Most companies today have innovation envy. They yearn to come up with a game—changing innovation like Apple's iPod, or create an entirely new category like Facebook. Many make genuine efforts to be innovative—they spend on R&D, bring in creative designers, hire innovation consultants. But they get disappointing results.
Why? In The Design of Business, Roger Martin offers a compelling and provocative answer: we rely far too exclusively on analytical thinking, which merely refines current knowledge, producing small improvements to the status quo.
To innovate and win, companies need design thinking. This form of thinking is rooted in how knowledge advances from one stage to another—from mystery (something we can't explain) to heuristic (a rule of thumb that guides us toward solution) to algorithm (a predictable formula for producing an answer) to code (when the formula becomes so predictable it can be fully automated). As knowledge advances across the stages, productivity grows and costs drop-creating massive value for companies.
Martin shows how leading companies such as Procter & Gamble, Cirque du Soleil, RIM, and others use design thinking to push knowledge through the stages in ways that produce breakthrough innovations and competitive advantage.
Filled with deep insights and fresh perspectives, The Design of Business reveals the true foundation of successful, profitable innovation.
The Design of Business: Why design thinking is the next competitive advantage, by Roger Martin was a positive surprise as it was a quick read, well structured, delivered several interesting concepts and some in depth cases on design thinking and business model innovation.
Even though several of the cases are familiar for many readers (such as P&G, Apple, Cirque du Soleil, McDonalds and RIM) Roger, who is dean of the Rotman School of Management at the University of Toronto, professor of strategic management, and author of the book The Opposable Mind, adds interesting perspectives and sometimes information from behind the scenes working as a consultant and advisor. The book is an extension of Roger's popular article (free download) from 2004 with the same name.
The book in three bullet points:
It introduces and explores the concept of the "Knowledge Funnel" describing how knowledge advances from mystery to heuristic, to algorithm for businesses to gain efficiency and lower costs, and the activities of moving across the knowledge stages (exploration) and operating within each knowledge stage (exploitation).
To accelerate the pace at which knowledge advances through the Knowledge Funnel, it presents the concept of design thinking as the necessary balance between analytical thinking using deductive and inductive reasoning (with the need for reliability and the ability to produce consistent and predictable outcomes), and intuitive thinking (with the need for validity and to produce outcomes that meet a desired objective).
It discusses challenges (primarily the results of proof-based analytical thinking) faced by organizations, CEOs and individuals within organizations, to build structures and processes that foster, support and reward a culture of design thinking, and how different CEOs have used different approaches to generate successful outcomes.
A brief summary of the different chapters:
1. The knowledge funnel: How discovery takes shape
The introductory chapter starts with a story about McDonalds journey from mystery (how and what did Californians want to eat) to algorithm (stripping away uncertainty, ambiguity, and judgment from almost all processes). It briefly discusses analytical thinking, intuitive thinking and design thinking, to solve mysteries and advance knowledge, and the fine balance between exploring new knowledge and exploiting existing one.
It introduces and explores the concept of the "Knowledge Funnel" describing how knowledge advances from mystery to heuristic, to algorithm for businesses to gain efficiency and lower costs. This is explored also in later chapters: "Mysteries are expensive, time consuming, and risky; they are worth tackling only because of the potential benefits of discovering a path out of the mystery to a revenue-generating heuristic", "The algorithm generates savings by turning judgment… …into a formula or set of rules that, if followed, will produce a desired solution" and “Computer code – the digital end point of the algorithm stage – is the most efficient expression of an algorithm”.
It also addresses the need for organizations to re-explore solved mysteries, even the founding ideas behind the business, and not get too comfortable focusing on the "administration of business" running an existing algorithm.
In addition, the first chapter presents abductive logic, and some ideas originated by philosopher Charles Sanders Peirce; that it is not possible to prove a new thought concept, or idea in advance and that all new ideas can be validated only through the unfolding of future events. To advance knowledge we need to make a "logical leap of the mind" or an "inference to the best explanation" (or "Leaps of Faith" that John Mullins and Randy Komisar calls it in the book Getting to plan B see review/summary) to imaging a heuristic for understanding a mystery. Free preview of Chapter 1
2. The reliability bias: Why advancing knowledge is so hard
The second chapter focus on the distinction between reliability (produce consistent, predictable outcomes by narrowing the scope of a test to what can be measured in a replicable, quantitative way) and validity (produce outcomes that meet a desired objective, that through the passage of time will be shown to be correct, often incorporating some aspects of subjectivity and judgment to be achieved). Roger's main point in the chapter (or even in the book) is that today's business world is focusing too much on reliability (due to three forces: demand for proof, an aversion to bias and the constraints of time), with algorithmic decision-making techniques using various systems (such as ERP, CRM, TQM, KM) to crunch data objectively and extrapolate from the past to make predictions about the future. "What organizations dedicated to running reliable algorithms often fail to realize is that while they reduce the risk of small variations in their businesses, they increase the risk of cataclysmic events that occur when the future no longer resembles the past and the algorithm is no longer relevant or useful" With the turbulent times we live in, where new mysteries constantly spring up that reliable systems won't address or even acknowledge, businesses risk being outflanked by new entrants solving old and new mysteries developing new heuristics and algorithms. "Without validity, an organization has little chance of moving knowledge across the funnel. Without reliability, an organization will struggle to exploit the rewards of its advances… the optimal approach... is to seek a balance of both"
3. Design thinking: How thinking like a designer can create sustainable advantage
Chapter three starts with an interesting case of Research In Motion (RIM) that leads into the discussion of what is really design thinking. Roger uses the quote by Tim Brown of IDEO, "a discipline that uses the designer's sensibility and methods to match people's needs with what is technologically feasible and what a viable business strategy can convert into customer value and market opportunity" and adds himself "a person or organization instilled with that discipline is constantly seeking a fruitful balance between reliability and validity, between art and science, between intuition and analytics, and between exploration and exploitation". That designers live in the world of abductive reasoning, actively look for new data points, challenge accepted explanations to posit what could possibly be true (in contrast to the two dominant forms of logic - deduction and induction, with the goal to declare a conclusion to be true or false).
The chapter ends with the first discussion on roadblocks to design thinking (many more to come), with one being the corporate tendency to settle at the current stage in the knowledge funnel, and another how "highly paid executives or specialists with knowledge, turf and paychecks to defend” has the company's heuristics in their heads with no interest in advancing to the algorithm stage, making the executives less important. This leads nicely into the forth chapter about the transformation of Procter & Gamble.
4. Transforming the corporation: The design of Procter & Gamble
A.G. Lafley's transformation of Procter & Gamble from an incumbent in crisis to an innovative and efficient organization in just a few years has been widely covered in the business literature. As a student some years back I made an internship in P&G's Connect & Develop (connect with innovators outside the company and develop their ideas for P&G products), and have since been reading up on everything I can find about the transition and why other companies have not been able to make the same transition. Roger adds interesting perspectives, from his work with the company and its first vice president of innovation strategy and design, Claudia Kotchka, to develop "a comprehensive program that would provide practical experience in design thinking to P&G leaders". One of the top-down efforts being to drive brand-building from heuristic (in the minds of scarce and costly senior executives) toward algorithm, providing less senior employees the tools needed to do much of the work previously done by high-cost elites who then could then focus on the next mystery in order to create the next brand experience. The chapter also covers the Connect & Develop initiative and how it bulked up P&G's supply of ideas in the mystery-heuristic transition where it was thin, enabling it to feed more opportunities into its well-developed heuristics and algorithms of development, branding, positioning, pricing and distribution.
Another highly interesting topic covered in the chapter is the change of processes within P&G, including the strategy review, at P&G. Lafley recognized that the existing processes was a recipe for producing reliability, not validity, "so risky creative leaps were out of the question". A transition from annual reviews with category managers pitching, "with all the inductive and deductive proof needed to gain the approval of the CEO and senior management" to "forcing category managers to toss around ideas with senior management… to become comfortable with the logical leaps of mind needed to generate new ideas".
5. The balancing act: How design-thinking organizations embrace reliability and validity
The chapter focuses on the need to balance reliability and validity, and the challenges to do so (foremost all structures, processes and cultural norms tilted towards reliability). "Financial planning and reward systems are dramatically tilted toward running an existing heuristic or algorithm and must be modified in significant ways to create a balance between reliability and validity". Roger presents a rough rule of thumb "when the challenge is to seize an emerging opportunity, the solution is to perform like a design team: work iteratively, build a prototype, elicit feedback, refine it, rinse, repeat… On the other hand, running a supply chain, building a forecasting model, and compiling the financials are functions best left to people who work in fixed roles with permanent tasks". The chapter feels somewhat repetitive, in the uphill battle for validity, and more obstacles of change are presented:
Preponderance of Training in Analytical Thinking
Reliability orientation of key stakeholders
Ease of defending reliability vs. validity
In this chapter, Roger also discusses how design-thinking companies have to develop new reward systems and norms, with an example of how to think about constraints. "In reliability-driven, analytical-thinking companies, the norm is to see constraints as the enemy", whereas when validity is the goal "constraints are opportunities" and "they frame the mystery that needs to be solved".
6. World-class explorers: Leading the design-thinking organization
In chapter six several interesting cases, and approaches of different CEOs, are presented, one being the widely covered case of Guy Laliberté, and his Cirque du Soleil. Again Roger adds to the existing body of knowledge with the twist of reliability vs. validity in creating a new market, and the knowledge funnel taking a one-off street festival into an unstoppable international $600 million-a-year business with four thousand employees. Laliberté has reinvented Cirque's creative and business models time and time again, "usually over protests that he was fixing what was not broken and that he could destroy the company". Other CEOs and cases covered in the chapter are James Hackett of Steelcase, Bob Ulrich of Target, and Steve Jobs of Apple.
The role of the CEO and different approaches to build design-friendly organizational processes and norms into companies are discussed referring to the different cases presented.
Again, Roger returns to the reliability vs validity battle, now from a CEO perspective with terms such as "resisting reliability", "those systems-whether they are for budgeting, capital appropriation, product development…", and "counter the internal and external pressures toward reliability".
7. Getting personal: Developing yourself as a design thinker
In the final chapter the focus is on how a non-CEO can function as a design thinker and develop skills to individually produce more valid outcomes even in reliability-oriented companies. Roger refers back to his previous book The Opposable Mind, and the concept of a personal knowledge system as a way of thinking about how we acquire knowledge and expertise. The knowledge system has three components:
Stance: "Who am I in the world and what am I trying to accomplish?"
Tools: "With what tools and models do I organize my thinking and understand the world?"
Experiences: "With what experiences can I build my repertoire of sensitivities and skills.
Roger then presents the design thinker's stance, key tools (observation, imagination, and configuration), and how to obtain experiences by trying new things and test their boundaries.
Roger also presents five things that the design thinker needs to do to be more effective with colleagues at the extremes of the reliability and validity spectrum:
Reframe extreme views as a creative challenge
Empathize with your colleagues on the extremes
Learn to speak the languages of both reliability and validity
Put unfamiliar concepts in familiar terms
When it comes to proof, use size to your advantage
This is a great book and I recommend business developers and business model innovators to buy it, as it is a quick read with several important concepts and interesting cases to learn from. I believe design thinking has the potential to help managers break out from the Matrix they live in and again realize the real world behind the existing algorithms.
Starbucks is a retail company that sells beverages (primarily consisting of coffee-related drinks) and food. In 2018, Starbucks had 52% of company-operated stores vs. 48% of licensed stores. The revenues for company-operated stores accounted for 80% of total revenues, thus making Starbucks a chain business model.
When 1983, Howard Schultz was walking through the streets of Milan and Verona he became “enamored” by the coffee experience people had in the Italian bars. He decided to bring that experience back home. That’s how Starbucks was born.
While McDonald’s makes money by primarily and heavily franchising its restaurants, Starbucks is a mix of operated vs. licensed stores. If we look at the revenue generation, company-operated stores make up 79% of the company’s revenues in 2017.
Ad-supported (subsidized) business model
Spotify is a two-sided marketplace where artists and music fans engage. Spotify has a free ad-supported service and a paid membership. Founded in 2008 with the belief that music should be universally accessible, it generated €9.66 billion in 2021. Of these revenues, 87.5% or €8.46 billion came from premium memberships, while over 12.5% or €1.2 billion came from ad-supported members.
Keeping a free product offering, especially when it comes to a consumer brand, like Spotify, can be quite expensive. It is true, that Spotify uses a sort of self-serving model where its free accounts are channeled to activate premium plans (the Family Plan has been the most popular in the last years).
On the other end, Spotify makes sure to support its free side of the business by running ads. Those ads, subsidize in part the free service for over 163 million accounts as of March 2020.
Therefore, instead of letting premium members support the free plans. The ad-supported side (representing 10% of its revenues as of 2019) becomes self-standing and viable.
In short, while the free/ad-supported side of the business is relevant to Spotify to convert those accounts in premium. At the same time, it works pretty well as a self-sustaining product tied into a digital business model.
However, as the ad-supported model scales, it also proses some threats to the scalability of the business model, as the licensing costs for the streamed content might grow quickly (Spotify will pay more royalties as more free users stream content on the platform).
That is also part of the transition of what I like to call from platform to brand.
Affiliate business model
Let’s say you have a website with a large amount of traffic each month. Yet you don’t sell any product or service, which is yours. How do you make money? Well, thanks to affiliate marketing you don’t need either a product or a service, you have many from other companies.
Thus, you’ll make money by merely featuring other products or services and getting a commission for that. Affiliate marketing done right can be a powerful source of income. Take, Pat Flynn from Smart Passive Income, which has been generating millions of dollars with affiliate marketing:
Aggregator business model
An aggregator business model can be classified as a sort of platform business model, however, with its specific features. For instance, the aggregator might act as a middleman. Still, it monetizes the eyeballs on the platform (advertisers subsidize the aggregator) while keeping tight control on the whole experience of users.
In this business model, the aggregator becomes the middleman by removing all the other middlemen from the market. To understand more about this model and how it differentiates from platform business models, read the guide on the aggregator business model.
Agency-based business model
neilpatel.com is one of the most successful sites in digital marketing. Neil Patel has also used his name as a brand, which has become recognized in the digital marketing space.
However, rather than selling tools or info products, Neil Patel is monetizing its traffic by generating leads for his digital agency. As he pointed out:
My model isn’t as scalable and it requires more headcount, but it can generate much more money. Just look at ad agencies like WPP and Dentsu. They generate billions in revenue!
In short, Neil Patel Digital is the SEO and digital marketing agency that allows Neil Patel to monetize its traffic primarily by offering free content and free marketing tools. This is a mixture of a freemium business model, combined with an agency-based business model.
Yet, the idea behind the agency-based business model is simple: you generate enough qualified leads, set up a lean team to manage those projects, and grow the agency based on on-coming projects! According to Neil Patel – at least in the digital marketing space – there is still space to grow a multi-billion turnover agency.
AIaaS business models
In the coming decade, every software company will be an AI company. And this trend is very very strong. Indeed the SaaS industry is already turning into an AI-based software industry. Thus, the AIaaS industry and its business models already turned into a multi-billion dollar industry:
Artificial Intelligence as a Service (AlaaS) helps organizations incorporate artificial intelligence (AI) functionality without the associated expertise. Usually, AIaaS services are built upon cloud-based providers like Amazon AWS, Google Cloud, Microsoft Azure, and IMB Cloud, used as IaaS. The AI service, framework, and workflows built upon these infrastructures are offered to final customers for various use cases (e.g., inventory management services, manufacturing optimizations, text generation).
Asymmetric business models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
Some examples of hidden revenue generation are Google and Facebook. The two most popular websites on planet earth have a similar monetization strategy. They offer free apps and platforms for a broad audience (billion people worldwide) while monetizing the data of the same users.
Each time you click through a link on Google that has the “ad” notation next to it. De facto you’re allowing Google to monetize on a keyword, while you’re making a business monetize on that keyword if you buy the service they provide.
A similar logic applies to Facebook. The news feed is the place where Facebook monetizes most of its ads. Both models both use a hidden revenue generation model as those services work so well that most users barely realize their data is getting sold for advertising.
Attention merchant business model
An attention merchant might be defined as a company that primarily makes money by harvesting human attention. While this definition is tough in practice (most companies make money by grabbing their target attention) the attention merchant’s primary asset is human attention.
That is also why companies operating with an advertising business model are defined, as attention merchants. While in the tech industry companies like Facebook and Google have become hugely profitable by using an advertising model.
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.
For the sake of this article, I’m mentioning Snapchat Business Model as it probably represents the wildest evolution of where attention merchants can get. Just like Google allows businesses to bet on keywords. Businesses on Snapchat can create their Geofilters based on location and track the results of those Ggeofilters.
While Google and Facebook proved to have a solid business model, attention merchants usually also face many challenges. In fact, as those companies scale up, they also end up grabbing the attention of billions of people worldwide. When that happens, those tools become a threat to the political system which tries to kick back by regulating or fining them.
Another aspect of attention merchants is about keeping the users hooked. When those apps start losing users’ attention – if they don’t have a solid business model – a single Tweet from a Kardashian can make the company burn over a billion dollars in market cap!
sooo does anyone else not open Snapchat anymore? Or is it just me… ugh this is so sad.
A Barbell strategy consists of making sure that 90% of your capital is safe, and using the remaining 10%, or on risky investments. Applied to business strategy, this means having a binary approach. On the one hand, extremely conservative. On the other, extremely aggressive, thus creating a potent mix.
Author Nassim Nicholas Taleb explains this approach in his Incerto Series. It’s an approach where you invest most of your wealth in extremely conservative financial instruments to preserve the capital.
And on the other end, the remaining part of the capital is invested in extremely aggressive strategies with massive potential upsides, yet controlled downsides. In short, you make yourself prone to take advantage of positive Black Swans (rare events that can benefit you).
I want to take this further to apply that to business modeling. Here the company uses a barbell approach to product and distribution. You have a core product and business where most resources are spent and the whole organization is structured around. On the other end, you place bets on new products that might renew your business model and make the old irrelevant.
Grubhub is an online and mobile platform for restaurant pick-up and delivery orders. In 2018 the company connected 95,000 takeout restaurants in over 1,700 U.S. cities and London. The Grubhub portfolio of brands like Seamless, LevelUp, Eat24, AllMenus, MenuPages, and Tapingo. The company makes money primarily by charging restaurants a pre-order commission and it generates revenues when diners place an order on its platform. Also, it charges restaurants that use Grubhub delivery services and when diners pay for those services.
Grubhub is an extremely interesting case as the Company primarily charges restaurant partners a per-order commission (mostly percentage-based). The restaurants can choose (in most cases) their level of commission rate, at or above the base rate.
When a restaurant pays a higher rate, that positively affects its prominence and exposure to diners on the Platform. This approach combined with Grubhub’s brands enables restaurants to easily build up their delivery operations even if they lack that.
Thus, increasing the overall market value, as more restaurants can supply their food and people get more variety.
Blitzscaler-mode business model
Amazon has a diversified business model. In 2021 Amazon posted over $469 billion in revenues and over $33 billion in net profits. Online stores contributed to over 47% of Amazon revenues, Third-party Seller Services, Amazon AWS, Subscription Services, Advertising revenues, and Physical Stores.
Amazon’s continuous, massive, investment in growth to dominate multiple markets is a perfect example of a business model with built-in growth. This is the combination of several elements (platform’s network effects + branding power + scalable financial model).
That applies to the consumer e-commerce side of Amazon (excluding Amazon AWS) where the company, while generating low-profit margins for years, also generated substantial cash flows that it invested back to massive growth. A sort of continuous blitzscaler-mode, that while risky for most companies, has become a normal mode for Amazon. Thus, Amazon has been able to ingrain blitzscaling within its business model.
Blockchain-based business models
When on January 10th, 2009, a guy named Satoshi Nakamoto (it probably was only a pseudonym) sent an email to a man from Santa Barbara, Hal Finney, he announced a new currency, called Bitcoin, based on a new technology called Blockchain.
Merely put the Blockchain is a distributed ledger that relies on cryptography to handle transactions, interactions, or anything that implies an exchange between people, which is decentralized and anonymous.
That was a revolution. Since Bitcoin has become a global phenomenon, the technology that allows it to function, the Blockchain, has been evolving. To be sure, the Bitcoin Blockchain isn’t the only protocol.
Large numbers of Blockchain protocols have been created since the Bitcoin launch. This means that the combination of existing business and new Blockchain protocols will give rise to a countless number of innovative business models.
Those few that will pass the test of time might probably give rise to the next Blockchain Giants. A compelling case of innovation based on a Blockchain-based business model is Steemit:
In a Blockchain Economy, a good chunk of value is at protocol level. Therefore, you will have a Blockchain Protocol (in this case Steem is the protocol) which has a set of underlying rules. The Steem protocol reaches consensus, and it follows a proof-of-stake (contrary to Bitcoin where there is a proof-of-value mechanism). On top of the Steem protocol, several applications can be freely built. Those applications will be decentralized, as they will be based on a decentralized network in the first place. In the Steem Blockchain context, Steemit is among the largest and most important (Steemit was the first application launched as a use case for the Steem Protocol).
That is a decentralized social network, which rewarding system is based on a Blockchain protocol, called Steem. Like Steemit many others are trying to innovate in several fields. Thus, we might expect an explosion of Blockchain-based business models.
Proof of Work (ETH 1.0), switching to Proof of Stake (ETH 2.0). A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like Ethereum’s Casper protocol). Proof of Stake has the advantage of security, reduced risk of centralization, and energy efficiency.
Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.
ERC-20 Utility Token: Ethereum as the underlying protocol. An ERC-20 Token stands for “Ethereum Request for Comments,” a standard built on top of Ethereum to enable other tokens to be issued. Based on a smart contract that determines its rules, the ERC-20 enables anyone to issue tokens on top of Ethereum. As they are using a standard, those are interoperable. ERC-20 Tokens are critical to understanding the development of Ethereum as a business platform. Utility Tokens enable users’ participation in the network. Thus they work as a sort of built-in incentive mechanism for users to help the network grow.
The Graph is an ERC20 Utility Token (built on top of Ethereum) to enable consumers to freely query the blockchain through a fully decentralized database kept by indexers, incentivized by the payment of tokens (called GRT). The network is also ministered by curators and delegators that help maintain a high-quality index.
Brave is an open-source, privacy-centric web browser developed by Brave Software Inc. The company was founded by Brian Bondy and Brendan Eich in 2015. Brave makes the bulk of its revenue through banner advertising. In a rather unique arrangement, Brave users take 70% of the advertising revenue with the company taking the remaining 30%. Brave sells subscriptions to its video conferencing, VPN, and firewall products. It also makes money through affiliate commissions and merchandise sales in its decentralized web store.
Arbitrum Layer 2 Leveraging Ethereum’s protocol
A layer 2 solution can be applied as an additional protocol layer to solve various issues that the primary protocol can’t handle at scale. For instance, when it comes to Ethereum, when too many transactions go through the primary protocol, they can hardly go through, thus slowing down the main Ethereum protocol and making it not usable. In the case of Arbitrum, this works as a Layer 2 scaling solution. Meaning it helps manage transactions on top of this extra layer to help further scale the volume of transactions handled by the main protocol. Arbitrum works as the middle layer for various applications. For instance, Uniswap decentralized exchange is also, in part, relying on Arbitrum to scale the transactions that go through Uniswap.
One of the most popular Ethereum scaling solutions, Arbitrum aims to speed up transaction times and cut fees on the Ethereum blockchain
Uniswap is a decentralized exchange that enables users to exchange any ERC-20 token and more. Uniswap is a DeFi application and protocol which sits on top of Ethereum’s main protocol, and it leverages two Layer 2 scaling solutions (Optimistic Ethereum & Arbtrum). These underlying scaling solutions enable many transactions to go through the platform smoothly. When looking at Uniswap, it’s essential to distinguish between Uniswap as a token (which allows crypto users to exchange the UNI token) and Uniswap. This decentralized platform sits on top of Ethereum and leverages Optimistic Ethereum & Arbtrum to enable millions of transactions on top of the platform.
Uniswap is a decentralized cryptocurrency exchange founded by former Siemens mechanical engineer Hayden Adams in 2018. The exchange utilizes an automated market-making system rather than a traditional order book for transactions on the Ethereum blockchain.
Axie Infinity is a Non-fungible token (NFT). NFTs are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. non-fungible tokens contain identifying information that makes them unique.
Axie Infinity is an NFT-based online video game developed by Sky Mavis, a Vietnamese game studio founded by Trung Nguyen in 2018. Nguyen combined his interest in blockchain accountability and the CryptoKitties craze to launch the game in August 2018. Sky Mavis generates the bulk of its revenue via the 4.25% fee it charges on all in-game purchases. This includes land purchases, monster NFT trading, and monster breeding. Axie Infinity requires that all new players purchase three monsters to get started. Since the cost can run into hundreds of dollars, Sky Mavis will lend players the monsters and collect a 30% interest fee once the player starts earning currency.
Bundler model
Bundling is a business process where a series of blocks in a value chain are grouped to lock in consumers as the bundler takes advantage of its distribution network to limit competition and gain market shares in adjacent markets. This is a distribution-driven strategy where incumbents take advantage of their leading position.
In bundling, a strong distribution power combines several products in a single offer to extract more from the market. For decades Microsoft has been able to bundle several products under the same umbrella (Office has been coupled from time to time with several other products) so the company extracts more from the market, or if it were selling a single product.
Cash conversion cycle or cash machine model
Have ever wondered how some businesses survive, nonetheless the thin margin they have? One great example is Amazon.
A company that makes a low-profit margin yet it has been very disruptive. In reality, Amazon can get its partners to finance the business by playing on the short-term liquidity of the business.
Cloud-as-a-service (CaaS) business models
Cloud as a service is a business model that combines the cloud infrastructure delivered to customers as a subscription-based service, where the customer can access a cloud infrastructure without running it on-premise. Therefore, the whole premise of the cloud as a service business model is to offer a more agile cloud infrastructure at a fraction of the costs compared to on-premise software, and that can be scaled up according to the need of the business.
Cloud-based services have become the new standard. As the software paradigm has shifted from proprietary, to hosted, agile, and continuously improving, updating, and integrating within the company’s architecture, cloud-as-a-service business models (IaaS, PaaS, and SaaS), have become the new standard of the software industry.
The discount business model focuses on high quality
Leveraging on the price to gain a competitive advantage isn’t new. However, price wars are not the best way to create a sustainable business model. Instead, the supermarket chain – ALDI – has done just the opposite. One of the critical ingredients of the ALDI business model is to keep its prices low while maintaining its quality as high as possible.
How? With several strategies. For instance, ALDI limits its stores to 1,300 items, which generates minimum waste. Also, ALDI also features its brands, which makes it inexpensive to sell them, as there will be lower sales and marketing costs associated. 90% of ALDI brands have an exclusive agreement with the market chain!
It is important to notice that almost any business can be classified as a distribution-based business model, as there is no company that can survive without distribution.
However, in general, companies that tap into consumer markets need to be extremely good at creating distribution channels that are able to unlock long-term value. There are a few critical aspects:
The distribution channel has to be sustainable: this means that if you spend more money to maintain it that is what it generates might not work. It is fine in the short term to lose money on building up a distribution strategy. Yet in the medium term, it needs to be sustainable.
It needs to be diversified: relying on a single distribution channel might be too risky, especially if you don’t control it. Therefore, it is critical to focus on the main channel, yet the company needs to expand and tap into other channels.
It needs to scale: a distribution strategy is as good as its ability to stick also when the business scales up. Thus, the critical question is “would this strategy work if I go from €1 million to €10 million in revenues?” Many won’t and it’s fine. Yet as an entrepreneur, your goal should be to find a distribution strategy that scales.
Also, tech giants like Google spent billions to guarantee proper distribution. For instance, Google spends a good chunk of its revenues on distribution via acquiring traffic from several sources:
The traffic acquisition cost represents the expenses incurred by an internet company, like Google, to gain qualified traffic – on its pages – for monetization. Over the years Google has been able to reduce its traffic acquisition costs and in any case, keep it stable. In 2021 Google spent 21.75% of its total advertising revenues (over $45.56 billion) to guarantee its traffic on several desktop and mobile devices across the web.
When you see companies with a large turnover, you need to always ask, “what’s their distribution strategy?” or “how did they get there?” You’ll find out that they spent massive resources to tap into channels that proved successful to scale up their business!
Direct-to-consumers business model
A direct-to-consumer business model is primarily based on direct access from a brand or company to its final customers. Indeed, the more a company is able to tap into its customers without the need of an intermediary, the more this model will work in favor of the brand, which is able to control the perception of its customers via massive marketing campaigns.
Indeed, this kind of model implies a massive activity of branding and marketing to make sure consumers have your product on top of their minds. A successful example of a direct-to-consumer business model is Unilever:
Unilever is the second-largest advertiser in the world in 2017, based on media spending. Alongside more conventional advertising, Unilever creates and delivers tailored content through several digital channels.
When building up a direct-to-consumer business model it is critical to emphasize marketing rather than sales processes:
Indeed, consumer products have a low pricing point. Thus, to make sure to generate enough revenues for the company, marketing activities will be the key ingredient.
Direct sales business model
Nowadays, with the advent of AI, machine learning, and a new form of advanced technologies, it might seem demode to talk about direct sales. In fact, for many, this is a thing of the past.
However, the opposite is true. In an era where everything is getting automated the personal touch is becoming critical. Of course, once technology produces machines to the point of seeming human (see the Google Duplex experiment) that might be a different story.
Yet as of now, companies like ConvertKit use direct sales as a powerful weapon to grow their business, fast! Below you can see a simple Trello board put up by Nathan Berry, founder of ConvertKit when he decided to create a mail marketing tool from scratch just to see it grow to over a million dollars in monthly recurring revenue in only six years:
Thus, direct sales can be a powerful way to develop a business if done correctly. One of the secrets to a successful direct sales strategy is the qualification of your target audience.
If you try to sell your service or product to anyone, this is more spamming. The more you qualify your audience, the more you create value.
E-commerce marketplace business model
With almost $23 billion in revenues and nearly $7 billion in profits. While in North America and the western world in general, Amazon is the synonym of “e-commerce.”
When it comes to the Chinese industry, Alibaba is the market leader! In 2016 the company recorded over 423 million active buyers. Alibaba, just like Amazon has a diversified business model, with many moving parts. However, as of 2017 most of its revenues still came from core commerce.
As building up a website and e-commerce has become inexpensive, and it buries no particular cost for the traditional brick-and-mortar business, more and more small businesses join in and make the marketplace their primary source of revenue following Amazon’s leadership at the global scale. In fact, in many cases brick-and-mortar stores opt to become Amazon sellers:
In fact, by becoming a seller on Amazon, you allow your products to be directly picked, packed and shipped. Amazon takes a cut of the revenue, and the seller retains the rest. As Amazon puts it:
We offer programs that enable sellers to grow their businesses, sell their products on our websites and their own branded websites, and fulfill orders through us. We are not the seller of record in these transactions. We earn fixed fees, a percentage of sales, per-unit activity fees, interest, or some combination thereof, for our seller programs.
Built by one of the smartest persons on earth (Stephen Wolfram), Wolfram Alpha is a computational engine, able to provide complex mathematical questions and way more advanced (at least until a few years ago) compared to any other search engine.
Wolfram Alpha has built its business based on education. The primary targets remain students or teachers, which with a subscription can get unlimited access to Wolfram Alpha features.
Wolfram Alpha makes its computational engine free and open to anyone. Yet to get advanced features (such as full mathematical procedures) you will need to subscribe to the paid version. In short, that is a mixture of a freemium and subscription-based model that targets the educational industry.
Family-owned integrated business model
The family-owned integrated model starts from the assumption that even if you’ve built a multi-billion dollar company you can control it in its entirety, while you also keep an agile decision-making process based on an ownership structure that keeps the control of the organization in the hands of the family.
Prada generated over three billion euros in revenues in 2017, and it managed to integrate its overall chain, from the creative process to the distribution to consumers via its directly operated stores:
Source: Prada annual report for 2017
They’ve also managed to keep the ownership of the firm in the hands of its two founders and partners in life, Miuccia Prada and Patrizio Bertelli:
Source: Prada annual report for 2017
With 100% of Prada Holding, the couple controls 80% of Prada! Their word is law within the organization. Although Prada as a multinational has complex management systems, Miuccia Prada and Patrizio Bertelli are the key decision-makers on strategic initiatives.
Feeding model
HyreCar is a peer-to-peer marketplace where owners of cars can rent their idle vehicles to drivers that want to make an additional income via ride-sharing services like Uber, and Lyft. As a two-sided marketplace, HyreCar makes money by charging drivers for direct insurance and a 10% fee on the weekly rental expense. And by taking a 15% fee from owners’ weekly rental income.
As platforms arise, they create ecosystems, becoming unexplored markets. Those markets can be surfed by feeding your business model on top of that. A good example is how HyreCar feeds its business model on top of Lyft and Uber networks of drivers.
People that want to make some extra bucks can rent temporarily a car and connect to Lyft and Uber to generate some extra income. In a sort of “tit for tat” relationship HyreCar “cooperates” and surfs the drivers’ network of Uber and Lyft, to create more liquidity, by making more cars available on the road for drivers, thus improving the supply, and therefore generating more demand.
Franchising business models
We’ve already mentioned here a couple of franchising business models, however, it’s worth having an overview of how these evolved over the years.
Franchising is a business model where the owner (franchisor) of a product, service, or method utilizes the distribution services of an affiliated dealer (franchisee). Usually, the franchisee pays a royalty to the franchisor to be using the brand, process, and product. And the franchisor instead supports the franchisee in starting up the activity and providing a set of services as part of the franchising agreement. Franchising models can be heavy-franchised, heavy-chained, or hybrid (franchained).
From the FourWeekMBA research, we identified three primary franchising models:
Heavy-franchised: where franchisees own the business operations, but the franchisor controls the land development and the lease, as a tweak to control the standards followed by franchisees over the franchising operations (McDonald’s).
Heavy-chained: where the franchising company takes care of the investment and costs to open a new unit, yet the company also takes higher royalties and profits get split up (Chick-fil-A).
And franchained (or reverse franchained): in a franchained model, a company leverages the ownership model to establish new operations. Once established, the company reverts back to franchising. This model is extremely suited for those operations that require extreme expertise and leverage on the company’s scale to open up new markets (Coca-Cola). In a reverse franchained model instead, the company leverages the franchising model in the short, and it reverts back to an ownership model in the long run. This is extremely suited to quickly testing new markets, by increasing speed and reducing the cost of growth. For the model to work, there must be built-in incentives for the franchisee to sell back the operations at a premium, if they turn out successful.
Franchained and reverse franchained
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.
In a reverse franchained business model, the franchising company can leverage franchising to test whether new markets are profitable, by reducing the operational costs required to open new units, and by speeding up the growth while internalizing them in the long run, if they turn out to be successful and strategic for the company by making it easy and convenient for franchisees to sell back the operations.
Freemium model (freemium as a growth tool)
The freemium is usually a growth and branding strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through either marketing or sales funnel. The free users not converting in customers help spread the brand.
Free can be a powerful weapon for growth. Many in the tech industry and more specifically in the SaaS business model use Freemium to grow their business. The freemium is a mix of free and paid services.
The company offers a basic version of the product that works just like the premium product but it either has limited usage, or it has limited features. Thus, the free version is used for lead generation (capture contacts of people) and invite them to upgrade to the paid version or have the users with a free account to advertise their product.
Take SumoMe, a tool that allows you t grow the audience of a blog through newsletter forms, pop-ups, A/B tests, and heat maps:
If you get the freemium version of the tool, you still have a lot of features for free. SumoMe will invite you to upgrade over time, and it will show a small link “powered by SumoMe.”
In short, the free product can be leveraged in several ways. First, for lead generation. Second, as a way to trigger upsells for non-paying customers.
Third, as a virality tool, with CTAs and links placed in strategic places to have free publicity from non-paying users.
If appropriately implemented the freemium model can be a great way to grow a brand and a business fast.
While freemium can be considered in certain circumstances a key element of a business model, it influences all its aspects. In many other cases, a freemium model is a growth tool that has an incredible potential in spreading the brand of the company offering it.
Companies like MailChimp and Slack, have strengthened their brands and marketing funnels by leveraging the freemium model.
Free-to-play model
Fortnite developed by Epic Games is available in three modes. Save the World follows a premium model, where the game is sold, starting at $14.99- Battle Royale follows a free-to-play model, available for free. Still, gamers can buy things or customize characters with its digital currency (V-Bucks), and Creative Mode. As reported by Variety, Fortnite made $1.8 billion in 2019 and $2.4 billion in 2018.
The free-to-play model has become widely adopted in the gaming industry. Where companies like Microsoft and Sony sold their consoles at cost (Xbox and PlayStation) with a locked-in logic (gamers could not play in teams across those consoles) as they made money primarily by selling games.
Epic Games with Fortnite flipped this model. It made the game free, and up-sold products within the game.
Fortnite isn’t just a traditional freemium model, which we usually find in the software world. It had three modes of consumption, which helped shape its overall business model:
Save the World, premium model: built as a player vs environment game, is structured as a mission-based game. Contrary to the Battle Royal mode, which is the one that enabled Fortnite success, Save the World is available at $14.99.
Battle Royale, free-to-play model: built as a Player versus Player, or PvP, game mode this free-to-play game sparked virality and made Fortnite the success it is today. This game mode enabled up to 100 players, to play in several formats, alone, in duos, in squads, and more. The built-in group dynamics, and the fact it was freely available, helped sparkle the Epic Games’ ecosystem. And it is also lucrative for the company, as gamers can buy V-Bucks (Fortnite’s virtual currency) to customize their characters or else.
Creative mode: in the Creative mode, players gain access to a private island, where they can design the whole thing as they want and invite others. This mode is pretty interesting as it enables not only gamers but also creators or aspiring so to build their own gaming environment.
Freeterprise model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.
As consumer brands showed the freemium model could be both a great go-to-market strategy and generate a continuous flow of qualified leads (however, only after the whole organization would be organized around identifying those opportunities), other B2B/Enterprise companies (those primarily selling to other companies or larger corporations) also mastered the freemium model but on a B2B scale.
That is why I like to call that “Freeterprise.” Companies like Slack and Zoom are great examples of how you can build a valuable business with a Freeterprise model.
Zoom is a video communication platform, which mission is to “make video communications frictionless.” Leveraging on the viral growth from its freemium model, Zoom then uses its direct sales force to identify the opportunity and channel those in B2B and enterprise accounts.
This sort of looks like magic, as you can start from a single free professional account, and pull a whole organization into that, to transform it into an enterprise
As I explained in the Zoom business model though, the whole organization needs to be structured around the freeterprise model, where on the one end the company seamlessly uses the free product as an entry point within companies.
And on the other end, salespeople with the ability to build a strong relationship with the account can get the whole company on board, thus transforming a free professional account into a potential enterprise customer.
Of course, this leads the organization to skew its resources toward building an army of qualified salespeople to handle the volume of leads generated by the free offering (in 2019 Zoom spent 54% of its revenues primarily in salespeople headcounts).
Gatekeeper model
In the gatekeeper model, the dominant company has become the main middleman between the market and millions if not billions of potential customers. In the previous era, many middlemen captured value and retained distribution power, by fragmenting the market.
In the gatekeepers’ era, the market has been unified, and as such, it has become much bigger, yet the single middleman (the gatekeeper) is also the one who locked the distribution pipelines, thus retaining control over the access to millions of consumers.
Thus, the whole gatekeeper business model is about becoming the unlocker to final customers for millions of small businesses.
Heavy-franchised business model
McDonald’s is a heavy-franchised business model. In 2021, over 56% of the total revenues came from franchised restaurants. The long-term goal of the company is to transition toward 95% of franchised restaurants (in 2020 franchised restaurants were 93% of the total). The company generated over $23 billion in revenues in 2021, of which $9.78 billion from owned restaurants and $13 billion from franchised restaurants.
McDonald’s follows what could be defined as a “heavy franchised business model.” 92% of its restaurants are franchised. With a long-term objective to reach 95% of franchised restaurants.
The franchising business model is quite effective for the expansion of the organization. A franchisor licenses its know-how (which might comprise procedures, training materials, brand, and more) for a franchisee, which has the right to sell the franchisor products and services in exchange for a royalty. In some cases, the franchisor also gets a percentage of the revenues.
Humanist enterprise business model
The most prominent advocate for the humanist enterprise business model is Brunello Cucinelli. Indeed, Brunello Cucinelli business model is based on three key pillars:
Italian Craftsmanship,
Sustainable Growth,
and Exclusive Positioning and Distribution.
The company generated over €503 million in 2017:
The humanist enterprise is based on the premise that “profit is made without harm or offense to anyone, and part of it is set aside for any initiative that can really improve the condition of human life: services, schools, places of worship, and cultural heritage.”
EdTech: enhanced education through digitalization ad tech platforms
EdTech is the attempt to make education more effective by leveraging on digital and tech. Several players are tackling this problem in different ways. Below are some examples.
For instance, the Udemy business model is trying to make everyone an instructor.
Udemy is an e-learning platform with two primary parts: the consumer-facing platform (B2C). And the enterprise platform (B2B). Udemy sells courses to anyone on its core marketplace, while it sells Udemy for Business only to B2B/Enterprise accounts. As such, Udemy has two key players: instructors on the marketplace, and business instructors for the B2B platform.
On the opposite spectrum, the Masterclass business model is trying to transform world-class experts into instructors:
Started as an attempt to transform education, MasterClass finds top talents and turns them into instructors. With a straightforward membership model of $180 per year, the streaming online education platform gives access to all its courses and the new releases on the platform. In 2020, it got valued at over $800 million.
Duolingo is an EdTech platform leveraging gamification to enable millions of users to learn languages. Duolingo leverages a hybrid between ad-supported and freemium models. Indeed, the free app makes money through advertising. Free users are also channeled into premium subscriptions with an ad-free experience and more features.
Udacity’s business model instead leverages partnerships with universities, to offer different kinds and formats of education, based on “nano-degrees.”
Udacity is a freemium EdTech platform, offering MOOCs (courses open to anyone for enrolment). Udacity partners up with companies and universities to offer nano-degrees (short-term online education programs focused on specialized skills in computer science). The user either pays a one-time or subscription fee to access one or all courses.
Enterprise business model built on complex sales
In an enterprise business model, a company focuses on large clients, usually Fortune 500 clients that have a massive budget of millions or billions of dollars. This kind of business is primarily based on complex sales.
As Peter Thiel explains in his book Zero to One, when it comes to a company’s distribution it is critical to understand where you stand. Indeed, in an enterprise business model, it’s all based on closing large deals.
Therefore, it is crucial to have senior salespeople with competence in managing those large deals to guarantee the success of the company.
In this respect, drawing a clear line between Marketing and Sales is the key point when trying to build up an enterprise business. That’s because you need to identify the right target with a laser focus.
Most of the time a large enterprise business might have only a few dozens of potential clients. Once identified those potential clients you need to put the proper resources to close those deals.
