The Value Proposition in Business Models

Anders Sundelin wrote a post earlier this week about the evolution of the business model concept. He does a great job of showing the various ways in which this idea has been operationalized – it’s still surprisingly fuzzy. For the state of the art thinking on business model innovation, a special issue of Long Range Planning has twenty articles on the topic (all free to download through September).

One element that is consistent across nearly all of the different ways of thinking about business models is that of the Value Proposition. A central part of building a successful business model is creating value for your customers. Innovation plays a role here in two ways: first, innovation is the process of executing new ideas to create value, so it is a central part of any new value proposition; second, we can innovate in the way that we create value, not just in the products, services or know-how that we offer.

In order to innovate the way we create value, it makes sense to look at how we create value from information. In general, we do this by aggregating, filtering and connecting. This works for big firms like Amazon, and smaller firms like O’Reilly Publishing.

I ran across two more examples of how this can work for smaller firms this week. The first comes from Seth Godin’s description of Gerald Roush and his Ferrari Market Newsletter. Here is the description of the newsletter:

The newsletter, it appears, was not just lucrative, it was a bargain. It chronicled the pricing, whereabouts and details of just about every Ferrari ever made. If you were a buyer or a seller, you subscribed. If you wanted to run an ad, you were required to include the car’s VIN, which added to Roush’s voluminous database.

The Roush effect involves extraordinary domain knowledge, a market small enough to understand and diligently earning the role of data middleman. The players in the market want there to be one clearinghouse, one authority who can connect the data, see the trends and publish the conventional wisdom.

Often when people talk about “aggregators”, they are referring to places like Amazon or Google, who try to catalog everything (or close to it). This is a great example of how you can effectively aggregate on a much smaller scale. The Ferrari Market Newsletter isn’t trying to aggregate everything, it’s just trying to aggregate all available information on Ferraris.

In this case, the aggregating is combined with filtering to create an comprehensive aggregation of information in a specific niche. The connections are made between people that are interested in Ferraris – most importantly, between those that want to sell one and those who wish to buy one.

Note that this is not algorithmic filtering, as we see on the comprehensive sites. It is judgment-based filtering. It often sounds as though algorithms are the only way to go these days, and as this case shows, that is not at all the case. There are still opportunities to build effective business models based on personal judgment.

Here’s another example, though it is more speculative. On Techdirt, Michael Masnick talks about the idea of building affinity-based music groups. Techdirt is a consistently interesting blog, and you should definitely check it out. Here is how he describes these groups:

… Topspin’s CEO, Ian Rogers, penned an open letter to Guy Hands, the head of (struggling) EMI, suggesting that rather than think of itself as a “record label” focused on promotion and distribution (two things that are easier and cheaper than ever before), it could instead focus on being the smart filter for music listeners today, struggling to find the music they love amidst so much musical abundance in the world. The suggestion was to take some of the key, iconic, bands under the EMI roof, and put them under affinity-based “mini-labels” with other less well known bands, that would appeal to people who liked the more well known band. It seemed like a great idea, which, of course, EMI has not done.

Here again, the value is created through filtering. And as with the Ferrari Market Newsletter, this model would then try to aggregate all of the bands that relate to each other in a specific way. This is a model that has worked very effectively for many years for Dischord Records – and like Masnick I think it has great potential.

Creating a novel value proposition is an essential part of generating an effective business model. There are great opportunities to do this in creative ways. If you focus on aggregating, filtering and connecting, you can build a good information-based value proposition.

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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