After writing about business models for the last few years, I came across the question “What’s a business model, anyway?”
You may think this is asked by someone who doesn’t know what a business model is…
But really, it was not. It’s a perfectly valid question ...
The question is pertinent because there are many definitions - or shall I better say assumptions - on what it is.
It gets confused with many other things, esp pricing models.
Very quickly I stumbled across the Freemium “business model”. It’s a great example that I will elaborate on in this article.
But I am not coming with a mindset to disprove definitions that I disagree with.
This article is sharing 6 things to know about business models that most expert will agree with.
What we can agree on
Summary. A look through HBR’s archives shows that business thinkers use the concept of a “business model” in many different ways, potentially skewing the definition.
All of them have at least the components of value creation and value capture in common
- Value Creation describes the inner workings of the business model
- Value Capture refers to how the the firm makes profits
Insight 1: Business models consist of value creation and value capture activities
About this article
This article closely resembles the content of our following video. It is an intro to our course on the best tech biz models today. Read the article or watch the video whichever mode of consumption you prefer.
How many types of business models are there?
Let’s take two of the most frequent examples of “business models”:
- the Subscription biz model and
- the Freemium biz model.
There are many websites with a list of a few dozen business models You will find these two models on literally all of them.
The Wikipedia entry on business models features a list of 31 biz models (as of April 2021), including the two aforementioned.
When we look for examples of biz models, we will often find a long list of fancy-sounding business model names.
As mentioned, there are 31 just in the Wikipedia entry. Others seem to make a sport out of coming up with new names.
I dont mind them - nor do I disapprove of them. But some clarification - I believe - is necessary.
Of course, it’s a good thing to have names for things.
But one downside is that many of these names refer only to the monetisation model and with that only to value capture.
Subscription biz model & Freemium model
So, let’s look at these two biz models in a little bit more detail.
I have chosen the Wikipedia definition but it doesnt differ from the many other sites.
The subscription business model charges recurring fees for a service or product.
The Freemium "business model" on the other hand provides free access to some products or services and charges a premium price for other tiers.
Here is a screenshot from Slack’s pricing page - they are a very popular collaboration software.
Here is a screenshot from Slack’s pricing page - they are a very popular collaboration software.
Here’s the thing - the Freemium biz model - it turns out - is actually only a pricing model to the subscription business model.
Check out Trello’s pricing page and will you see the same.
Of course, you know I could show you hundreds of other companies and we would always see the same thing.
This is not ideal
This poses a couple of problems (or at least is not ideal) in my mind:
- The first problem is that it is actually a bit confusing because these are not genuinely different biz models
- And the second problem is that these business model names are derived from the value capture - i.e. monetisation perspective. They tell us nothing about the value creation side of things.
On our website and in our course on the tech best business models today, we are doing things differently. More in line with value creation.
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For those who are interested in the course, let me assure you that I have a cross-mapping table with all the course examples against 50 popularised business model names.
But keep on reading either way - there are still 5 more insights to come on business models independent of the course.
Build your business model around Value Creation
Now you will ask: How then are we categorising business models and why?
Instead of categorising our business models around value capture (i.e. monetisation), we are categorising it around value creation (not just in the course but basically in all our articles and products).
How do we do so: we start with the end result of the value creation process and that is always a product or service.
Insight 2: The end product of the value creation activities is a product or a service that the company monetises on
The elements and patterns of value creation therefore are intrinsically linked to the end product.
And that is why I have chosen to categorise our business models this way
By the products or services that the respective innovators provide.
Insight 3: The product / service determines greatly the value creation activities
Business Model Canvas (BMC)
ery The business model canvas (BMC) is a popular strategy and entrepreneurial space.
If you don't know it, don't worry it is very intuitively understandable.
It is a useful way to show key elements of a business model at a glance.
The upper part relates to value creation.
The lower part to value capture.
Biz Model Canvas: asset sharing
Here is the BMC for certain types of asset sharing platforms like Uber, Airbnb and similar businesses with 20 innovation and monetisation tactics.
Understanding playbooks & transfering tactics
Understand the innovation tactics used by Airbnb & Uber and all of a sudden you know a lot about a whole range of similar companies such as urban mobility platforms, vehicle / ride sharing, food / goods delivery platforms and many more.
Lime is another exciting innovator in the asset sharing space as is WeWork.
One the surface, one may think Lime would have similarities to Uber given they are in the mobility space.
And one may think that WeWork would have similarities to Airbnb given they are in real estate lease.
But looking at their business models will show us that they are very different in their value creation process.
Learning about them will bring you knowledge about a whole range of other exciting areas, such as mobility-as-a-service, real estate co-use, office sharing & service, co-living and more.
And this is only 1 of many product / service categories that we are covering on our pages.
Imagine what can can do when you know about all categories.
Value Capture (=monetisation)
But comparing Lime to Uber and WeWork to Airbnb shows us something else.
And that is that certain value creation patterns correlate with certain value capture, i.e. monetisation tactics.
E.g. Uber generates most of their revenues through commissions, Lime monetises mainly through pay-per-use.
Airbnb also uses commissions to monetise, WeWork however uses a subscription model plus pay-per-use .
Take it, some monetisation tactics have proven to be more beneficial for certain value creation patterns.
You cant look at value creation in separation to value capture.
Insight 4: Certain value creation patterns are best monetised through certain value capture methods
Patterns of tactics (=playbooks)
The next thing to know about biz models is that different elements work together to create value.
Looking at combinations of tactics is very powerful.
All business model elements are linked to all other elements but some links are far stronger and more relevant.
Insight 5: All business model elements are linked to all other elements but some links are far stronger and more relevant ⇒ patterns of tactics
Exciting Examples
So far, we were concerned about understanding others' business models.
But with all that we know, it's easy to start borrowing ideas from them
Knowing such patterns, you can borrow a a range of connected tactics at once without having to copy someone else’s business model in its entirety.
We can borrow, combine, tweak and further innovate on their ideas.
And we should realise that we can do this with business model tactics from all sort of areas.
In fact, if you want to differentiate yourself from your competitors, ideas from entirely different ideas may just be what you need.
Example Doximity
E.g. Doximity is an exciting health tech platform whose main features are a combination of Zoom, Google and Facebook
But they have not built a general purpose search engine, nor a general purpose communication platform nor a social media platform
They have borrowed a range of connected innovation tactics from each of these large players
They now have 75% of US doctors on their platform - what a lucrative user segment.
Doximity has 75% of US doctors on their platform just by combining elements from other business models.
But note: they did NOT combine elements from other Health Tech companies.
Instead they used ideas from entirely DIFFERENT areas.
Ingsight 6: We can innovate by borrowing, combining, tweaking and further innovating on patterns from other innovators from DIFFERENT areas
Example: Social Media & Social Communication
And there are many others who are doing the same.
Look at Crunchbase and you will find 40,000 Social Media companies.
Well, you guessed it!
Most of them are of course not a general-purpose social media platform.
It’s just a range of innovators who once again have borrowed many patterns from the likes of Facebook.
Wouldn’t it be a great idea to understand how the social media business model works so you can potentially use patterns of tactic from them?
Example: Search, Vertical Search, Market Intelligence
And what about the emerging vertical search engines?
They too borrow ideas from general purpose search engines but are again specialised on different verticals.
Like Google, but at a smaller scale, AirDNA crawls through the pages of Airbnb and other platforms to scrape relevant data.
Sure, they will never have as many user as Google.
But - like Doximity - they are focussing on a a number of highly lucrative customer segments such as real estate agents and real estate investors.
The space of highly specialised vertical search engines and market intelligence platforms is just a huge field of emerging opportunities.
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