks can also become a multiplier when you’re filling a conspicuous gap in a high value and acknowledged way. It not only can complete a “whole product,” but done correctly, this sort of strategic alignment can create a dramatic pull in the market, putting you in a position for multiplied growth.
Underpinning all of this is the necessity for what I call “SLIPPERY products”: Simple, Low or no initial cost, Installs easily, Proves value quickly, Plays well with others, Easy to use, ROI is obvious, Your customers can’t live without it. Slippery products grease the skids for end-user adoption, which can dramatically reduce customer acquisition and retention costs.
Levers to drive down costs
Levers help you reduce time, cost and resources to deliver your value proposition. Open-source (OSS) and other co-creation models are great examples of leveraged business models. Here, you sell value, often in the form of services, support and perhaps commercial add-on products, on top of a core product that is built and maintained by the community. Red Hat is the classic example of a company that has built a franchise around the Linux open-source community and a billion-dollar business around this model. Acquia is following a similar path around Drupal open source community and, with cloud services as their multiplier, in the social publishing space.
Crowdsourcing is another great example. For example, uTest is a company that has leveraged crowds effectively by mobilizing a global community to execute a mobile application test matrix of such combinatorial complexity that it would have been economically infeasible otherwise.
From the perspective of demand generation, viral, inbound and social marketing has changed the game altogether by shifting the economics of marketing through an inversion of the model from push to pull, and therefore outbound to inbound, making marketing more cost-effective and powerful when executed well.
Of course, the real magic is getting multipliers and levers to work together, where multipliers like freemium models also provide leveraged selling value through a community of free users who see value in conversion to paid usage tiers. Your community becomes your pipeline.
By thinking through the three aspects of business model creation—identifying your C.O.R.E. value, finding multipliers for growth and levers for cost economies—you’ll have much better odds of building a company that returns value disproportionally to all of its stakeholders.
So, that’s a partial summary of the workshop on business models. I hope you’ll review the slides and video to gain a fuller understanding with the case studies to bring it to life.
In this video workshop (1 hour and 51 minutes), we walk through several key frameworks to building a game-changing business model in order to create the Perfect Startup Storm. See key players from companies like Acquia, Formlabs, Diagnostics for All, and OPEXengine explain how their business models push boundaries and ultimately become successful.
The written lessons below provide a deeper look into some of the frameworks presented in the video workshop, like finding your market positioning with the BLAC and White framework and getting the most out of your business model with Levers and Multipliers. Don’t forget to check out the comment section at the end of this guidebook for conversations with the Underscore Community!
Video Workshop: Game-Changing Business Models
On the go? Listen to our workshop on SoundCloud:
Case Study: Demandware’s Business Model
Demandware is an example of a company that leveraged its SaaS technology disruption with a fundamentally different business model to its competitors, creating innovation on demand for its customers and making partners out of them with a shared success model.
Case Study: Drupal
This is a case to exemplify how disruptive open-source and co-creation can be as part of your business model. Presented by Dries Buytaert, founder of Drupal, the largest open source project on the planet.
Case Study: Diagnostics For All
Contributed by Alok Tayi, PhD
Diagnostics For All (DFA) is a Cambridge, MA-based not-for-profit enterprise that aims “to save lives and improve health in the developing world through pioneering technological innovation.” DFA started with simple, paper-based diagnostic technology initially developed in George Whitesides’ Lab at Harvard.
Like their for-profit counterparts, DFA works to be financially self-sufficient; however, DFA has the added goal of ameliorating illness in the developing world. Conventional medical diagnostic firms are for-profit and focus their resources on the most profitable customers: high cost, high volume markets in the developed world. Diagnostic technology produced by these for-profit firms rarely makes an impact beyond the first world – their technology is expensive and requires extensive training to use. On occasion, medical technology firms will donate products or resources; however, the impact of this charity is limited.
DFA is disrupting this model by selling products simultaneously to the first and third worlds. This mixed approach is unique. Diagnosis products sold to the first world (high margin) produce profits that are re-invested in the third world (low margin) by providing diagnostics and training at a minimal cost. The two-pronged approach enables the DFA to focus on developing one diagnostic technology that applies to multiple markets.
Currently, DFA is investing 100% of its resources in technology development. With grants from the Bill & Melinda Gates Foundation, UK Government, Defense Advanced Projects Research Projects Agency, and other sources, DFA’s low cost, paper-based diagnostics are a critical part of their value proposition. Unlike traditional medical diagnostics that require expensive machines and extensive training to perform, DFA’s platform is inexpensive and colorimetric (changes color). A color-based readout enables diagnosis via cellphone: the patient can take a picture of the test with their cellphone, and a doctor elsewhere can analyze it. Initially, we’re developing this technology for five areas: liver function, at-risk pregnancy, small farmer support, child nutrition, and nucleic acid detection.
Looking to the future – partnerships with governments, NGOs, and larger companies, could be a boon for DFA. For example, collaboration with a larger company, such as a drug manufacturer in the third world, would provide established distribution networks. Through a partnership, DFA could theoretically distribute their diagnostic with an existing treatment; this combination would enable greater access for the patient to the diagnosis and treatment. Such creative packaging solutions could serve as a win-win for the for-profit drug manufacturer and not-for-profit DFA.
DFA represents a new breed of not-for-profit enterprises. We’re a company tackling illnesses in the developing world by inventing disruptive technologies that can be sold profitably in the developed world. When successful, DFA will be an excellent model for future social enterprises that need to balance financial sustainability and social good.
Case Study: Google
Google is such a fascinating example of a company that changed the game on the software industry giant Microsoft with its business model of advertising. Who better to share that than Don Dodge who was initially at Microsoft and then joined Google? He also covers the battle royale in the mobile world with Android vs. iOS, where the stakes are even higher, and the battleground is even more complicated with carriers. While one could argue as to who is winning or who will ultimately prevail, it’s evident either way that the Business Model has as much to do with the fight as the technology.