How to create scalable growth using smart, proven “non-obvious” business model innovation
Reid Hoffmann, Founder of LinkedIn, has written about business model innovation and how crucial it is to get venture funding. In his recent book, Blitzscaling, The lighting fast path to building massively valuable companies, Reid is outlining how some business models are superior to scale and retain long-term competitive advantage. Amongst his recommended short lists are some obvious ones, like the digital monetization of data (selling bits, not atoms), “platforms” (which he calls the “venice model of trading”); Marketplaces, subscriptions and feeds. Not surprisingly, those are the digital business models that the technology giants of Amazon, Google, Facebook, or to a lesser extend Apple have successfully created. Warren Buffet’s investment philosophy of “ moats” and their defensiveness comes to mind as well.
Free or freemium: How to get VC money?
The most alluring point of Reid’s book is how he convincingly points out the advantages of free or freemium business models. His view is simple: In order to build a “first scaler” (not first mover) advantage, fast market entry and low customer acquisition cost are crucial. With the free or freemium business model, companies can create strong network effects at lower cost which will also heighten the barriers to entry for your competitors, and thus create the type of powerful monopolies (he is not using this word, but it’s clear that this is what the result may be) that VC’s are looking for.
With huge network effects and scale advantage, free or freemium might be the most scalable (although highly depend on VC investment) business model.
Developing non-obvious business models
I was putting Reid’s teaching into practice with a tool box coming from my alma mater, the St.Gallen Business Model Navigator. The book and card set includes 55 business models that “will revolutionize your business”.
With a playful yet strategic angle to create and ideate on new business models, I set out to discuss business model with a dozen tech startups in Switzerland. We analysed both the current business model (e.g. selling hardware). Together, we developed a series of “non-obvious business models”, using the 55 examples of the St.Gallen Business Model Navigator as inspiration.
Here is the comparison of “obvious” versus “non-obvious” business models in my sample:
|Startup Case||“Obvious“ Business Model Today||
Non-Obvious Business Models
|Examples of Successful Companies|
|Company A||Hardware|| – Sensor as a service
– Rent instead of buy
|Google Nest, Xerox|
|Company B||Software + after-sales support|| – Two sided marketplace
– Open busines model
|TripAdvisor, Valve Corporation, P&G|
|Company C||Hardware|| – Hidden revenue
– Performance-based contracting
|Xerox, Philips Lighting|
|Company D||Hardware (B2B2C)|| – Licensing
– Private label
|SAP, Ryanair, uber|
|Company E||Software (SaaS)|| – Licensing
|Zara, Exxon Mobile, Shell Bistro, IKEA|
|Company F||Software + consulting services|| – Hidden revenues
|Company G||Professional Service Provider|| – Auction
– Customer loyalty
|eBay, Google AdWords, Delta, Amazon Prime|
|Company H||Hardware|| – Long tail
|iTunes, Apple, Netflix, Vodafone, IKEA, McDonalds|
Simple, not obvious business models are the exception, not the rule!
My analysis shows that most startups conceptualize a rather “obvious” – and not innovative – business model. The risk of picking an inadequate business model is that it’s less scalable and therefore less attractive to investors. You will not become a master of scale!
“Non-obvious business models”, on the other hand, are smart and scalable. Business models such as hidden revenue, long tails, orchestrator, or “performance-based contracting” are really powerful and can turn your business logic upside down.
And remember: These models are also proven because they have been in use for over 20 years by leading tech companies such as Microsoft, eBay, Google, uber or Netflix.
Why don’t we see more smart, proven and “non-obvious” business models with startups?
Maybe it’s because as entrepreneurs, we think too much of the product and the customer problem and less how we can shape a business model that can really create competitive advantage.
Startup entrepreneurs must spend more time and strategic thinking on business model innovation. Product-market fit is obviously relevant, but it’s the power of business model innovation that can truly build masters of scale.
My point: With less than 1% of startups succeeding in VC funding, wouldn’t it be wise to develop innovative, scalable business models that VC’s do like?
The solution is smart, proven & not so obvious business model innovation for your startup!