As a result of the Corona pandemic, many companies were forced to change their business model. Restaurants introduced take-away meals. Hotels started with renting out rooms as private offices. Will these companies be able to return to their old business model? Or is it time to break new ground?
While I’m writing this, the Netherlands is in a lockdown that should help control the Coronavirus. Many sectors, including hospitality, tourism and culture, have been hit hard by the economic effects of the pandemic and are struggling to survive. You can see that many companies are forced to temporarily change their business model. Will these organizations be able to return to their old business model after Corona? In some cases that will certainly be possible. Nevertheless, all companies would do well, especially now, to take a critical look at their business model and the extent to which this model is future proof. Clear shifts are taking place in the world of business models.
Make your business model future proof
In their recent book ‘Business Model Shifts’ Patrick van der Pijl and others discuss the main business model trends. These trends are driven on the one hand by (digital) technology, but often also by the changing social or ethical context. By responding to the ‘shifts’ in business models, companies can prepare for the future. Below I give you a bird’s-eye view of the most important six shifts.
1. From product to ‘as-a-service
“People don’t want a six millimeter drill bit. They want a six-millimeter hole”. These are the words of Theodore Levitt, American economist and Harvard professor. Levitt expresses perfectly what the shift from product to as-a-service is all about. Consumers and business users are not always looking to own a product, but to solve their problem.
A nice practical example of this trend is Swapfiets. The company provides ‘cycling-as-a-service’, at a fixed monthly rate, including repairs. Swapfiets was once started by a few students in Delft with 150 customers (fellow students) and has now grown to 124,000, in 50 cities and 3 countries.
The advantage for companies with such business models is that there is a recurring (‘recurring’) revenue. This can provide greater financial predictability and stability. It is therefore no coincidence that during the current pandemic, companies working with a subscription model continue to perform relatively well.
2. From shareholder to stakeholder
For a long time, shareholder value was the inviolable principle in the financial world. Companies had to strive for profit maximization, with the aim of maximizing shareholder value. Customers, employees, society and the environment often came second (or even lower) in this respect. That time seems to have passed by now.
More and more, short-term profit maximization is giving way to long-term value. Also, it is no longer just about the interests of shareholders, but more and more often a good balance is being sought between the positions of customers, employees, society as a whole and investors.
The search for a healthy balance between the interests of the various stakeholders is a very logical principle, even if you look at it from a business perspective. After all, if your organization has (very) satisfied customers, happy employees and a ‘socially responsible’ product, it becomes a lot easier to be successful in the market.
Unilever is perhaps the textbook example of a multinational that has made the switch from shareholder to stakeholder. With the arrival of the new CEO Paul Polman in 2009, a new path was taken in which short-term profit maximization gave way to a much greater social involvement. For example, the company is actively supporting local economies in countries such as India, Bangladesh and Vietnam. In addition, measuring and improving Unilever’s impact on the environment is of course high on the agenda. Unilever’s financial results show that corporate social responsibility and high profitability can go hand in hand.
3. From physical to digital
It is a misunderstanding to assume that digital business models should be based purely on the latest and most advanced digital techniques. A digital business model should primarily take the customer as its starting point and explore opportunities to create attractive value, via the online channel, but sometimes also with physical channels. Different patterns of digital models can be distinguished:
- Digital first: an organisation that is built on the basis of the digital mindset, in which physical channels are still used to a certain extent.
- Digital proposition: a digital value proposition that can stand next to physical propositions.
- Digital relationship: digital technologies are used purely to optimise the connection with customers.
- Fixed’: digital elements are, rather ad hoc, ‘screwed’ to the propositions. (“We also have an app.”)
Digital first: not digital only
An example of Digital first is the eyewear supplier Warby Parker. Launched in 2010, the founders set the goal of opening up the eyewear industry through a combination of chic yet low-priced frames and a streamlined online customer experience. As said, a Digital first approach doesn’t have to mean physical channels are out of the question. Warby Parker began optimizing the online customer journey (finding, fitting, buying, returning) and then decided to open physical stores as they could further improve the customer journey.
4. From pipeline to platform
Since the Industrial Revolution, the pipeline business model has been the prevailing model. Companies make products and sell them to customers, in many cases through numerous links that all want a ‘piece of the pie’. The platform model offers a radically different approach to the relationship between producers and consumers. Sangeet Paul Choudary, co-author of the book ‘Platform Revolution’ formulates it this way:
“A platform is a plug-and-play business model that allows multiple participants (producers and consumers) to connect […] and exchange value.
Efficiency and reliability
A platform can facilitate efficient product trading by reducing the distance between buyer and seller. Think, for example, of the role of a platform like the Alibaba. Because of this platform giant, Chinese companies are now able to deliver to a buyer on the other side of the world without any problems. Do not underestimate the role of the concept of ‘reliability’. Because Alibaba is well known and works with its own labels, buyers outside China are much more willing to do business.
Product trading is only one of the many possible applications of the platform model. With a platform like LinkedIn it is not so much about selling ‘products’ but about facilitating contact between professionals. The basic proposition of LinkedIn is free (Freemium). The network gets its value from the huge amount of relevant data that is generated in the network. Based on this LinkedIn has developed a large range of paid propositions, varying from sophisticated targeting of advertisements to specific services for recruiters.
5. From incremental to exponential
Many established organizations are focused on small, incremental innovations of their existing products. A detergent that makes your clothes just a fraction cleaner. A new way to navigate on your smartphone. As a result, the growth of this type of organization is usually modest.
The exponential business model has a different starting point. The goal here is to ‘disrupt’ a market and thus make a major impact on the world. That sounds fun, but how do you do that? Of course, there is no golden formula for enforcing exponential growth. What is in any case important is that a ‘big problem’ is tackled. A problem that is still waiting for a breakthrough; a totally different approach, which has the potential to break open a market. You can then think of far-reaching innovations in the field of:
- Energy: developing solutions that make polluting fuels superfluous
- Food: making affordable, organic food available
- Health: offering low-threshold, personalised diagnostic tools
Hundreds of percent growth
An example of exponential growth through food innovation is Beyond Meat. Ethan Brown, the founder of Beyond Meat, once asked himself the following question: “Are animals the only way to produce meat? The search he then initiated, together with researchers from the University of Missouri and Maryland, has now led to meat replacement products that have been introduced with enormous success. As a result, Beyond Meat’s turnover has increased not by a few percentage points – which is customary in the food sector – but by hundreds of percentage points. Beyond Meat proves that exponential growth and corporate social responsibility can go hand in hand.
6. Linear to circular
The linear business model has been with us for a long time. A manufacturer makes a mass market product as cheaply as possible. The consumer uses the product and throws it away after a number of years (or sooner) because it is broken or because new versions of the product are offered. A company that works ‘circularly’ chooses a different approach. The circular business model implies that the company feels responsible for the entire life cycle of the product: from development, to production, to use and then to responsible processing of the (residual) materials of the old product.
There are numerous elaborations of the circular model. To name a few of them:
- Use the by-product: waste from production process A, is used as new product B.
- Use together: owners of certain products that they use only temporarily are facilitated (via a platform) to share them with others.
- Longer use: striving for a longer life of the product, for example by offering repair services.
Forget new, repair that shirt
This last idea, using it for longer, is essentially an unexpected approach when you assume that companies mainly earn from selling ‘new’ products. The more interesting is the case of Patagonia.
Apparel company Patagonia brings outdoor clothing on the market and strives for sustainability in several ways. To begin with, the clothing is largely produced with recycled materials. The goal for 2025 is even to work with 100% sustainable materials. But there is more. Patagonia spends 1% of its turnover on donations to projects that support nature and the environment. Most groundbreaking for a ‘commercial’ company, however, is Patagonia’s choice to encourage customers to have their old Patagonia clothes repaired instead of always buying new ones.
This blog was also published (in Dutch) on Frankwatching.
Subscriptions are a common thread in Bas Verhoeven's career. As a marketing manager, he introduced numerous subscriptions to the market for multinationals such as Wolters-Kluwer and Vodafone. As a consultant and interim marketing manager, he also helped many SME organisations to increase their recurring turnover.