As the pace of technological growth and development continues to increase, more and more companies are under greater pressure to innovate.
In most cases, companies think of innovation as simply creating new products. While these solutions can lead to significant profits, the most successful companies in the world today have gone beyond products and services. Instead, they've innovated their business models.
This is known as business model innovation - the process of adjusting an existing business model, or creating an entirely new one, often to meet new and evolving consumer preferences. A textbook example of business growth through model innovation can be seen in Netflix's evolution from a mail-order DVD rental business to the world's largest subscription-based streaming service 20 years later.
Business Model Innovation vs. Other Innovation Types
Compared to other types of innovation, innovating a business model requires making fundamental changes to an enterprise's value propositions. Consider a company like Amazon, which started out as an online bookstore and is now the world's single largest online marketplace.
In other words, the changes introduced by business model innovation tend to run deeper and are more transformational than product-based innovations.
Of course, huge changes mean huge risks. Innovating a business model often means disrupting the company's basic operations, which can be expensive. Startups tend to have the upper hand in this area as their leaner organizations and early-stage business models make them better suited to drastic transitions. This is why more than half of business executives see startups as drivers of digital disruption.
When to Innovate Your Business Model?
The Boston Consulting Group notes that over the past five decades, the business model lifespan has fallen, on average, from around 15 years to less than five. This suggests that companies should be ready to evolve their business models more frequently. The question, however, is when this should happen.
Unfortunately, there is no one-size-fits-all answer. According to one study, periods of economic instability and transition can be an opportune moment for business model innovation. During these times, companies are more likely to consider new methods of value creation, giving them a reason to change their business models.
Other timing signals to consider include-
- An industry-wide decline in margins
- A trend of commoditization
- Lagging behind industry changes
- A trend of base industry technology being used in other industries
- An overall decline in innovation metrics (e.g., sales of new products)
Different Approaches to Business Model Innovation
While there are different approaches to model innovation, Boston Consulting Group offers a framework that breaks down the fundamental ways to reinvent your business model.
Businesses take the reinventor approach to adapt to fundamental industry changes, such as the introduction of new regulations or commoditization of products. When the business model is showing signs of becoming obsolete, a company can reinvent its value proposition to meet the new preferences of customers.
Businesses take the adopter approach when reinventing the business model isn't enough to weather fundamental industry disruption. This often means pivoting into adjacent markets or industries. Adapters are advised to build innovation engines to continually experiment with design and R&D in their organizations.
Maverick companies use their resources to build a potentially more profitable core business. Whether you're a startup or incumbent company, taking this approach to business model innovation requires being quick to establish a competitive edge and finding new ways to drive growth.
Adventurers pursue growth by expanding into new or uncharted territories. Companies that take this approach often leverage their competitive advantage to place strategic bets on new initiatives, For example, Google started out as a search engine but later acquired businesses in biotech (Calico) and the Internet of Things (Nest).
Business Model Innovation Strategies
Regardless of the approach, most attempts to innovate a business model usually fall under two strategies.
1. Creating an entirely new business model
This strategy is similar to what an entrepreneur would do before launching a business.
Draft a value proposition - Research your customers' needs, pain points, rewards, and challenges to draft a new value proposition. Remember, a value proposition is essentially a simple statement or pledge of the benefits a company offers to customers and the approximate price charged for these benefits.
Identify a target audience - Next, identify the target audience (or audiences) that will appreciate the new value proposition. Consider creating buyer personas to drill down to the specific attributes of the target audience.
Formulate and test the hypothesis - Arguably the most crucial step of creating a new business model is distilling all of your research into a statement that explains a problem and a proposed solution. Going back to Netflix's business model, this hypothesis could be-
People no longer want to rent DVDs. They want the convenience of accessing videos on demand over the Internet.
Validating this hypothesis requires another round of customer-focused research, whether it's through interviews, focus groups, or process simulations.
2. Tweaking sections of the business model
Changing parts of a company's existing business model will require knowing it inside and out. From here, business owners can make adjustments based on two factors.
Adjusting a business model's economic factors can include-
- Changing pricing models
- Offering products in bundles
- Offering products through subscription models
- Charging customers by the time spent using the product
Another approach is to Integrate network effects into the business model. These networks include-
- Builders networks - This relies on platform users attracting developers. Examples can be seen in how the game consoles attract game developers.
- User-generated content (UGC) - This is where the use and sharing of content created by users attract even more consumers. For example, see platforms like TikTok.
- Marketplaces - This is when sellers attract buyers.
The most successful businesses no longer depend on just having a great product. Companies that adopt business model innovation as one of their core values can position themselves to grow instead of just survive.
Innovating your business model makes it possible to create compelling value propositions that can adapt to changes in both market conditions and customers' expectations.