This post is an extract of my forthcoming book on business model innovation. The innovation book looks at why business model innovation is needed and how it works. You can read more about it here. These posts are early drafts of planned content and I’m putting them out to get feedback. Please do comment below, or subscribe to these pages to get each new section as it is published. In today’s post, we will be looking at finding opportunities in this new world.
The last major component of a business model is its viability. Does it make enough money to pay its costs?
Can it pay for the investment required? Can it generate a large enough profit for a long enough time to make the effort worthwhile?
Those questions are often the place to start when we look at viability. But we do need to delve deeper.
A good business model is often not simply a matter of profit versus loss.
Traditionally we have been conditioned to the thing as viability working something like this.
We own a factory that makes x. If we know the cost of making x, the cost of selling X, and then the amount Y that we can get from selling the product, then we know, whether it is profitable/viable
That is correct, and good as far as it goes.
What happens if you have a business model that gives away X for free? What happens if you get the product for free, or you make money from something else that has only a tangential relationship to X.
Then, it starts to make more sense to talk in terms of viability as the traditional accounting measures become a lot more complex.
How Google Makes Its Product Viable?
Take, for example, Google. It gives away its primary product, search for free. It makes money because its Search product is good and its Advertising product is good. These compound business models make it difficult to assess the profitability of a business model at an early stage.
But you can assess the viability because once you have the components in place, as Amazon did, it is clear that a business model is viable, well before it becomes profitable.
Viability is often the least important component of a business model at an early stage. That is because if you are able to create a value proposition that is desirable and is feasible then there are always many ways to monetise it.
Conversely, in businesses that are more mature then viability is baked in so much that it is almost impossible to change the way that it is monetised. Could we adopt a freemium model to electricity sales and overturn 50+ years of regulation and industry standards?
Concretised Viability
This concretised viability then often rigidifies the existing business model. How can we change the revenue generation of the business model if it puts everything else at risk?
Conversely, it is somewhat easier to change the cost profile or structure of a business model – and this has proved more popular over the year – the use that banks have made of shifting customer service from bank counters to customer service centres – offshoring them, and then bringing them back, have all had a huge impact on their costs – and customer retention.
This comes back to the engineer’s paradox. It is easier to build a system and tinker with it to reduce costs than to build something that people want and change the way they pay for it.
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