What is Business Model Innovation and How Can you Implement it?

By: Jeffrey Baumgartner

Business model innovation is a potentially powerful strategy for growing your business in the current recessionary economy. In this article, Jeffrey Baumgartner provides a helpful overview of it, and outlines some ways in which your organization may be able to leverage it.

When we think about organizational innovation, there is a tendency to think either of research and development innovation leading to new and improved products, or of cost-cutting innovation that reduces operational costs and hence profitability. However, there is another kind of innovation: business model innovation. And if your company is not exploring this avenue now, you should start. I’ll explain why in a moment.

Business model innovation is essentially reinventing your business. Typically, this involves fundamentally changing the way you make, deliver and/or sell your products or services in order to deliver value to your customers in new ways. Car-sharing is a good example. Traditionally, people buy or lease their own cars and occasionally rent cars when they travel. For people living in larger cities, however, cars are particularly expensive to own. Parking is both difficult and expensive. Moreover, thanks to extensive public transportation, most city dwellers can go for days at a time without cars. Nevertheless, many of them still need cars once or twice a week. Car sharing was invented for such people.

The way car-sharing works is simple. You register with a car-sharing company. Then, whenever you need a car, you go on-line and reserve a vehicle near you. You can specify a rental period of as little as an hour or as long as several days. Your car-sharing membership card acts like a key for the rental vehicle, unlocking it and allowing you to drive it. So, if you only need a car for an hour to do some shopping, you only pay for that hour. If you need a car for a three day road trip, you pay for that. Car sharing frees people from the hassles and costs of owning cars in crowded cities, but gives them convenient, pay-as-you-use-it motoring options. For the individual who only uses a car once or twice a week, substantial savings can be made over buying and maintaining car.

Other relatively recent examples of business model innovation include software as a service (SaaS), in which users access software via the Internet and pay a subscription rate based on actual usage. SaaS spreads the cost of a major software implementation over a long period of time and allows customers to pay only for what they use.

Amazon, of course, changed the way we buy books. The list goes on.

Economic changes require business model innovation

Business model innovation is always important, discovering new ways of delivering value to your customers can give you a leg up over the competition and enable you to garner market share – always a good thing. But, in the current economic situation, I would argue that business model innovation is critical.

Although economists tell us that we are coming out of the recession, it does not feel that way. Apparently (and I will confess here, I am no economist – so apologies if I over-simplify), the nature of the recent recession and its depth mean that the recovery will take longer than usual. This can be seen in long-lasting high unemployment levels. Moreover, conflicting reports about the condition of the economy, not to mention threats of a double-dip recession, leave businesses uncertain about the future and therefore reluctant to hire new people or make major investments whose return may be as uncertain as the economy.

As a result, more people than usual do not have jobs. Many people who do have jobs feel insecure about their futures and so are saving more money than they were a couple of years ago. Manual laborers are receiving less overtime and so have less income. In other words, many people – your customers (or, if you sell to businesses, their customers) – are being a lot more careful about spending money.

At the same time, businesses are generating less income and financial projections are more conservative than usual. That means they are spending less and expecting more for their investments.

But there is a twist to this. Many companies have recently laid off large numbers of staff. This means that existing employees are doing more work themselves, giving them less time to take on new responsibilities. In some cases, employees with specialized skills are gone, leaving companies without anyone who can perform certain tasks. These issues will clearly cause problems if your product requires staff time or specialized expertise to operate.

New ways of buying

What all this means is that your customers have a different attitude towards how and what they buy. Consumers and businesses are being more careful with their cash. However, some businesses are also under-resourced and, as a result, are willing to spend more for products that do not require manpower to operate, or which reduce employee workloads.

The knee-jerk reaction of the traditional manager to this economic climate is to reduce prices. But if you sell fewer products at lower margins, that will not do your company any good. A better approach is to look at new ways that your business could deliver value to your customers.

One approach would be to allow customers to pay for your product as they use it (such as SaaS). Rather than paying thousands of dollars up front for a product expected to last several years, you might rent or sell your product as a service for a monthly payment of a couple hundred dollars.

If customers will only need your product occasionally, you might follow the car-sharing model and allow people to rent your product for short periods. Although this would result in less income per person, it might make your product interesting to a much larger number of people, thus generating many more sales, albeit each one for a smaller amount of money. Moreover, you will probably generate more income per item as the sum total of rental payments over the lifetime of the product can be expected to be higher than the purchase cost of that product.

In the case of specialized products for business, you might sell your product as a service in which your experts operate the product on the customer’s behalf. In companies where the workforce is already stretched to the limit, this would be an attractive option as it would save your customers from having to invest in more staff had they bought your product.

You may simply look at new ways of delivering your product to your customers, allowing them and you to save money.

Another thing to keep in mind is that when people are concerned about their income and savings, they often like predictability more than the cheapest possible prices. For instance, rather than buy services on an as-needed basis, which may result in unpredictable annual costs, many people prefer to purchase a fixed price package for services – albeit with the option to purchase more services if needed.

What can you do?

I would argue that every business today needs to review its business model in order to explore opportunities to innovate. Moreover, the faster you move, the more likely you are to be able to exploit the new opportunities that result as a result of your innovation. You do not want your competitors to grab the first-mover’s advantage, do you?

Insight

In the search for new business models, you will need lots of insight. This involves a little research.

Look for insight in various places. First, look at who your customers are, how they use your product and how they pay for your product. If sales have slowed down, ask why. If customers are paying more slowly or not at all, ask why. You can ask your customers for new business model suggestions. But, for all the excitement about crowdsourcing, the truth is: disruptive innovations do not come from customers suggestions, but rather from observing customers.

Secondly, look at the business models of other businesses, especially businesses unrelated to yours. Look at software as a service, car-sharing, fast food, discount shops and other business models. In particular, look at businesses that are thriving in the current economic environment and look at new business models that other industries are adopting.

Then ask yourself, “How might we adopt this model to our business?” This is important. Do not ask whether or not it would work. Ask only how it might work at this stage. Deciding something will not work before reviewing it is a certain way to ensure it does not work irrespective of the concept’s potential. Thinking, “Wouldn’t it be cool if we could do something like that”, on the other hand, is the first step towards breakthrough innovation.

Act quickly

Assuming you do devise and develop a promising new business model, you should act quickly. Very possibly, your competitors are also exploring new business model ideas. An even bigger threat, however, is the competitor that does not yet exist: a nimble and innovative start-up that disrupts your sector with a clever new business model. Would it not be better if your company received the accolades for disrupting the business model instead?

By Jeffrey Baumgartner