The solutions business model is a dyadic relationship where your physical good or service can only be designed and delivered after prior interactions with the customer.
This Pathway Requires
A dyadic relationship where the Organisation engages with a Customer about a problem that the Customer faces, and provides an integrated solution to that problem. The value proposition is relational.
Compared with the product pathway, the solutions pathway requires much greater customer engagement by the Organisation with its Customer. The Customer has to trust the Organisation to deliver the product-service that is typically key to the Customer’s business (B2B) or enjoyment (B2C).
In B2B markets, users of airplane engines, machine tools or computers are provided services on a solutions basis such as ‘power by the hour‘, ‘machine time as a service‘ and ‘software as a solution‘. In B2C markets, services such as a haircut or an interactive premium priced online video game are solutions. In government markets, we see solutions being offered in some Private Finance Initiative (PFI) contracts. The boundary line between Solutions and Products is sometimes a matter of degree – not absolute. This pathway requires:
- Identifying potential customers
- Creating a high level of trust with those customers, that allows identification of unmet needs
- Tailoring the product or service delivery to fulfil those needs in the context of the customer
- Charging mechanisms are almost always value based rather than cost based
- Customer engagement is rarely outsourced; in contrast there are many possible supply arrangements including outsourcing for the component products or services.
Scalability – Difficult: greater volumes often lead to higher unit costs.
Profitability – Typically excellent among selected customers.
Risk – Developing relationship with a customer and tailor-made solutions require upfront investments in time, money, and relationship building.
Transform your thinking of the
Solutions Business Model
The BusinessModelZoo™ provides insight to help you understand and navigate the opportunities and rewards as well as risks and threats to the solutions business model it faces from the other business model pathways.
Most physical solutions business models such as a management consultant or a full-service restaurant are challenged to operate at scale. Adding a product business model version of the offering may be an effective way of creating more volume and scale, with perhaps lower margin.
Adding a physical market place (or better a digital market place) that allows customers to buy not just my offerings but also those of rivals is an addition to my business portfolio. By definition, a market place uses a matchmaking business model that allows me to engage with a wider group of customers and to learn more about rival offerings, but typically demands more resources and a much more-nimble approach to management. Amazon’s market place is not a very profitable business considered separately, but this matchmaking business model has allowed Amazon to create complementary businesses such as AWS that are very profitable.
Adding a new customer group that brings a new additional revenue stream on account of their interactions with my current customers is an essential element of becoming a multi-sided business model. Such actions will be challenging, costly and is typically only achieved in stages, but might be a very profitable final end point. The new customers are likely to be advertisers, and whoever they are it is essential that they engage with my existing customers in a value adding manner. I will need enhanced capabilities to service this new group of customers (the advertisers). Once again, to be really effective as a multi-sided business model, I will have to digitize many elements of my offering.
My physical solutions business model is at risk from rivals offering simple low-priced physical product business model alternatives. Product business model companies typically have much lower costs and can operate at larger scale. I should consider this move when I can turn my complex solution into a simpler product business model that is attractive to my customers, and as a result reduce my costs and raise my volumes.
If a market place appears in my industry, my sales could be increased by participating in this matchmaking business model, but I might lose my direct customer relationship that may reduce my profits. (see text above).
It may be very difficult to counter an effective multi-sided business model competitor, especially if the multisided organisation is able to use one of its customer groups to subsidize the costs (and prices) of its offering. If the appearance of the extra customer group debases the offering in the eyes of customers (as in say advertising supported educational offerings) you may be able to resist by maintaining the integrity of your offer. Otherwise you might be forced to change your business model to either a multi-sided business model (see text above).
Adding a simple digital product business model offering to complement my solutions business model may be attractive if by doing so I can lower my costs and engage with a completely new set of customers. However, I need to be careful, digital solutions business models typically give higher value and higher prices.
Adding a digital market place that allows customers to buy not just my offerings but also those of rivals is an addition to my business portfolio. By definition, a market place uses a matchmaking business model that allows me to engage with a wider group of customers and to learn more about rival offerings, but typically demands more resources and a much more-nimble approach to management. Electronic games producers often run market places, and this aspect of their business is typically not a very profitable business considered separately, but the matchmaking business model allows the games producers insights into market trends and competitor offerings not otherwise easily obtainable.
Adding a new customer group that brings a new additional revenue stream on account of their interactions with my current customers is an essential element of becoming a multi-sided business model. Such actions will be challenging, costly and is typically only achieved in stages, but might be a very profitable final end point. The new customers are likely to be advertisers, and whoever they are it is essential that they engage with my existing customers in a value adding manner. I will need enhanced capabilities to service this new group of customers (the advertisers).
If I am offering a digital solutions business model at scale, it is unlikely that a rival with a product business model will be a real threat, unless the rival product offering is significantly less expensive. In most instances, a digitized solutions business model is superior to the product counter-part but there may be exceptions.
If a market place appears in my industry, my sales could be increased by participating in this matchmaking business model, but I might lose my direct customer relationship that may reduce my profits. Airbnb expanded the sales of its smaller rental firm participants many-fold, but threatened traditional hotel chains who were reluctant to participate because they no longer “owned the customer”.
It may be very difficult to counter an effective multi-sided business model competitor, especially if the multisided organisation is able to use one of its customer groups to subsidize the costs (and prices) of its offering. If the appearance of the extra customer group debases the offering in the eyes of customers (as in say advertising supported educational offerings) you may be able to resist by maintaining the integrity of your offer. Otherwise you might be forced to change your business model to a multi-sided business model (see text above).
Unicorn Business Model Exemplars
AvidXchange
Overview
As explained below, AvidXchange software solutions are tailor-made for each customer to enable them to automate each stage across the account payable lifecycle: raising purchase orders, invoicing, and making payments. The ability to tailor-make their system with the customer needs is evidenced by the fact that Avid can integrate with more than 150 accounting systems used by customers in all areas from invoice receipt to payment execution (including Sage Intact, QuickBooks, Oracle NetSuite, Microsoft Dynamics GP and more).
AvidXchange engages with business customers around their B2B accounts payable and invoice management needs. Unlimited custom enforceable invoice approval workflows can be created to route invoices to specific departments or users, and account codes can be automatically assigned, including allocation codes. Payment approval workflows can also be customized, with options for multiple approvers and step-level approvals. Payment and approval statuses can be viewed at any time.
AvidXchange has established itself as one of the leading service providers in finance, serving more than 5500 customers across the United States and 400000 suppliers nationwide. AvidXchange is reported to generate $124.9M in estimated revenue annually (2019). Key competitors include Bill.com, Billtrust, and Tipalti that appear to offer similar services.
In January 2020, the leading provider of AP and payment automation solutions, have raised $260 million in equity capital as part of the company’s latest financing round. The new capital will increase the company investment in its solutions for both buyers and suppliers while reaching more customers in the middle market.
History
AvidXchange was founded in 2000 by Michael Praeger (CEO). Before establishing AvidXchange, Michael was CEO of InfoLink Partners, a software company specializing in automating the tax billing and collection functions for municipalities. AvidXchange started out offering accounts payable software services directly to companies in finance and real estate.
In 2017, AvidXchange partnered with Mastercard to power Mastercard’s label B2B accounts payable software solution for SMEs. In September 2019, the company acquired BankTEL Systems, a firm based in Columbus, Mississippi who provides accounting services to more than 20% of U.S. banks.
There have been 4 formal rounds of funding: Series B in 2002 raising $2m, a private equity round in 2015 raising $225m, Series E round in 2016 raising $18m, and another private equity round in 2017 raising $300m. There are 13 key investors, including Temasek Holdings and MasterCard as the most recent funding (Crunchbase, 2019). In 2020, AvidXchange has raised $260 million in equity capital as part of the company’s latest financing round, adding to the more than $525 million it has raised prior.
Customers
AvidXchange has one main customer group: mid-sized companies willing to automate their payments process from beginning to end. The company creates value for customers through its various corporate partners who use AvidXchange’s software to power their accounts payable platforms, such as Mastercard, ClickPay, and GCPay.com.
LUMI
Overview
Lumi is an example of company that has a portfolio of business models. In its product business model it sells apps, software, and hardware to companies for real-time audience insight. Lumi also operates a solutions business model, which this write-up will focus on. In this side of the business, Lumi Insight provide meeting/conference services to their clients. By combining Lumi’s technology with the convenience of event planning, Lumi creates an additional revenue stream while also gaining the opportunity to advertise the benefits of their systems. Lumi’s service is also used to gather customer feedback in the form of mobile surveys.
History
Lumi is a global market leader in real-time audience insight technology. Lumi was developed in Finland between 2005 and 2008. Marcus Wikars, Magnus Holtlund, and Johannes Berg incorporated the firm in London in 2008. Lumi was focused on creating a set of patent-driven products that could be sold individually or in groups to clients. Lumi started off as Lumi Mobile, selling apps and software that allowed for easy market research and audience participation. In 2014 it acquired IML Worldwide, adding a series of hardware options to their product offering. Today meetings and events represent the largest part of Lumi’s revenues, but market research opportunities present the greatest chance for growth.
Customers
Lumi’s customers for the solutions business model are individuals or groups hosting events and conferences where participant feedback is vital. Lumi also caters to customers whose businesses require mobile input from the public.
Mediatonic — Service
Overview
UK video game developer Mediatonic currently finds itself in a transitional phase where it is shifting away from a service (work-for-hire) model towards a product model. Facilitated by the advent of online distribution channels such as Facebook and Apple’s iOS, video game developer, Mediatonic’s transition to the product model will entail giving away games for free to end-user who can accelerate their game experience through various paid-for options (e.g., micro-transactions and downloadable content). This is in contrast to its work-for-hire model in which it creates customized games for larger companies, such as Disney, in a “taxi” approach. An example product from the product model is ‘Amateur Surgeon 3: Tag Team Trauma ’ released on iOS and Google Play. The game can be downloaded for free, but Mediatonic hopes players “spend some money on all the cool extra stuff we have in the game!” This write-up will focus on the work-for-hire business model.
History
Mediatonic was founded in 2005 using financial support from external investors. In many ways, the 60-employee firm is an exemplar of medium-sized video game developers. The firm was founded on the premise of developing high quality video games for traditional video game consoles (e.g. Sony’s PlayStation 3) using a work-for-hire business model. Upon meeting project milestones video game publishers paid Mediatonic an agreed upon lump sum fee. Other independent UK-based video game studios that are currently changing their business models include Auroch Digital and Quartic Llama.
Customers
Mediatonic’s customers for the work-for-hire business model are either an established video game publisher that commissions a development project around an intellectual property (IP) the financier owns the rights to, or an external media IP holder who wishes to have a video game adaptation of one of its media properties. Examples of the latter include Disney and its unorthodox counterpart Adult Swim.
Nomad Digital
Overview
Nomad Digital is an example of a “solutions” business model. The company provides wireless communication solutions for the rail transportation industry by providing both devices and services to rail franchise operators as well as rail engineering and manufacturing companies. These solutions are used for passenger internet services, rail service information displays, and rail operator maintenance and monitoring. While Nomad has developed and patented specialized networking equipment, the company’s true expertise is in deploying and integrating an overall system, and does not sell its networking equipment separately. Thus, Nomad is an exemplar of a solutions business model, and not a product business model.
History
Nomad Digital was founded in 2002 by Nigel Wallbridge and Grame Lowdon. Observing the prevalence of high-speed wireless services in Canada, the two thought of applying such technology to non-fixed settings, with trains seen as an ideal candidate.
Nomad developed key technologies for its wireless product, particularly the ability to use multiple simultaneous mobile 3g/4g connections for high sustained data rates in order to satisfy large numbers of passenger connections. This train wifi service is the most visible to consumers, but a key part of Nomad’s business is utilization of this wireless capability for a variety of valuable services for train operators. This includes data connections for information displays, real-time status monitoring of train systems, fleet monitoring, and CCTV security systems. As opposed to the ‘nice to have’ passenger internet feature for rail operators, these latter services help operators deliver on their core performance goals of reliability, utilization, and safety.
Today, Nomad is one of the largest providers of rail internet communications equipment and can count high profile customers such as Eurostar, Virgin Trains, Bombardier, and Alstom amongst its customers.
Customers
Nomad Digital markets to two customers; train operators such as Virgin Trains, who may elect to implement Nomad’s wireless systems to existing rolling stock, or rolling stock manufacturing companies such as Bombardier and Alstom, which would select Nomad’s solutions as part of proposed new rolling stock.
Playgen
Overview
Playgen operates a typical service, or work-for-hire, business model in which the company creates a custom video game for a client and licenses use of the product to the client. Clients tend to be nonprofit organizations. Income is generated upon completion of the project. Playgen specializes in an industry segment best known as ‘serious games’. Big institutions, government bodies and other large clients that are interested in some form of behavioral change commission Playgen to develop video games to attain just that. ‘Me Tycoon’ for example is a social simulation game for young students to explore and develop their virtual life, where decisions affect prosperity, achievements and happiness. Project financiers often release the content to a targeted audience (e.g. students, employees, local land development officials) free of charge in the hopes that it will affect their behavior.
History
Playgen was founded in 2001 on the concept of gamification – the use of game mechanics to engage users in some type of behavioral change. The privately owned firm gets over 80 per cent of its business commissioned to by not-for-profit organizations such as municipalities, educational institutes and ideological organizations. These organizations often have a desire to engage a specific audience in a more interactive way, to make players reflect on their behavior or change their views of the world (e.g., quit smoking). Since Playgen gets all their income directly from project- based sales, choice of platforms is less crucial of an issue as it is for traditional video game companies. In recent years, Playgen has even extended their philosophy of applying game mechanics to real world games. Other firms that operate a similar business model include “advergaming” studios such as Sticky Studios (State Farm Paper Football) or serious games studios such as UK’s Capsian Learning.
Customers
Playgen’s sole customer group consists of large institutions including The University of Manchester’s Dalton Nuclear Institute, Aviva and the West Midlands Police in the United Kingdom. These customers initiate development projects on the basis of a particular need. To a lesser extent compared to other video game companies discussed here, Playgen’s activities are only partially driven by end-user demands. Behavioral change is not something that is in high demand among end-users, but rather initiated by its sole beneficiary or advocate. Satisfying customers’ need through content design is the firm’s main concern. Playgen’s customers approach the firm with a certain goal in mind (e.g. promote understanding and critical conversation on belief systems, as well as social and economic inequality). Sometimes these customers set milestones based on deliverables or external deadlines.
Scoota
Overview
Scoota represents an exemplar of a dyadic solutions business model in the rich media advertising sector. The company offers a bespoke online video advertisement production and distribution service to advertising agencies and website publishers. The videos that Scoota creates are intended to target specific audiences, and are interactive (e.g., individuals can interact with the online video advertisement). Recently the company launched a marketplace business model, which connects advertisers with publishers and complements its software-based solutions business model. This write-up will focus on the solutions business model as this remains Scoota’s core model.
History
Scoota was founded as Rockabox in 2008, in London by James Booth, a digital technology expert, and Torie Chilcott, one of the co-developers for the successful ITV’s original Pop Idol series with Simon Cowell. The aim of the founders was to create a revolution in content marketing. The company was intended to produce rich, interactive media campaigns for publishers. The company recently secured funding of 3 million from Notion Capital supported by Frog Capital and fourteen17 who have both invested in the company previously. In September 2015, the company was rebranded as “Scoota” and the company raised £3.7m from the founders of Innocent. In 2014, Scoota had turnover of £1.9 million, and is forecasting revenues of £5m in 2015.
Customers
Scoota primarily targets companies selling products online such as airline tickets or hotel rooms that require rich media content for Internet users to view and interact with.
Smile Direct Club
Overview
Smile Direct Club (SDC) is a healthcare business using a solutions business model to provide fully customized, 3D printed, plastic orthodontic aligners to customers who pay via a subscription service. Even if Smile Direct shows some elements of a product business model such as durable unit economics with some costs reducing with volume; the engagement with customers to design personalized products to match different treatment goals, suggests it is a solutions business model.
Smile Direct Club delivers “teledentistry” (i.e., the use of information technology and telecommunications for dental care) seeking to disrupt the traditional orthodontic market in which customers engage in face-to-face consultations with licensed orthodontists.
Through a med-tech platform, Smile Direct delivers a co-created solution based on strong customer engagement before and during treatment. While pricing remains consistent, the length of treatments varies depending on customer needs, likely meaning that costs of provision of the licensed dentist or orthodontist are spread across the customer group.
Smile Direct Club aligners compete with traditional braces and transparent alignment companies. Looking at the competitors, Invisalign provides plastic aligners following consultation with a traditional orthodontist, costing £2500-5500; and Clear Correct provides plastic aligners following consultation with a traditional orthodontist.
On 29 November 2019, Smile Direct shares were trading at $9.98, giving a $3.9bn and 5500 employees valuation. SDC operates in the USA (since inception), Canada (from 2018), UK, and Australia (from 2019).
History
Smile Direct Club was founded in 2014 by Jordan Katzman and Alex Fenkell. SDC was initially funded by equity from the Camelot Venture Group. Growth was supported through investments from other interested parties, including Align Technology in 2016, and then a significant $380million raised in equity capital in 2018, giving a valuation of $3.2bn (from investors including Clayton, Dubilier, and Rice) and entering the unicorn club. In September 2019, the SDC Initial Public Offering on NASDAQ raised $1.35bn with shares priced at $23, giving a $9bn valuation.
Customers
Smile Direct Club targets a “direct-to-customer” approach via its med-tech platform, enabling to target customers in all the countries in which SDC has established marketing, orthodontist, and distribution system. Smile Direct suggests that 85% of the world has a form of malocclusion, with less than 1% treated annually. Their IPO prospectus indicates that the potential of the market is up to $945bn globally.
Sports Interactive
Overview
Sports Interactive operates a service (or work-for-hire) business model in which a wholly developed video game is prepared bespoke for a publisher. Unlike some other service business models, Sports Interactive has just one primary customer, Sega. This model is similar to a contract writer for a magazine, or a designer-in-residence for a fashion company. Sega pays Sports Interactive when the latter reaches pre-agreed project milestones. Sports Interactive develops the highly popular “Football Manager” video game series for various online and tangible goods distribution channels. These channels include PC (Steam and retail) and Apple’s iOS. Publisher Sega has the exclusive publishing and distribution rights to the Football Manager franchise. New versions to the game are released annually to include updated player profiles and statistics. Sega monetizes the game using a premium pricing revenue model.
History
Sports Interactive was incorporated in 1994 in London, UK. The firm first’s product was football simulation game Championship Manager which was released in 1992 on PC and Atari platforms. After working with established publisher Eidos (UK) for various instalments of the game, in 2006 it was announced that Sports Interactive would be acquired as an independent subsidiary by Japanese video game giant Sega. Since being acquired the Championship Manager brand was replaced by Football Manager, which Sports Interactive has produced on an annual basis since. Contrary to other video game developers, the digital revolution has not changed Sports Interactive’s business model other than an increase in the number of technology platforms on which its games can now be played. In 2013, Sports Interactive employed over 90 full-time employees. Other firms that operate a similar business model in this industry include most traditional console video game developers such as Rockstar (GTA, Red Ded Redemption), Bungie (Halo, Destiny), and Vigil Games (Darksiders).
Customers
Operating as an independent subsidiary, Sports Interactive’s customer is parent firm video game publisher Sega. Each year, contingent on last year’s game’s performance and other external factors, Sega frees up budget for the development of the latest installment of Football Manager. Looking at trends in the market and at what comparable titles do, Sega requests for certain features (additional downloadable content) or compatibility with specific platforms (e.g. Valve’s Steam) to be included in the content’s development trajectory. Sega sets milestones upon which certain deliverables – including beta and alpha versions of the game – are due for delivery by the developer.
Indirectly, Sports Interactive has two additional customer groups. Game marketplace owners such as Steam and Apple have their own strategic agendas that determine what types of content they will offer favorable placement to within their respective digital distribution shops. Additionally, platform owners are incentivized to promote ‘Superstar’ games with exceptional market performance since they receive a revenue share from every game sold on the platform. End-users are the final arbiters of value. Since Sports Interactive’s development budget in part depends on the market performance of previous installments of Football Manager, it is paramount for Sports Interactive to take these indirect customer groups into account.
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