The ultimate Business model innovation cheatsheet 2020: How to, tips and examples

Table of Contents

What is a business model?

Definition business model

There are multiple components. As coined by Shafer in 2005 and later on simplified by Alex Osterwalder, we prefer the following definition for a business model: “An organization’s approach to creating, delivering and capturing value.”

How you create value is defined by a value proposition:

  • This is the foundation of any business model. You will need to understand the clear benefits you have to offer.
  • Who are your clients?
  • What problem are you solving for them?
  • What products or services are your offering
 

How you deliver value is defined by your value architecture:

  • A great idea is not enough. You will need an efficient operating model to turn you idea into a successful innovation.
  • What are your available resources?
  • What are your key competencies in delivering value?
  • What is your value chain?
 

How to make money or a profit?

  • The third component of a business model describes how you can capture the value that you create. You can have everything in place, but still don’t have an innovate way to make money.
  • What is your pricing strategy?
  • What is your cost structure?
  • How can you optimize multiple channels?

Difference revenue model versus business model

Many people that are looking for an innovative business model are just looking for a creative new way to make money. But as described above, how you capture this value is not a full business model.

The different revenue model options that can be tried are just a subset all the problems to solve. Your pricing experiments and revenue stream are crucial of course. This should never be an afterthought. On this page we’ll describe several revenue model examples.

How to make a profit?

When discussing how to make money, you will need to understand the following concepts:

Cost of delivery

  • Variable Costs: All the costs directly related to producing the product/service. (example: COGS, …)
  • Customer Acquisition Cost (CAC): Cost of acquiring a customer.
  • Other operating costs: All the overhead costs you make and are not directly related to producing the product/service.
 

Capturing value

  • Selling pricing per unit versus contribution (or gross profit) versus operational profit.

What is my revenue potential?

How much money can we realistically make in a competitive market?

How to start a business model analysis?

Unit economics: Example ballparks exercise

  • Selling price: e.g. Average annual price of product/service [€100/year]
  • Gross profit margin (%): Profit after the cost to make & deliver a product or a service
    = (Selling price – COGS) / Selling price = [80%]
  • Lifetime: Total amount of time the customer uses your product/service [e.g. 5 years]
  • Lifetime value (LTV): How much profit do we make of a customer once we acquire him
    = Selling price * gross profit (%) * lifetime [€400]
  • Customer Acquisition Cost (CAC/CoCA/CoA): Cost of acquiring (CoA) + cost of servicing and maintaining a customer = annual sales and marketing expenses (€) / # customers gained per year [120]
  • LTV/CAC: Bigger than 3 is considered healthy rule of thumb and ready for sustainable scaling [3.3]

 

Understand your market: TAM vs SAM vs SOM

  • Total Addressable Market: total revenue potential of the entire market (e.g. global car market, fast food market in North America)
  • Serviceable Attainable Market: total revenue potential of your target market segment (e.g. global second-hand car market, fast food market on West Coast of USA)
  • Serviceable Obtainable Market: total revenue potential of your market share (e.g. 2% of the global second-hand market, 10% of the fast food market on West Coast)
Understand your market: TAM vs SAM vs SOM

Understand the market growth: CAGR

The compounded annual growth rate (CAGR) gives us an indication of how fast the market is expected to grow or decline in the future. To maximize our chances of building a sustainable business, we want to enter a market that is growing i.e. positive CAGR. Just like the old saying goes “A rising tide lifts all boats.”

Segment your market

We can begin segmenting the market by using quantitative, socio-demographic data. However, this data can only take us so far. By conducting customer interviews and gaining qualitative data about customers’ needs, motivations, and behaviours, we can begin segmenting the market into finer niches by using psychographics.

The different types of business models

List of business models

If business model innovation is your thing and you want to explore the full spectrum, you will soon discover there are plenty of ways to approach this challenge.

According to the type of pricing strategy

Freemium

Offer Basic package for free, attract a large volume of users, then convert users into paying clients with access to Premium features.  

Examples: Spotify, Dropbox

Auction-based

Potential buyers bid on a product with limited availability. When the auction ends, the highest bid wins, and the buyer receives the product. 

Examples: Ebay, Google ads

Reverse auction

Multiple sellers are bidding for the lowest possible sales price. When no other supplier is willing to sell at a lower rate, the sale is final.

Examples: more used in a B2B context

Razor-blade

Sell the product at a low price, but profit from selling consumables that are needed to use the product.

Examples: Printers & cartridges

Pay-what-you-want/ Donation-based/ Charity-based

Buyers are allowed to pick their own price – including zero dollars. Or, buyers can pick from a given range of options.

Examples: Amazon Web Services (AWS)

Pay-as-you-go

You only pay for what you actually use so a product is being split up in measurable chunks (consumables, time-based, etc.)

Examples: Mailchimp

Low-cost/ Nickel-and-dime

Offer a basic product at a significantly low price, but profit from selling multiple paid add-ons or upgrades.

Example: Ryanair  

Discounter

Offer quality products but at a significantly low price point, achieved by purchasing products in large volume.

Examples: ALDI

According to the position or role in the ecosystem

(online) Marketplace

Bundle different suppliers/sellers on one platform to make it more convenient for buyers to browse for the product. Often, a commission is taken on each successful sale.

Examples: Fiverr, Etsy

Multi-sided platform/ Matchmaker/ Broker

A platform to act as a middleman between a buy and a seller. Typically a commission is made on the transaction between these parties.

Examples: Dating, Travelocity

Aggregator

A company bundles the services of multiple providers or suppliers under one main brand to be offered to clients. Recently some platforms are aggregating the demand side by bundling clients together to create leverage towards suppliers.

Examples: Uber, Zillow

Manufacturer

Producer of physical goods based on raw materials that can be sold with a profit to other companies (or consumers).

Distributor

Reseller of goods in a B2B context. Typically a distributor will take care of the logistics and storage of items before handing it over to retailers or wholesalers.

According to the channels used

Direct sales

Often this model refers to sales reps who interact with buyers via a ‘parties’ model, where the salesperson brings multiple potential customers together and takes a commission on each sale

Examples: Tupperware

Direct to consumer / D2C

Avoid the middleman in a transaction by going straight to the end-buyer. This saves costs, but you lose the value the middleman can provide.

Examples: Casper

According to the interaction model with the client

Subscription/ Renting/ Leasing

Convince clients to pay on a recurring basis. (I.e. monthly, quarterly) Rental/leasing often refers to the same model when hardware or equipment is involved. People pay for the use of the product or service and no ownership is transferred.

Examples: Netflix, Avis

‘X’ As As Service (SAAS)

A variation of the previous model where X typically stands for a specific hardware product that can be accessed or used for a fixed fee per month.

According to the type of product/service sold

Ad-based/ Advertising/ Attention merchant

The attention of a specific audience is being sold to advertisers so they can promote their products within a given context.

Examples: Facebook, Google, Newspapers

Data seller/ data licensing

Data of users (or other stakeholders) is collected, sometimes enriched with other data sets, and offered for sale to third parties. Data can be sold per access, per set, per time period, etc.

Examples: Gnip

Affiliate marketing/ Referral-based

Profit by referring people to a third party. For every client that signs-up you receive a referral fee or commission.

Example: thewirecutter.com

Consulting

Experts are sold by the hour or for a specific day rate to help businesses with specific challenges.

Agency model

A service business where solutions are sold for a (fixed) project or delivery fee. Pricing can be a combination of day rates and deliverables.

According to the internal operating model

Franchising

In exchange for royalties, business owners can use the brand and some resources of a larger company to operate their business.

Examples: Starbucks

(API) Licensing

Buyers get access to a service or resource by paying a specific fee, often for a given time period.

Brick-and-mortar

Offline, physical stores that sell goods and services. Most large retailers today operate via this model but combine this with online sales channels.

Best Buy, Starbucks

E-commerce

Sales of products or services via digital/online channels.

Example: Alibaba

Drop-shipping

An e-commerce business model where the company acts as an online store front only. After purchase, products are shipped from the manufacturer to the buyer without further intervention from the “dropshipper.”

Examples: Oberlo

Crowdsourcing

To create value, a platform can involve a large group (crowd) to work together, wherein each participant contributes a portion of work sometimes even for free.

Examples: Wikipedia

Value-added reseller

A company combines one or more different products, adds features to increase value, and then sells it to the end-user.

Multi-brand

A holding company clusters different sub-brand together. Often, consumers are not fully aware what the parent company stands for, as it only interacts with the sub-brands. 

Examples: Nestlé

How to start with business model innovation?

Business Model Innovation Process

We recommend to follow an iterative approach. Use the following phases as a guide:

SIMPLE VISUAL 4 PHASES FLOW (only titles)

4 Phases of business model innovation
Discovery

Understanding of market

  • Define the size of the market
  • Identify key players in the market
  • Understand evolution of the market

Expected outputs:

  • Size of the market (TAM)
  • Main competitors in the market
  • Key forces impacting the market
Problem Fit

Validation of user problem

  • Size customer pains and segments
  • Determine value of solving the pains
  • Understand evolution of the problem

Expected outputs:

  • Size of the problem (SAM)
  • Main customer segments
  • Opportunities for innovation
Solution fit

Validation of solution

  • Ideate multiple business models
  • Evaluate viability of each model
  • Test assumptions of each model
 

Expected outputs:

  • Size of the revenue potential (SOM)
  • Completed BMC and BM Kit
  • Initial validated assumption
Market Fit

Launch validated business model

  • Test growth model
  • Refine business model based on feedback

Expected outputs:

  • Fully validated business model
  • Happy first customers
  • Sustainable growth model

Business design

Build products and services customers love, with a profitable and sustainable business model.

Best business model frameworks with examples.

Different business model templates (PDF)

To complement the Business Model Canvas template, developed by Alex Osterwalder, we’ve created the Business Model Kit. This tool designed to explore and imagine different business models to support your solution.

The key to a sustainable business model is ensuring that all stakeholders in the ecosystem are delivering and capturing items of value. The business model kit helps you ideate multiple business model options. In particular, it raises awareness over the value exchange between stakeholders.

Using a common, visual language enables you to easily communicate business models to different audiences, to learn from successful models in other industries, and to quickly generate new variations and business models of the future.

That’s why the business model kit uses 16 simple icons (“blocks”) to represent the major components of business models:

  • The 6 stakeholders represent the organizations/group of people/consumers between which the value exchange happens.
  • The 10 value elements represent 10 major types of value that humans can exchange between each other.

Get the Business model kit

The business model kit is a tool designed to explore and imagine different business models to support your solution.

We selected the most innovative business models and visualized the different revenue streams! Each example comes with detailed info about the company and its innovations. Once you have understood how each of the companies generates value, then you are ready for a business model innovation session.

Challenge your own model and drive discussions leading to more value-generating business models.

Healthcare business model examples

When you need to pick a business model for your startup or new corporate venture, there are many options to explore. To make it easier, we’ve handpicked dozens of innovative revenue models and partnership ideas.

A stack of 50+ business model examples

Discover innovative business models, see visualizations of their different revenue streams, and copy ideas for your startup.

Industry-specific business model examples

Circular business models

Coming soon!

Finance business models

Download our guide and learn from the business models of these promising digital finance ventures!

Energy business models

5 innovative revenue frameworks and partnership ideas from within the energy industry. Copy elements of these energy business models for your company.

Mobility business models

Download our guide and learn from the business models of these promising ventures in mobility!

Health business models

Download our guide and learn from the business models of these promising digital health ventures!

Checklist before moving forward

Can you check off all the boxes?
If not, go back to one of these tools

You explored different business models to support your solution.

You explored additional revenue streams.

You have a high-level estimate of bottom-line impact.

You understand the unit economics supporting your business model.

Well done! Now validate your findings. Check our business design  playbook for more info.

Need business model training?

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