Electric Cars & Business Model Innovation: Better Place

When was the first car fully powered by electricity built?

Depends on how you define it. There was a prototype built in 1835. One built in Belgium set the land speed records in 1899 (68 mph!). And a few were on sale from at least 1895 on.

In all that time, they’ve had one fundamental problem – battery life. They’ve all had restricted range. As a consequence of this, most of the recent electric cars have been small, with poor performance – making these trade-offs extends the range of the vehicle. It’s always been possible to make electric cars that perform as well as or better than petrol powered vehicles. Just look at the Belgian land speed record – or the cars from Tesla Motors today.

So electric cars have been around for a long time. Why haven’t they take off? There are a variety of reasons, but one critical one is that for the most part, they have primarily been conceived and sold using the same business model used for petrol-powered cars. Consequently, they are judged against the performance of petrol-powered cars, and in this regard they consistently come up short.

What’s the solution?

Business model innovation, of course! Watch this talk by Shai Agassi from last year’s TED Conference, and think about the business model that his company Better Place is trying to implement:

We discussed this video in class this week – when I asked how this business model stacked up against the traditional one for cars, one woman enthusiastically said “Everything is different!” She’s right. That is why Better Place is becoming a popular example among people interested in business model innovation. Mark Johnson talks about them in Seizing the White Space, Anders Sundelin has written several excellent posts on Better Place on the Business Model Database Blog, and it’s been discussed on Knowledge @ Wharton Innovation and Entrepreneurship page.

Because Better Place has already been pretty widely discussed, I want to focus on just two parts of their business model innovation: revenue generation, and their value network.

The Better Place vehicles are being sold on the mobile phone model – the hardware is pretty cheap, because it is subsidised by a usage fee. You get the car for very little, but you pay Better Place a mileage fee. This is important for several reasons. One is that dramatically changes the economics of buying a car. In Denmark, you will be able to buy a BP car for about 1/3 the cost of a petrol-powered car of similar specs, and running costs will be about the same. This introduces a new buying decision for people. It’s no longer “I’d like to be green so I’ll accept a bunch of severely limiting performance trade-offs to do so.” This payment structure actually makes BP cars attractive whether you want to be green or not.

The changes in the value network are driven by these changes in the revenue generation mechanism as well. Better Place is not manufacturing cars – they are assembling an electric vehicle ecosystem. Here is the description from the Wharton piece:

Just like telecoms operators established a wireless network to enable mobile phone communication, Better Place established a network, but in its case to enable mobile transportation with electric vehicle charging spots and battery exchange stations powered by renewable energy. It is creating an ecosystem of companies, which will produce electric cars with batteries that can be exchanged or recharged at the stations, manufacture batteries, set up electric-car dealerships and more. Just like telecoms customers paying for minutes used on a wireless network, its customers pay for miles driven. The vehicles become the means of generating revenue for Better Place.

“The company thought about a novel way to [change] the automotive industry in a way that alleviates a reliance on fossil fuels. It’s good for the environment, good for national security, good for consumers,” Amit notes. Better Place “may even give customers a car for a nominal fee because it makes money from renting a battery, just like the cell operator gives you a free phone to use on their network.” The Better Place business model, he says, has turned much of what the auto sector does on its head. “Right now, when a dealer sells you a car, he doesn’t make money when you drive it. The Better Place revenue model is based on car usage. This is a different business model.”

By approaching their business model this way, Better Place accomplishes two important things. One is that they establish an ongoing relationship with the car buyers. For as long as you are driving one of their cars, you’re connected to the firm. The second accomplishment is that this extended recharging and battery-swapping network gets around the range problem that has been the critical issue for electric cars for well over 100 years. By taking that out of the equation, they eliminate the primary reason for not driving an electric car.

Finally, this business model positions Better Place to take advantage of what will be substantial falling costs of producing electricity for their cars. As Agassi notes in the talk, the cost of producing and storing power will drop in half about every five years. This is staggering – it means that these savings can either be passed on to consumers, or held as extra profit. Either way is good Better Place.

As my student pointed out, all aspects of the Better Place business model are different – not just these two things. This is a great case study of business model innovation. It shows how new business model can reinvent an industry. It’s pretty easy to see how the auto industry will change enormously if this approach works. It also demonstrates how all of the elements of a business model need to be integrated. I didn’t talk about all of them, but you can see in the talk how the market being served, the problem being addressed, and the firm’s place in the value chain are all different too – and that everything fits together.

Business model innovation is a powerful, yet often overlooked form of innovation. Innovating your business model not might have results as radical as Better Place’s, but it is an option that is open to all organisations. And it’s one to which you should give some thought.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

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