100+ Business Models Book!
In the last few years, I’ve dissected business models and companies of all sizes.
At the same time, I’ve been talking, interviewing, and discussing business models and business model innovation with dozens of entrepreneurs and practitioners.
I’ve been doing that for several reasons:
I wanted to gain a better understanding of the businesses around me. I had the option to gain a Ph.D. on the topic or to create my Ph.D. I went for the latter, and in the process, I thought to document it all on FourWeekMBA. Over time, I wanted to create the business school I always dreamed of.
Business models enabled me to gain holistic insights into how companies worked so that I could become a better digital entrepreneur.
Business modeling also helped me test the assumptions around the business I was trying to build, thus reducing the time or potential financial resources spent on a project doomed to failure.
In short, I found myself using business modeling for several reasons, and those I believe are all legitimate.
At the same time, while researching the topic with the mindset of an entrepreneur, I learned about the depth of reach of a Ph.D.
I noticed how business and business model innovation had become widely adopted concepts. And also (and probably for that reason) widely misunderstood.
Business model innovation is about increasing the success of an organization with existing products and technologies by creating a compelling value proposition, allowing an organization to scale up customers with a better operating model.
At its core, business model innovation is a subtle change that, as it becomes hard to dissect from the outside world (in many cases, business model innovation is detected only in hindsight), is also hard to copy.
Thus, business model innovation can make a huge difference in a world where technology gets commoditized.
Before we move toward deciphering and dissecting business model innovation, let’s bust three myths about entrepreneurship, especially in the era of digital business models.
Where do we start?
A business model is critical to any startup's success, as it unlocks long-term value.
In a way, developing a business model isn’t only about monetization strategies.
Indeed, that is way more holistic. To develop a business model, companies need to create value for several stakeholders.
Thus, a business model is about what makes users return to your app, service, or product. It is about how businesses can get value from your solution.
It is about how suppliers grow their business through it.
A business model is all those things together. In short, when those pieces come together, you can say to have a business model.
“business model” and “business models” in millions of books according to Google Ngram
While the Internet catalyzes business model innovation, the term itself was born way before that.
However, it stayed asleep until the Internet proved commercially viable. The rise of the Internet and the dot-com fall awakened the need for innovative business models.
Indeed, many companies were born during the dot-com era.
Those companies used the Internet as a new distribution channel but still played with an old business playbook when the dot-com bubble fell.
That left room for a few companies that would prove commercially viable and become among the tech giants that dominated the web.
Companies like Amazon, Google, and eBay built, tweaked and consolidated their business playbooks during that era.
Business model innovation as a competitive moat
As technology becomes over time a commodity, creating a lasting advantage requires business model understanding, experimentation, and execution.
That’s because business model innovation shifted the focus from the competition, which is what, in the last decades, we’ve all been looking at with frameworks like Porter’s Five Forces to customers.
When I say that the focus has shifted to customers, it doesn’t mean you don’t need to understand your competition. It just means you must start with customers and their problems.
Only after that do you want to move to competition and what existing alternatives exist.
A multi-faceted concept
Although we like to give a single definition to each of the concepts we know, those concepts will adapt based on their context.
In short, it is fine to have multiple definitions of the concept based on each practitioner's objective. Therefore, it’s okay that a concept translated into several fields will have different meanings.
Thus, let’s see some of those meanings.
Analysts use business models to produce financial analyses
Business modeling can be seen as a technique for dissecting any organization and business for analysts and business people trying to gain a better understanding of those businesses.
Business and financial analysts use business modeling to better understand tech companies. They do it to give investment recommendations, financial reviews, and investment advice.
Academics study business models for the sake of classifying things
For academics, a business model might be just a holistic way to describe a business.
The purpose of an academic might seem more rigorous than that of an entrepreneur.
The academic has to prove that a business has certain features that make it different from or similar to other businesses.
From those features, the academic will derive classifications that, as they become more and more complex, only live in theory land. The research, therefore, doesn’t necessarily have a practical purpose.
Instead, the goal is to uncover universal classification systems for things in the real world. As such, they might lose a practical application.
Business model innovation is an experimentation mindset for entrepreneurs
Business model design is not about sketching a plan on a piece of paper but rather a mindset of experimentation.
In business modeling, you can manufacture experiments (business models and business model variations) that enable the entrepreneur to test the assumptions around the business quickly, cheaply, and with minimum effort. It is important to start testing (as practitioners like Ash Maurya highlighted) from the riskiest assumptions.
Those assumptions are assumptions for which the business might not become sustainable over time.
Things like monetization strategy or critical customer understanding are some of the riskiest assumptions, and they need to be tested quickly.
An entrepreneur is not a scientist
An entrepreneur has different goals than a scientist. Where the scientist might try to uncover more universal truths.
The entrepreneur needs business model experimentation to test the assumptions, uncover market opportunities, reduce the time to market, and eventually build a valuable business.
In short, an entrepreneur is a market-driven animal.
Rather than starting from theories to find if that is true through experiments.
An entrepreneur starts from a problem, and he or she goes back to theory to understand the underlying assumptions preventing the business from succeeding.
Once those assumptions have been streamlined, they can be tested so that the entrepreneur can move on and make the product or service in target with the market.
Business model innovation is, at the same time, a mindset, a framework, and a set of tools for entrepreneurs
Business model innovation, therefore, can be seen as a mindset, framework, and a set of tools for entrepreneurs to build relevant businesses in today’s marketplace.
Myth one: the best product always wins
When you get online and want to look for something but are unsure what it is, chances are you’ll land on a white page with a small search box on it. That is the Google search results page.
Why, in the first place, do you get there?
Well, you get there because Google is an incredible product that can find you anything on the web at a super-fast speed. Yet, is Google the best product out there? And how do we define best?
Google is a great search engine that gives you relevant results to any question but also benefits from network effects.
In short, one of the reasons why Google is good enough to intercept search intents is that billions of people worldwide use it daily.
At the same time, Google is a decent product for what it gives us back (and it is free), but it also has drawbacks.
For instance, in an experiment, an SEO expert tried to rank a Latin Language site (a language used by ancient Romans, no longer in use), and guess what? It did that successfully.
This is not to say that Google is not a good search engine.
When Google launched, it became the best product in the market.
Yet, among the reasons why Google today is the most widely used search engine on earth, part of the reason is its distribution strategy.
Since its scale-up phase, Google aggressively acquired deals that made it the tech giant we know today.
However, only a few people realize it, and it is easy to think—especially in tech—that the best product always wins. Yet a great product without a strong distribution strategy won’t go far.
Myth two: technology is what gives a competitive advantage
In his book Zero to One, Peter Thiel, former CEO of PayPal, challenges an important business paradigm.
As the common business thinking goes, “Be the first, and you’ll probably win over time.”
In business jargon, that’s called “first-mover advantage.”
Peter Thiel pointed out that in the tech business world, the last mover often wins the whole market. What he called the “last-mover advantage."
In other words, companies that come later, especially in the tech industry, can win over existing organizations, even when those were the first movers.
For instance, Google and Facebook were not the first movers (in search and social network spaces, respectively).
Myth three: business model innovation is just about how you make money
It was a great search engine when Google came out of the Stanford dormitory where the two P.h.D. had invented it.
Many argue it was 10x better than competitors.
Yet it wasn’t financially successful until it managed to design an innovative business model via a couple of years of trial and error.
In short, Google introduced an auction system for advertising, the aim of which was to remove the inefficiencies of how advertising had worked for decades. That was not the primary innovation.
Indeed, another search engine called Overture was already doing it successfully. Therefore, where Google innovated was the introduction of a few critical parameters to allow advertisers to show on top of Google text-based ad results.
In other words, it wasn’t enough to be offering a higher bidding rate on a keyword. Google crossed that with a few other parameters, which allowed it to show those that were most relevant and had a higher click-through rate on top of the ads space on Google results.
Even though it might sound trivial now, as the whole web, after Google has been built on the premise of click-through-rate, it was not back then.
That business model innovation was critical to Google’s economic hypergrowth, scale, and domination.
Business modeling isn’t a simple concept, and in most people's minds, that is about how you make money.
However, business modeling is way more than that. It is how you make a great product or service so your customers return. It is about how you make that product or service scalable.
And how you keep making financial sense of your business over time. But also the value proposition you can deliver to critical partners, which is crucial to your business success!
Thus, even though business model innovation can be about changing how you charge your customers and how you make money, it can also be about other critical aspects of the business that will allow you to scale up.
This is an example of how Airbnb “confused” its business model for its monetization strategy.
How WeWork described its business model in the report before the IPO.
You might notice that they’re talking about their revenue generation strategy. Another misconception around business models is to confuse them with a company's monetization strategy or revenue model.
While this is an essential piece of the puzzle, it is just one of the components of a successful business model.
Myth four: A business model is just like a business plan
Among the top results, Google suggests “How to write a business model” when typing “how to … business model. When you click on the result that Google suggested, see what happens.
When you click on the Google suggested result for “How to write a business model,” you get “How to write a business plan.”
A common misunderstanding is to think of business modeling as a one-page business plan. However, a business plan is a document with a specific aim.
It contains a bunch of assumptions about your business. It also includes financial projections about the business for the next 3-5 years.
However, those assumptions can hardly be tested.
The business plan thus remains a document that lives in the imaginary world. Drafted beautifully to impress friends and potential investors, it is hardly of any use for experimentation.
Instead, as we will see, business modeling is primarily about experimentation.
What kind of questions do you need to ask?
To understand how to innovate a business model, you might want to think along the lines of how to tweak and redesign your value chain, cost structure, key partners, and in general, what can help you scale:
How can I design a better value chain?
Can I improve the existing cost structure?
What is the distribution channel that can accelerate growth?
Why is my company experiencing bottlenecks in certain areas?
Is the organizational structure helping the company to grow as it should?
Paths toward business model innovation
There isn’t a single path toward business model innovation.
You can sometimes design a business model based on your previous experiences in that industry.
Other times, you’ll have to figure it out along the way. Among the many paths to business model innovation, we’ll see three paths that might be pretty interesting for your business.
