What is Business Model Innovation?
Business model innovation is defined as the process of partially or fully altering the existing model of business such as operations, target market, customer outreach, and value proposition.
It is important to note the distinction from product innovation or service innovation, where the product or service undergoes modifications or complete changes instead of the business model. The opposite takes place under business model innovation, where the product or service remains the same and the model around selling it undergoes changes at various levels of the business.
In this type of innovation, any area of the business contributing to the core business model other than the product or service is under the microscope to be innovated upon. For example, a video sharing platform may choose to move from an ad-based revenue generation model to a shared model where users can subscribe and pay to go ad-free or continue with ads. This is a value proposition innovation within the business model innovation framework.
Similarly, a consumer products company may choose to change their target market from budget-oriented consumers to high-end consumers or vice-versa. Here, the product itself is not undergoing changes, instead the focus on products in the line-up or the way the product’s features are packaged changes. For example, a soap brand may discontinue a premium segment product and instead focus marketing on the product already being made for the mid-budget segment.
Various Areas of Business Model Innovation
Business model innovation involves several key components that collectively define how a company creates, delivers, and captures value. Innovation in any one of these areas also means that it may affect the other areas of strategy and operations.
Here are the key areas of innovation in the business model framework:
- Feature grouping and value propositions
Whether it’s a software or a soap, every product company experiments to find the best way to group their features and price them accordingly to find the best value proposition for customers. This is a commonly used business model innovation strategy to differentiate from other products with similar features. The core benefit here is that businesses can shift focus from one type of buyer to another by increasing the value proposition of that segment of users.
For example, software companies often provide 4 to 5 subscription models to users, typically ranging from free with very basic features to advanced and relatively expensive enterprise/ team subscriptions with all the product features made available. By altering pricing and feature grouping, the company can come up with a new value proposition with a core segment of buyers in mind.
Another example in the consumer products segment, can be a shampoo brand offering a line of products, with the basic shampoo ingredient product being priced the lowest, with prices going up to target multiple price brackets and buyers. If such a company wants to capture more of a certain segment, they may choose to offer discounts or better ingredients for a specific shampoo amongst the line of shampoos it holds, thereby potentially allowing for deeper penetration into this segment of buyers.
- Customer acquisition strategy
The marketing and sales funnel through which customers are being acquired is a very significant area of focus for any good business. This typically includes how customers are made aware of the product’s presence across the buyer’s journey and how the mechanism through which final sales happen.
For example, a vacuum cleaner brand may choose to change its customer acquisition stream from door-to-door demonstrations and sales, plus through brick and mortar store presence, to going fully online, where demo and sales happens. Instead they may decide to use their physical real estate presence to focus on enhanced servicing, instead of sales. This will also be an example of complete business model innovation through a dramatic shift in customer acquisition strategy, which in-turn requires alignment of all other business operations.
- Customer relationship strategy
Customer relationships are another area where innovation can be derived by increasing or decreasing effort around it, and/or finding new methods of relationship-building.
For example, a self-service enterprise software business may not focus much on customer relationship building in its initial stages of growth. However, after acquiring some high-profile customers, they may shift their focus to retaining and growing the accounts of these large clients through robust customer relationship building. Such a business model innovation effort may create a new revenue stream from existing customers’ renewals and upgrades.
- Operational activities
Business operations is a great area for innovation, as it may include any team involved in customer acquisition or relationship team, such as marketing, sales, account management and customer support.
An example of business model innovation through operational shifts can be business moving from online ad-based lead generation to focusing on organic and sustained demand building through efforts around driving organic traffic and social distribution channels.
Another example can be a business that shifts its customer support model from phone and email based to live-chat.
Such efforts may also involve retraining of staff, change in work allocation, team leadership structures, hiring external mentors and consultants etc.
- Target market segment
The core target market of a company is any group of potential buyers who fit a certain description or category. For example, Fortune 500 enterprises can be a target market for a high-end data analysis software, the households in a real-estate area can be the target segment for a retail chain, etc.
Now lets see how innovation takes place through this area of business operations. Let’s take a company that builds homes in the range of $1-5 million. Such a company may innovate its model by refocusing on the lower area of the segment around $1 million in certain residential areas based on purchasing ability, whereas it may only make homes around $5 million price point in select other areas. This would mean the business will need to realign suppliers, planners and workers based on this new model, across the geographies of the 2 specific target market segments.
- Vendors and partnerships
Suppliers/ vendors and companies/ individuals with whom a business chooses to partner with, can be a big area of impact for a business. For example, a partnership with an influencer can reinvigorate demand through product perception, or if done wrong can also collapse it.
Innovation in this area can include new partnerships, or new areas of focus and activities with existing partners. For example, you may create new marketing strategies with your external agencies to give rise to a rebranding effort. Or working with suppliers and industry associations to cut down costs of certain components through group-based supply and demand.
Another example can be in the smartphone making business, where USB-C was built as the standard for most smartphones through the USB Implementers Forum (USBIF) that includes hundreds of companies. This made manufacturing and assembly of USB-C much cheaper, as now there is a standard and guarantee of bulk-demand.
Business Model Innovation Process: 5 Key Stages
Stage 1: Self-evaluation and market analysis
Self-evaluation and market analysis in this regard go hand in hand. The goal is to understand where your business and its products/ services stand with respect to the market and where the untapped or low-tapped opportunity exists.
For instance, you may discover a certain market segment whose demand may not be adequately met; a feature that your product has that has much higher demand among certain buyer profiles; a vendor that can do a lot better at much less cost; a marketing stream that has much higher ROI etc.
These are not yet innovations at this stage, instead are areas where you can innovate as a business to meet these opportunities.
Stage 2: New innovation proposition
Based on the evaluation in stage 1, now is the main job to come up with innovation propositions that meet company goals and is rationally backed up with understanding and data.
During this stage, it is important to keep in mind the feasibility of its implementation vis-a-vis budget and resources. A proposed innovation to the business model can be logically sound but may fall off in the amount of resources it will need funding for and the risk balance.
It is always great to propose big changes in phases, such as low-hanging fruits that can be quickly implemented and based on their success more implementation can be done linearly.
Stage 3: Alignment across teams and leadership
Once the business model innovation is prepared, proposed and approved, the goal is to bring about alignment in the new direction from all stakeholders. This may involve team leaders and members beyond your immediate team or may be limited to just your team.
For example, a marketing team member is proposing paid marketing channels as a new marketing stream in a company that has never done any paid campaigns. Such an alignment typically requires the marketing leadership, operational contributors within the team, budget approval from the COO, and may even require CEO approval especially in small-to-medium businesses.
Stage 4. Market testing
Any innovation in the business model will require market testing before the company gets fully invested in it. This may also require alignment and co-operation from external contributors such as vendors and freelancers, especially if the innovation affects the supply-chain operations.
For example, if a company is testing out breaking into a new market segment, this will require limited shifting of supply-chain resources to the new market or partner with new vendors in that region, to make the test possible.
There also needs to be clear prior internal agreement on the success metrics of the test.
Stage 5. Full-scale implementation and tracking
Based on the success level of the test, the business may choose to go full-scale in this new innovative direction. The good news is, all the moving parts involved in the test are already introduced to the new approach and the operations only need to be expanded in scale to reach full potential.
What is key here is to keep on tracking the metrics to ensure that nothing is breaking down due to increased scale and that the set metrics for success are continually met. When something appears broken, pause, evaluate, fix and then continue. This will also prevent any error from spreading too far into the operations.
Importance of Business Model Innovation
Business model innovation is important for any forward thinking company. Let’s explore a few key factors that make it so important in the modern business landscape:
- Potential to hit big without product changes
Success of a company often depends only partially on the product and more on who it is being sold to, how it is being made available and how it is being supported. Many may not be aware, but a key reason for the huge success of many smartphone brands is the innovations they brought about in supply chain management, such that products are made available quickly when there is demand and not holding onto huge inventories.
In such industries where the products are relatively standard in their features, which is most industries, it is business model innovation that makes the difference between big successes and moderate ones.
- Responding to market changes
A company that is at least to some extent always trying to innovate on existing business models and evaluating itself constantly, such a business is much more prepared to respond to market disruptions and changes. For example, a new vendor may enter the market with quality offerings at cheaper prices, a business that signs an exclusive supply deal with this vendor will be able to offer its own products cheaper than the rest of the competition. Even small innovations scale up the chain and cause disruptions to the final consumer’s market.
- Better business positioning through opportunity awareness
Successful innovations to the business model lead to better positioning of existing products and services in the market, without changing anything in the product or the service.
Lets say, there is a segment of buyers which has recently grown, but no product is packaging features in a way that best suits them. A company that is aware of this opportunity can simply realign and create a value proposition for these buyers, without losing on existing customers. Here, it is simply pure opportunity awareness and responding to it with existing products but new value propositions.
