Interdependent business models are created by entrepreneurs or managers in several ways: when they choose the set of organizational activities they consider relevant to satisfying a perceived market need, when they design the links that weave activities together into a system and when they shape the governance mechanisms that hold the system together.
Interdependence among business model design elements
Content, structure and governance can be highly interdependent. Take the San Francisco, California-based peer-to-peer lending company Prosper, for example. The venture aims at enabling direct, small, unsecured loans between individual lenders and borrowers. Early on, the founders made the conscious decision to let lenders choose the borrowers to whom they wanted to lend their money. This structural choice settled the question of how lending and borrowing activities were linked, and it also constituted a decision about governance because it shifted the evaluation and selection activities to the customers and away from the company.
Interdependencies between business and revenue models
Managers also need to consider the interdependency between a company’s business model and its revenue model. The revenue model refers to the specific ways a business model enables revenue generation for the business and its partners.
It is the way in which the organization appropriates some of the value that is created by the business model for all its stakeholders. A revenue model complements a business model design, just as a pricing strategy complements a product design.
Consider Better Place, whose business model aimed to provide electric vehicle charging services. Like a mobile phone operator whose business model centers on enabling the use of the mobile phone device through its network rather than on the handset device itself, Better Place’s business model centered on providing charging networks and services rather than on the electric vehicle itself. It involved an innovative business model structure with partners ranging from governments, vehicle manufacturers, clean energy producers and others. Just as mobile phone operators charge customers variable or flat rates for telecommunication services, Better Place intended to implement a revenue model as a function of customers’ car usage (miles driven), thus taking into account the interdependency between its business and revenue models.
The concepts of business and revenue model, although conceptually distinct, may be quite closely related and even inextricably intertwined. For example, in the product world, Gillette uses its pricing strategy of selling inexpensive razors to make customers buy its more expensive blades.
A business model lays the foundations for a company’s value capture by co-defining (along with the company’s products and services) the overall “size of the value pie” (total value created), which can be considered an upper limit to the company’s value capture. The greater the total value created through the innovative business model, and the greater a company’s bargaining power, the greater the amount of value that the company can appropriate.
As the Better Place example suggests, business model innovators need to bear in mind that identifying technologically or strategically distinct activities can be conceptually challenging, because the number of potential activities is often quite large. Many seemingly inseparable activities can now be broken down even further, especially given ongoing advances in information and communications technologies.
What’s more, making changes to a company’s whole activity system rather than optimizing individual activities, such as production, requires systemic and holistic thinking, which can be demanding. When responding to a crisis, operating in tough economic times or taking advantage of a new opportunity, rethinking an entire business model may not always be the first thing on a manager’s mind. That fact is particularly true when the level of resistance to change is potentially high. As a result, choices on business model design often go unchallenged for a long time.
What are your experiences with, or thoughts on, operating a company by using interdependent business models?