(Part 2 - cutt.ly/lw9hq6sQ )
Fintech: digitalizing the financial system
Fintech business models have been tackling one of the hardest of all problems. How to transform the financial system through digitalization and technology. This is among the hardest problems because the financial industry is highly regulated, and very hard to transform.
Players like PayPal have been trying since the beginning of the digital era. Later on, other players like Stripe also tackled the problem. The wave of fintech is very strong. And with blockchain tech developing on the way, this might also help fintech take a leap forward in the coming decade.
Instant news business model
Twitter makes money in two ways: advertising and data licensing. In 2021, Twitter generated $4.5 billion from advertising and $570 million from data licensing. While Twitter generated $5 billion in total revenues, it lost 221 million.
Twitter has based its fortune on short messages (until 2017 140 characters, then extended to 280) which allows anyone to share the news but also updates that become news.
One of the most powerful aspects of Twitter is its immediateness, which although it might have also caused troubles in the media industry, also allowed news to be disintermediated.
Twitter is an attention merchant, which primarily makes money via advertising, like Facebook and Google.
Last-mile delivery, on-demand business models
Last-mile delivery is one of the hardest problems to tackle, as it sits outside what we call network effects. In short, it doesn’t matter much the network effects a company has accumulated over the years. Last-mile is the last leg of the supply chain, and yet extremely important (it’s consumer-facing, thus the overall customer experience will depend on it).
Various companies are tackling “the last-mile problems.” And as the pandemic hit, their business models quickly evolved. Last-mile is also intertwined with on-demand. In fact, the more a product can be ordered and quickly delivered, the more the divide between retail/physical stores and digital stores will narrow down.
Beyond Amazon, a few other platforms are tackling the last-mile problem by starting with food, and transportation. Yet once those two use cases have been figured out. This can be extended to many other industries. This is why the last-mile problem is worth trillions.
Lock-in business model
Apple is famous in the business world (beyond launching beautifully crafted tech products) for its philosophy of keeping its ecosystem as enclosed as possible. Apple devices will talk to each other in a seamless way, to create a great experience.
While the smooth experience for users through Apple’s devices makes its products compelling for millions of people, the lack of integration with products outside its ecosystem can also be frustrating.
A locked-in experience can be great to have as much control over users’ experience and incentivize customers to purchase more products from the company. It can also be a disadvantage in the long run as those competitors leveraging on an open approach can grow more quickly.
As long as the company can keep investing back in developing great products, integrating them with each other to create a seamless experience, and maintaining a strong distribution pipeline, that model might work.
Long-tail business model
Loss leader business model
Management consulting business model
As one of the most successful consulting companies in the world, Accenture makes money by selling consulting services in several industries (from financial services to communication and technology). A consulting business model is often based on hiring talented people with hiring people and having them work on multiple client projects. The client pays a fee that can be assessed per hour or per day, according to the requirements of the service. Accenture was able to build a multi-billion dollar based on consulting services across the globe.
Market-maker model
One of the major values of a platform like Uber is the fact that it is able to create liquidity on the platform by batching by time to time divers and riders, also with dynamic pricing.
Marketplaces business models
Marketplaces and platforms have become the most dominant business models of the digital era. And they have morphed into various types of platforms. From those offering products, services (or both). To those dealing only B2B, B2C, or C2B. And these marketplaces and platforms who primarily developed on a peer-to-peer basis, vs three or multi-sided ones.
Multi-brand business model
Back in the late 1990s, a war started in the fashion luxury industry to take over Gucci. That war saw an arm wrestling between Kering Group – a company founded as a lumber trading organization back in the 1960s – and LVMH Group – a company, started a few decades before primarily as a construction company just to become one of the most known luxury brands in the world.
The war was about who would become the largest luxury group – fought by the two wealthiest men in France – but also about who would be the most diversified luxury empire. Eventually, Gucci ended up within Kering Group, sold by LVMH at a high price.
At the same time, LVMH took over Fendi. Today, both Kering Group and LVMH have a massive portfolio of brands.
Kering Group’s portfolio of brands made over €15 billion in 2017
LVMH built a portfolio of brands and houses that made over €42 billion in sales in 2017
Both groups today follow a multi-brand strategy based on creating economies of scale at a central level; while keeping the Maison and Houses part of the portfolio operated and run independently.
This multi-brand approach leverages both centralization for certain aspects of the business (collaboration among the brands, economies of scale, better supply chain, shared branding initiatives) and decentralization for others (allow agile decision making, preserve the unicity of each brand to keep its creativity output high).
That approach to business modeling can be quite effective if you’re trying to build up an empire! It requires though massive resources to develop an acquisition campaign over the years. Indeed, both of those groups came from different industries and used the liquidity generated by their core activities to enter the luxury market.
Multi-business model
- Consumer e-commerce platform.
- First-party seller platform (Amazon owns a set of brands like AmazonBasics).
- Third-party seller platform and services (Amazon hosts third-party sellers).
- Amazon Prime.
- Amazon Advertising.
- Amazon AWC B2B/Enterprise Cloud platform.
The core of Amazon has always been the e-commerce platform, however over the years, as a side effect of developing adjacent parts of the business, to sustain its core. Amazon built successful programs (Prime and AWS are examples) that turned into self-standing businesses.
This is the fruit of a continuous mode of aggressive growth and business innovation that made Amazon expand, and reinvent its business model (AWS has a whole new logic than the core e-commerce business and could potentially be a spin-off of Amazon).
Multi-sided platform business model
If I saw, a professional social network, at least at the time of this writing, for sure you’ll think about LinkedIn. In fact, with over five hundred million users worldwide LinkedIn is a platform that offers value for several stakeholders.
LinkedIn is a source of value for a B2B that is trying to grow; it is a powerhouse for any business developer and a source of value for HR managers and candidates looking to grow their skills.
In short, in a peer-to-peer marketplace, a company acts as an “invisible” middleman that makes transactions and interactions among sellers and buyers as smooth as possible.
On a multi-sided platform, the company offers services to both sides.
For instance, LinkedIn sells subscription services to HR managers to find candidates to fill vacancies. At the same time, LinkedIn provides another subscription service to people looking for job opportunities.
As the value of the platform depends upon the ability of LinkedIn to offer skilled candidates to the HR manager, that is why LinkedIn also has an online teaching platform that offers together with a subscription, professional courses to people looking for a job.
Multimodal business model
Lyft leverages three key problems related to the cost of ownership:
- Underutilization: vehicles are not used most of the time.
- Inefficiency: the large ownership of vehicles also made cities build large parking spaces that occupy a good chunk of cities’ urban landscapes.
- Inequality: car ownership while distributed is still a large issue for many people that can’t afford to buy a car.
From there it offers different options to customers that can switch from car to bike-sharing, or electric scooters, depending on their short-term transportation needs.
Multi-product (Octopus) business model
From the low-end of the travel market to the higher-end with its Townhouse, a sort of modern boutique hotel. To further expand in co-working and corporate traveling.
This sort of business model is skewed toward a quick go-to-market strategy that moves in all the directions to expand and cover as much as possible of the end-to-end experience for travelers.
On-demand subscription-based business model
At times a business model only becomes possible when technology evolves. In some cases, it also requires some creativity when technology doesn’t help. For instance, in 1997 Reed Hastings, CEO, and founder of Netflix started a business based on the rental of DVDs.
This business today contributes to a small pie of Netflix revenues, yet at the time it was the core of the business, and it has been so for years. “On-demand” at the time was possible with the pay-per-rental business model.
Until Netflix transitioned to the on-demand subscription-based business model; an old business model used by magazines for decades was successful and “innovative” in the TV industry, where the content was mainly distributed at fixed schedules.
One-for-one business model
Have you ever heard of TOMS Shoes? As you can understand from the name, this is a company making shoes. What’s new about it? The founder of TOMS Shoes founder has come up with a model, in which, for a pair of shoes sold, another pair is given to kids around the world that cannot afford them.
This kind of model might be seen as a sort of hybrid that combines profit with non-for-profit models. In reality, TOMS Shoes has proved to be profitable and sustainable over time.
Indeed, the non-profit side of the business model works as an excellent propeller for the business. Anyone wants to take part in the growth of a company that not only sells shoes but takes care of kids around the world.
Thus, it isn’t anymore just a pair of shoes; it is a story you want to be part of.
Open-Source Business Model
There is a key difference, though.
Whereas in a freemium and freeterprise, the free product is built, developed, and maintained by the company centrally.
On an open-source model, the free product is built, developed, and in part, maintained by an open community of developers.
Those developers are not employees of the company, but rather part of an independent community. This implies the company selling the premium version of the open-source software will need to be careful in how it monetizes it to prevent disappointing the community of developers that made the project possible in the first place.
Open Core Business Model
As Nick Heudecker explained:
The central value proposition of open source core vendors has been freedom from vendor lock-in. After all, the core elements of the product are open source, developed by a global community. The core product isn’t owned by a single company, but, in almost every meaningful instance, by the Apache Software Foundation (ASF). If the worst happens and we go out of business, the code will live on in the ASF. You’re safe. If you don’t like us, it’s open-source. You’re protected. I don’t know what happens next but hey open source.
A key business model to understand open core is GitLab:
Peer-to-peer business model
A peer-to-peer business model is built on the premise of creating value for both the demand and offer sides, while the company that acts as a middleman monetizes through commissions.
Companies like Airbnb have implemented the modern version of the peer-to-peer business model. As technology has quickly advanced, in Airbnb’s case, it won just because it allowed the transactions between hosts and the hostee smooth.
The platform works seamlessly, and Airbnb only intervenes to create trust and mitigate risk for the party involved.
Platform-agnostic model
Grammarly’s CEO explained to TechCrunch as one of the key advantages of Grammarly is its “platform-agnostic approach.” In short, Grammarly focuses on being anywhere the user needs to be.
This approach makes Grammarly’s value proposition compelling in a tech world, dominated by the tech giants that are trying to cover the end-to-end experience of users, thus locking them in their walled gardens.
Grammarly instead is trying to be anywhere, independently from the platform, thus making the user free to choose the platform.
Platform business model
Definition Network Effects: The value of a service/platform increases for each additional user, as more users, join in. | Sub-type | Description – Example |
Direct, Same Side, or One-Sided | As more users join, the platform’s value increases for each additional user. Take the case of a social media platform, like Facebook, Instagram, TikTok, LinkedIn, and Twitter. The more users join, the more the platform will be valuable for each additional user, as the new user might find exponentially richer and broader content (provided the platform can prevent congestion or pollution). | |
Indirect or Cross-Side | In this case, a user type joining the platform makes it more valuable for other user types. Take the case of LinkedIn. While LinkedIn enjoys the same-side network effects, the platform becomes more valuable to users looking to enhance their careers as more users join in. At the same time, LinkedIn enjoys indirect or cross-side network effects. More users who join the platform to grow their career make it more valuable for recruiters (so a different user type) as they can find more qualified candidates on top of the platform. | |
Two-Sided | Take the case of LinkedIn. While LinkedIn enjoys the same-side network effects, the platform becomes more valuable to users looking to enhance their careers as more users join in. At the same time, LinkedIn enjoys indirect or cross-side network effects. In this case, a user type joining the platform makes it more valuable for other user types. More users who join the platform to grow their career make it more valuable for recruiters (so a different user type) as they can find more qualified candidates on top of the platform. | |
Multi-Sided | In this case, more than two user types are driven by the network dynamics. Take the case of Uber Eats; the more restaurants join the platform, the more the platform becomes valuable for eaters. While at the same time, by leveraging on its existing platform, Uber drivers have additional riding options. So they can earn extra income by delivering food instead of giving rides. That makes the overall platform much more valuable for the three main user types: eaters, restaurants, and riders. |
Therefore, a platform business model has to figure out how to kick off the side of the platform that automatically will trigger network effects on the other side (for instance, the more drivers on Uber, the more the platform is valuable to riders).
Beware though, even when platform business models scale, they can get out of hand, very quickly, due to negative network effects.
Definition Negative Network Effects: The Value of the service/platform decreases for each additional user, as more users join in. This might be due to congestion (when increased usage can’t be handled by the platform) or pollution (when the increased size of the network makes it hard to incrementally add value, and instead its value shrinks). | Description – Example |
Congestion (Increased Usage) | In this case, there is a reduced quality of the service when certain parts of the networks carry way more data than they can handle. That usually happens because of scale limitations and noise due to curation limitations. Since this is a technological issue, it manifests as service slowdown or perhaps the platform crashing. Take the case of services like YouTube crashing for too much traffic. Or, if you’re a professional, a service like Slack crashes as it cannot handle the traffic spikes. That becomes a disservice with potential negative network effects because you suddenly prevent a whole team from functioning properly. Therefore, a negative network effect can have exponential negative consequences. For instance, users would switch to alternatives en masse if this was repeatedly happening, thus creating structural damage to the network. |
Network Pollution (Increased Size) | The case of pollution is more tied to the ability of the platform to keep its service relevant at scale. Thus, imagine the case of a platform like Twitter, in which the principal asset is the feed. As Twitter becomes more and more popular, it needs to make sure that the user-generated content is qualitatively on target. Otherwise, the risk is for the user’s Twitter feed to become less relevant and lose value. Or imagine the case that many user-generated platforms face today, where spambots take over. Here, suppose the platform cannot handle this automatically generated content. In that case, it can quickly lose value, as the service becomes worthless for users (take the case of a user who has to spend an hour a day cleaning up the feed because of spamming). |
Play-to-earn business model
Privacy as an innovative business model
Part of it has been fueled by Google’s practice to gather users’ data. As more people become aware of the Google business model, they look for alternatives that respect privacy.
If you type “privacy” on the Google search box, among the most frequent related searches, you’ll find “privacy Google:”
In short, Google itself is revealing the existence of an industry that revolves around privacy online.
In this scenario, a search engine like DuckDuckGo, which has built its success on throwing the users’ data on the fly to allow private navigation, is growing quite fast.
That’s because DuckDuckGo makes money primarily via affiliations and by selling local keywords. Thus, privacy becomes a propeller for DuckDuckGo’s business growth.
https://bitly.ws/3gw6d