Six Killer 21st Century Business Models

I recently finished reading the book Business Model Generation, which is an excellent reference source for many of the new corporate strategies of the 21st century.  There are six business models that seem to be getting the most attention in recent years – the long tail (amazon, iTunes); multi-sided platforms (Facebook, Google); freemium (Skype, Gmail); blue ocean (iPad, Wii); As-a-Service (Amazon Web Services, ZipCar); and Open Innovation.  More details on each follow below:

The Long Tail – Businesses focus on offering a large number of niche products, each of which sells relatively infrequently.  The Long Tail is the opposite of the traditional Short Head business model in which companies focus on selling a small number of popular items or hits.  The best examples of the Long Tail are found in the entertainment industry.  Amazon.com, Apple and Netflix have each made a much wider distribution of movies, music and games available to consumer community through their online business models.  Such a variety of titles would never have been affordable in a traditional brick-and-mortar model.

Multi-Sided Platforms – Bring together two distinct, but interdependent groups of customers on a common platform.  For example, Facebook brings together a group of corporate advertisers with hundreds of millions of consumers.  Google brings together corporate advertisers with billions of end-users in search of information.  Traditional media such as television, magazines and newspapers used a similar model to bring advertisers together with readers.  The platform is only of value to one group if the other group already present, which creates a “chicken and egg” dilemma.

Freemium – One customer segment enjoys the use of a service free-of-charge.  And these non-paying customers are financed by another segment (often smaller) that does pay.  Skype is a great example of a freemium model.  In-network calls are free between users.  However, external calls to the traditional phone network are charged on a per-minute basis.  Google’s Gmail is another example of freemium.  Most end-users enjoy free unlimited usage of the service.  However, a small minority of users pay to access premium features.

Blue Ocean – Businesses should create demand in a new, uncontested market space rather than compete head-to-head with other vendors in an established industry.  Apple’s iPad is an excellent example of a Blue Ocean strategy.  Steve Jobs envisioned that a market would exist for a device with some of the characteristics of a laptop computer and some of the portability aspects of a mobile phone.  Nintendo’s Wii is another example.  Instead of creating a video game console that competed on price and performance and targeted hard core gamers, the Wii focused on the untapped market of casual gamers with an inexpensive, unintimidating product.

As-a-Service – Transforms the traditional manufacturing model of making products to sell into a services model in which capabilities are rented with usage based pricing. Although the “as a Service” model is most frequently referenced in the technology sector it can apply to any type of product.  Car2go and Zipcar are other examples of as-a-Service models in the automotive industry.  Urban citizens who do not have the funds to purchase, maintain and house a vehicle in a large city can rent a vehicle and pay only for the amount of time he or she uses the car.  Rolls Royce offers a similar model for aircraft engines.  Commercial airlines can purchase power by the hour rather than making capital expenditures to purchase the engine.

Open Business Model – Acknowledges that no company no matter how large or successful will be able to attract the smartest people in its field.  Organizations can leverage the crowd to generate new ideas, technology or intellectual property.  New product ideation is one of the more popular focus areas for open business models.  For example, Procter & Gamble, GlaxoSmithKline and Eli Lilly have each embraced these concepts in the consumer products and pharmaceutical sectors.  Dell and Salesforce.com each generate many of their product feature enhancement ideas from their community of customers.

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