Business Model pattern

Five step procedure to Identify your right Business Model pattern for your organization.

Before understanding Business Model patterns, we must understand what is Business Model. A Business Model is defined as the rationale by which the organization creates, captures and delivers  relevant perceived value to its customers. This is visually very well represented by Business Model canvas( BMC), with its Nine Building blocks, and it also acts as a shared common language as far as describing the Business Model of the company.  When these Nine building Blocks of BMC are compared, one finds that Business Models of same business pattern have many of the characteristics, arrangements, behaviours which are common.

According to the Book Business Model generation, the first step is drawing the BMC, then identifying the Business Pattern, and then the other steps of designing, strategizing, and the generic process of bringing innovation to  the Business Model.

First let us see the Nine Building Blocks of Business Model canvas. see the image bellow. As shown from left to right they are as follows

1.)Key Partners

2. )Key Activites

3.) Key Resources

 4.) Value Proposition

5.)Key Relationships

6.) Channels

7.) Customer segments

 8.) Cost structure

 9. )The revenue structure.

Business Model canvas

In brief, we can ask these questions to get an answer for each of the Building Blocks.

1.)Key partners.

 Who are our partners, which help us provide our solutions in the business.? For example for a telecom company, the key partners could be equipment providers, It infrastructure providers and others.

2.)Key Activities:

The relevant question we could ask is what do we do so that we generate revenue? Taking the same example above for this block and all other blocks, the key Activity of the telecom provider is maintaining the network which enables the customers to communicate both voice and data both within the company’s network and external networks.

3.)Key resources:

The relevant question could be which key resources enable the company to generate revenue?. They could be the Network of the company, the customer database, the human resources maintaining the system and others.

4.)Value proposition:

 This is the main block of the BMC. In this, the relevant question would be what product or service provides value to the customer and how it is achieved. For a telecom company, the value proposition is to enable its customer to communicate both voice and data.(Access Internet services ) Getting the value proposition of the Business model right is like working according to the 80/20 principle as explained in our earlier post. For more info check the following link.http://zoomplussystems.com/do-you-want-to-know-how-you-can-be-a-power-worker-by-using-the-80-20-principle/

5.)Customer relationships;

 In this, the relevant questions would be to what level of customer relationships we need to have with our customers, and how we will achieve that. For example for the majority of the telecom customers, it will be through call center, SMS, email, and other mass remote customer relationship management methods. Physical outlets will also be required for the customers to make bill payments and other services for which the level of customer engagement is at a deeper level compared to a remote customer. In this case, the relationship of the staff managing the outlet with customers plays an important role.  Sometimes they have really large customers in terms of the number of connections per organization,  for which a Dedicated Relationship Manager is appointed and special services are offered.

6.) Channels;

 The relevant questions for this block could be what channel we will use to acquire customers, service them, and other issues. In this case, the telecom operator may appoint retailers to sell their prepaid and post-paid plans. They may also have their own outlets. Online and telephonic channels could also be used to sell new connections.

7.)Customer segments:

the relevant question is which customer segments we are serving. For example prepaid customers, post-paid customers, enterprise customers, and others. However, it is important to map each customer segment to its appropriate channels with which it is going to be serviced and most importantly the value proposition which is offered to them by the organization. For example, the value proposition that a prepaid customer requires is very basic compared to what an enterprise customer is seeking.

8.) Cost structure:

 The relevant question is what are the costs involved in all the remaining seven blocks of  BMC with the key ones being key activities, and the channels. It would be better to list the costs separately for each customer segment.

9.) Revenue streams:

 The relevant question is in what way the organization receives revenue from each customer segment and other stakeholders if any.

Please see the image below, which is taken from the strategyzer website and very succinctly explains the Business Model.

 The yellow portion is Desirability, which we can find out by studying the strength of acceptability of the value proposition offered to the customer.  It also depends on how it is delivered to the customer and the customer experience.

The Blue portion is the feasibility of the Business Models. This in turn depends on the internal factors of the organization like resources and activities which the organization undertakes and the other is the external partnerships it has in place to get the work done.

The Green Portion is the viability which depends on how much higher are revenues over costs. For measuring this you require a good ERP systems. Please read our other post in this blog which shows the proficient way to select ERP software. http://zoomplussystems.com/select-erp-in-a-proficient-way/

Sometimes the organization may have some other metric to measure costs and revenue which is non-monetary. In this case, one must see that rewards are greater than efforts.

Business Model rationale.

In the Book Business Model Generation on which this article is based, there are five kinds of Business Model patterns.  They are as follows

 1.) Unbundling Business Models ( In this kind of organization, the Business models are varied but unbundled into three basic types as shown bellow.)

2. )The long tail

3.) Multisided Platforms

4.) Free as a business model

5. )Open business models.

1.) Unbundling Business Models:

In an organization with various divisions, you need to ensure that you unbundle basically three types of business models

1. Customer relationship business (Example Starbucks coffee where customer experience is key)

 2. Product Innovation business (for Example Apple,s hardware business)

3. Infrastructure business. ( Example Amazon’s cloud business (AWS) where the server infrastructure is the main thing.)

 As they have different imperatives from the point of view of economic, competitive, cultural, they must be separated as different SBU (Strategic Business Units) with different teams. They may co-exist in a single organization, but as separate entities to avoid conflicts and undesirable trade-offs. In this, the Example was given of a Bank, where Wealth Management services were unbundled from the Financial products division because the former is a customer relationship business and the latter is a product innovation business.

see the image for the main imperatives of the 3 types as mentioned above.

The imperatives of Business model types.

For example a Mobile company like Airtel, have started unbundling their Bussinesses. Traditionally they competed on Network quality, but now they are striking deals with their competitors for sharing their networks or outsourcing network operations altogether to equipment manufacturers. They realised that their Network is not the key asset, what is most important is their Brand and customer relationships.

2.) Long tail models

These days it is possible to offer large no of variety of products as per the individuals liking, even though unit sales of each product maybe in small numbers. This is called long tail model. The organization is able to achieve profitable sales, with its flexibility to offer huge variety at reasonable costs.

New Book Publishers like Lulu.com have developed expertise to publish even small number of copies of each Author. They almost print on demand.As a result they can cater to thousands of Authors and yet make money on low individual volumes. However when all the volumes of different authors is taken together, they have enough scale to make profits. Even lego the very famous Danish toy company has adopted the long tail model and is achieving considerable success.

The long tail business model sales bifurcation in terms of product range.

Pattern no 3. Multi sided platforms.

In this case the network of both paying and non paying customers is important. For example Google provides free search to millions of free customers, but this allows them to attract thousands of advertisers who want to be on the platform. This is called Multi sided because the customers of both types are interdependent on each other. Another example is a gaming company like Sony Playstation, where the network of gamers attracts the gaming companies.

google business model as a type of Multi-sided platform business pattern.

pattern no 4. Free as a Business Model.

 For example the Metro News paper, which is given free of cost to Metro railway customers in peak times, through the dedicated news paper vendors on the railway station. This huge readership of busy people, attracts very focused advertisers who are willing to pay higher advertisement rates of the newspaper and generates profits for the company. If the paper would not have been available free, it would have limited readership and hence less advertisement. It also serves the important need of the commuter to use their time productively and of their interest.

Another example is the Bait and Hook Model of Gillette, where the razor is sold at a subsidized rate, but the rayzor blades are sold at a premium, which the customer has to buy as their choice is reduced to practically zero.

Pattern no 5 .The open Business Model.(OBM)

In this case, the organization collaborates systematically with outside partners to create, capture and deliver value to its customers, on a consistent regular basis. For example, the FMCG giant P & G, regularly buys R & D done in bringing out innovative products, which become mainstream after they are taken from pilot run to large scale production. This is called OBM for innovation.

With the help of this knowledge of Business Model patterns, one can make good use of it by asking the following question for each pattern.

1. What is the context Before/ At the current juncture?

2. What is the challenge.?

3. What is the solution after.? ( After deciding to follow one type of suitable Business Model Pattern based upon the suitability)

4. what is the rationale.?

5. which example we can follow.?

In this way, we can make a big difference in our Business by using the knowledge above of the business model patterns. Please share your comments regarding the article, which I would like to read to expand my understanding of the subject.

For viewing my ppt in video form of 26 slides on Business Model Patterns the following youtube link.https://www.youtube.com/watch?v=BE5flHp-MmU&t=107s

Rahul Madhiwalla (Email: connect@rahulmadhiwalla.website)

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