In the Big Shift, we are all experiencing mounting performance pressure. Our response to that pressure so far has been failing, as revealed by our analysis of the collapse in return on assets for all public companies in the US since 1965. If we are going to turn that pressure into opportunity, we need to re-think everything, including the business models that have driven success in the past.
So, what is a business model? Everyone has their own definition, so let me offer mine. Business models focus on the specific form of value delivered to customers and the economics (revenue, expenses and assets) required to deliver that value to the marketplace so that customers feel they are paying a fair price and the owner of the business earns a decent return. It’s ultimately all about money. How much are customers willing to pay for value received and how much does the business have to spend/invest in order to deliver that value?
Our ROA analysis suggests that traditional business models, the ones that created so much value for the enterprise in the early to mid-20th century, are broken. So, what are the options? Are there new business models that can turn the pressure into profit?
As an optimist, I believe that the same forces that are generating mounting performance pressure are also providing the foundation for more attractive, but very different, business models. These new business models can create unparalleled value for customers and for the firm. But to harness these business models we need to step back and question some basic assumptions about the economics of the businesses we are in.
I see business models evolving on three fronts: payment, data and participants.
This dimension focuses on what we are asking customers to pay for. It is evolving both because customers are becoming more powerful and because digital technologies are making the invisible visible, creating new pricing possibilities that would have been unimaginable just a decade or two ago.
The traditional business model involved payment for a product or service upfront, regardless of whether or not it was ever used. Customers are less and less willing to tolerate this form of payment and are increasingly expecting to pay for actual usage – look at everything from software as a service to automobiles (e.g., the rapid growth of ride-sharing services) for early examples of this. Of course, without the technology to monitor usage, these kinds of pricing options would be unthinkable.
But, that’s just the beginning. As customers gain more power, they won’t be satisfied with paying for usage. They’ll want to pay based on value created, rather than simple usage. What if I use a product or service and create very little value from that usage – should I really have to pay for simple usage? We are already seeing value based billing emerge in certain parts of the professional services world.
This is obviously a far more challenging expectation because it requires the ability to measure and monitor value creation for the customer, rather than simple usage. But technology is rapidly evolving to give us a much richer view of the context of usage and the impact created by that usage. And, if we can quantify the value created for the customer from usage of the product, that customer would be much more willing to pay for value received.
Unless you are directly in the data business (e.g., credit scores or audience measurement), chances are data is not part of your business model, at least in terms of value received by the customer or revenue generated from the customer. Companies use data to optimize their own operations, but they rarely share any of that data with the customer.
That’s going to change, big time. As data generation and capture becomes both cheaper and more pervasive, new business models will emerge where more and more of the value delivered to the customer resides in the data rather than the product or service. Rather than remaining a by-product, data will become more central to the value received by the customer.
The type of data delivered to the customer will evolve. Today, the data is largely descriptive. For example, in my car, I get real-time updates on my speed, my gasoline usage and the amount of gasoline remaining in my fuel tank.
Over time, we will see more and more harnessing of predictive data, helping customers to anticipate future events. For example, some industrial machinery is starting to anticipate the increasing probability of a breakdown, helping users of the machinery to increase utilization by undertaking preventative maintenance as a result of the ability to better anticipate potential breakdowns.
Even more value can be created by harnessing prescriptive capabilities of the data. Rather than just anticipating likely future events, we increasingly have the ability to advise customers on what action to take in response to those future events in order to create the most value for themselves.
Back to my automobile example, what if my auto started to advise me on driving techniques that could help me to improve my fuel efficiency? This prescriptive capability comes from not just seeing an individual customer’s data, but the data of many customers and beginning to identify and analyze patterns of usage relative to value created.
Here’s the paradox. We, as customers are becoming more and more powerful, but we also are experiencing mounting performance pressure on multiple fronts, as individuals and as institutions. If there is someone who can provide us with insight on how to act in ways that create even more value for ourselves, we not only would welcome that insight, but we would likely be willing to pay for that kind of help.
Business models in the past have been pretty simple. There was me, the vendor, and you, the customer. I provide you with products and services and you pay me for those products and services.
That’s all changing. Increasingly, we are seeing the opportunity to mobilize others to deliver value to our customers. We are even finding ways to connect our customers with each other so that they can offer information and advice to each other. Platforms are becoming more and more central to value creation and value delivery.
Platforms are great for customers. They offer customers far more choice and flexibility in moving from one product or service to another. As customers become more and more powerful and experience pressure to increase their own performance, they will see more value in accessing platforms that expand their array of choices.
But, from a platform provider viewpoint, platforms definitely require an evolution of the business model. We need to be clear up front who will be paid for what. We also need to be clear about what services we will be providing to third party providers on the platform as well as to our customers directly. The economics certainly become more complicated.
But there’s yet another stage in the evolution of participants in the business model. What if we extend the range of participants beyond those who are on any single platform to anyone anywhere? If customers want more choice to ensure that they are getting the best value, why would we restrict their choice to those who are on a specific platform, no matter how big that platform might be?
Now, of course, platforms help to organize choices and make them more accessible but we are increasingly able to use digital infrastructures and the Internet to search for potential providers wherever they might be. Even pre-Internet there were business models that involved this kind of broad reach. For example, think of executive recruiters who offer to find the best candidates for a position regardless of where they are currently. I suspect that, over time, we will see more and more of this kind of business model to expand choice for customers.
Tying it all together
Am I saying that all business models will evolve to the extreme position outlined on each of these dimensions? No, we will see a healthy diversity of business models and the specific choice of where to be on each of these three dimensions will depend in part on the specific market/industry context as well as on the aspirations and capabilities of the business leaders. By my count, we are likely to see at least 26 different business models. Ultimately, the success of any of these emerging business models will hinge on the ability to deliver differentiated and superior value to the target market.
What I am suggesting is that our existing business models are generally much too limited. Over time, we will need to evolve those business models along one or more of the dimensions that I have outlined. Business leaders need to systematically assess how their particular market or industry is likely to evolve and then determine what new business model will be most effective in creating and delivering value.
I'll point out that if you choose the extreme position outlined on the right hand side of each of these dimensions, you end up with a business model that maps to a significant business opportunity that I’ve discussed before – the trusted advisor. There will certainly be companies that embrace this business model as a way to become trusted advisors and address an increasingly powerful unmet need among customers.
I'll also suggest that these emerging business models give hope that not everything will (d)evolve towards “free” because they focus on the opportunity to provide great value to the customer in highly differentiated ways.
The careful reader will note that I have not referenced advertising-based business models. This is a big topic in its own right (and I’ll try to cover it another blog post), but just to end with a provocation: I don’t believe advertising based business models will be sustainable in the Big Shift. Advertising is going to prove to be a less and less effective way to reach and engage with ever more powerful customers. As a result, we are ultimately going to have to figure out how to offer something of value that the customers will pay for themselves rather than continue to look to advertisers to foot the bill. This makes the search for new business models even more urgent.
Finally, as a more general note, let me caution that business models cannot be considered in isolation. Business models are generally focused on how to create and deliver value to customers while generating enough revenue to earn a return on the resources required to support the business. They are very useful as a snapshot of how value might be created and captured but they rarely explore in any systematic way the dynamics that could radically re-shape the market arena over time. In more stable times, this might have been OK but, in environments that are evolving at exponential rates, this potentially becomes a serious blind spot. In this kind of environment, it becomes important to understand the longer-term dynamics that are playing out on the broader business terrain and how that terrain is likely to evolve to determine whether the company has the capabilities and position in the marketplace to capture value over time relative to other players.