Here is Why Business Model Innovation is Powerful

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A Business Model Problem – Copying Everyone Else

Business model innovation is too often overlooked by firms. I ran across a great example today of the kind of opportunity that is available. Check out this graphic from Lean Analytics by Alistair Croll and Ben Yoskovitz:

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This shows the response to the question – “how do you set your price?”

The response is mind-boggling.  More than half of the firms surveyed just take prices from their competitors.  A quarter use cost-plus, which is a terrible tool too.  But at least it relates to some kind of real number from inside your own firm.  18% guessed.

Eighteen percent guessed!

And just over 20% based their price on data gathered from their own customers.

At a minimum then, 70% of firms put no strategic thought at all into how they set prices, which, arguably, is one of the most important metrics in your business.

Business Model Opportunity – Make Up Your Own!

Innovative new products and services work best when they are supported by an innovative business model.  If 70% of firms aren’t even thinking about how they set their prices, then how many are thinking about innovating their entire business model.

Not very many.

This is a huge opportunity – this is a big part of why business model innovation is so powerful.

Here are some ideas for taking advantage of this opportunity:

  • Be a Lean Startup. Lean startups turn into innovative firms, because they are built on an experimental, data-driven culture.  If you are using lean startup correctly as an approach, then you will end up as one of the 21% of firms that sets your price based on customer data.  Better yet, your entire business model will be based on hypothesis testing.  Lean Analytics provides a great set of tools for doing this.  Croll & Yoskovitz match metrics with where you are in the growth trajectory:
    1. Empathy: where you identify a real problem for people that needs solving.
    2. Stickiness: where you prove you have a solution to the problem that works.
    3. Virality: where you structure your solution so that the idea will spread.
    4. Revenue: where you start making money.
    5. Scale: where you get big.
  • Use Lean Startup Principles in an established firm. Lean Analytics suggests that intrapraneurs go through the same five steps with new innovations as startups, but with one big additional step: find an executive sponsor.  In a large firm the process looks like this:Screen Shot 2013-07-23 at 7.24.08 PM
  • Test Your Business Model Like a Scientist. The point with all of this is that you can build a new business model based on data.  The stats on pricing show that only about 20% of firms are doing this right now.  Imagine the advantage you can gain if you base your entire business model on genuine feedback from customers.

When you get right down to it, innovation is about solving real problems for people.  That’s how you create value.  Even if your solution to a problem is genuinely novel, it’s extremely hard to get people to listen to your idea if you cram it into the same old business model that they’re used to seeing.

That’s why copying from competitors is such a bad idea.  There’s nothing distinctive about that.

So go out and talk to people.  Identify real problems that they face, and build a hypothesis about how to solve one of them.  Then test that hypothesis carefully.  If you do that, you’ll build an innovative business model on top of your core innovation.

The thing that makes business model innovation so powerful is that so few people do it.  You should give it a try.

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

Please note: I reserve the right to delete comments that are offensive or off-topic.

6 thoughts on “Here is Why Business Model Innovation is Powerful

  1. It’s funny. I just – literally JUST – got my first paid subscriber this afternoon. How did I set that annual subscription price? I sort of looked around at what other magazines cost and guessed, based on how I felt my offering stacked up, comparatively.

    They have twice the pages, but greater than 90% of those pages have ads on them – or are nothing BUT ads – where I have ZERO advertising. They deliver a traditional, printed magazine to your door every month, where I only deliver digital to your inbox – plus the option to print-on-demand, which costs nearly 4X the going rate. So I figured, though my aim is to get up to US$36/yr (so as to afford to do the work full time, hire additional staff, and deliver print subscriptions), I need to start small.

    I had to laugh when I saw that most just do what everybody else is doing. Which is when it hit me that I’m just as guilty. Haha. Fortunately, what I’m doing is meaningful enough to the few customers we’ve got so far that they continue to support us. And that feels pretty good. Besides, price is not the place I want to innovate. 😉

  2. Dear Tim!
    Is in the book Lean Analytics a detailed description of how to find the real problems for consumers?

    • No. It is a detailed description of how to use analytics to build a product that solves a real problem for consumers. If you are interested in finding the problem and matching your solution to it, a much better book is Running Lean by Ash Maurya. He covers that issue very effectively.

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