The Models That We Live By

Jen van der MeerBusiness Model Practice

Are the business models we use constraining us from building the future we want?

Utilization
Organization
Optimization
Mechanization

The way we imagine and discuss new business models seems to be trapped back in the first Industrial Revolution. We talk about “creating machines,” “measuring throughput,” and “optimizing efficiency for zero defects.”

Yet when the subject turns to the value creation that recent advances in technology have made possible, we speak in terms of “complexity” and “emergence.”

Network effects
Ecosystems
Viral loops
S-curves

The growth toward real revenue, quickly accumulated, that we’ve seen in companies like Uber and Airbnb is forcing us all to wonder about their “mechanics.” These companies use the best digital-optimization tools on the planet, but their secret seems to be something more organic, which builds on complexity and grows emergently.

How do they do it? Can the process be replicated? What are the key takeaways? The best practices?

The smartest way to answer these questions may be to throw away the old machine metaphors.

I’ve been noticing the difference between machine and organism metaphors as I’ve embarked on my project for a Reason Street Business Model Library. Each week I take a request to deconstruct a business model. I document the collective wisdom of academics, investors, entrepreneurs, and the business intelligentsia, filtering it through my own Wall-Street-meets-design-thinking worldview.

Let’s consider three examples:

The Subscription Business Model
Everyone praises this model, favored by everything-in-a-box startups like Birchbox and BarkBox and Blue Apron as well as by SaaS (software-as-a-service) companies. Investors and business owners adore the predictable, repeatable, all but certain revenue that can be counted months in advance, like the cash flows from an electric utility. Yet the magic of these companies (when they’re successful) grows out of a deep understanding of network effects and cultural change, as well as the experimental excitement that comes with creating an offer and/or a product that connects with customers.

The Professional-Service Business Model:
Human beings giving other human beings advice, and charging for their time, in order to solve real problems is one of the oldest business models in existence. But there’s not a great deal of humanity in the way lawyers, accountants, consultants, and doctors tally up the hours they spend on us. Utilization (the number of hours a given employee is working), billing, and average revenue per employee have traditionally been the key performance indicators for this classic model. But Contrast them with the performance indicators for such new-era on-demand services companies as Taskrabbit, Upwork, or Zeel (in-home massages). The metrics for measuring are entirely different when you see your service provider as another customer rather than a benchmark of hours to be logged.

The Razor-Blade Business Model
The industrial-era corporate juggernaut Gillette recognized the value of selling a consumable part (the blade) for a higher margin of profit than the base product (the razor that holds it). Nespresso and HP both favor this model, which benefits from a cognitive bias in consumers: we’re so seduced by the low cost of a machine that we ignore the huge markups for the coffee pods or the printer cartridges it requires. But again, if we consider the razor-blade-style companies of the new era, we can see that Harry’s and Dollar Shave Club didn’t achieve their unprecedented growth through pricing formulas alone. They may be using the same low-cost machines to sell their higher-cost products, but their value creation has come from something newer and more fluid and connected: their genius at networking.

Since we don’t really have the language yet to speak about how these organisms work, we keep falling into the trap of describing what we’re seeing as “utilization,” “throughput,” “efficiency.”

We have entered an explosive new age of value creation but are still stuck in the machine metaphors of the past.

While we hunger to adopt these models in order to respond to the pressing needs of our mushrooming population and our burdened biosphere, we keep stepping back in time for our ideas.

The answer lies in coming up with a more creative, more visual language—of squiggles, loops, and connections—for how to build these new businesses. If we’re going to reimagine our future, we’ll have to sketch our way there.

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Reason Street's Most Popular Business Models

Pay-Per-Use

In a pay-per-use business model, use of a product or service is metered, and customers are charged when they use the service. “Pay-per-view TV” and online journal publications, custom research firms, who sell access to high value content on a per use or per download basis.

Two-Sided Marketplace

A two-sided-marketplace business model is a platform for economic exchange between two distinct user groups that provide each other with the benefits of a large network.

Business Model: Subscriptions

The explosion of the “subscription economy” is upon us with everything from flowers to car sharing to data storage to beauty care products now being billed to us on a monthly basis.

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