What do people mean when they talk about a business model?
A business model is how you deliver to your market in your value proposition. It talks about the value proposition, the target audience, how you connect to that target audience to deliver your value, what capabilities you need to have in your own organization or through partnerships, and what your cost structure is and how you get paid. All of those components make up a business plan. There is a business plan canvas available online. It helps you think through all of these components to make sure that you’ve got all the elements you need for a successful business.
Change the Business Plan, Change the Market
A lot of times what you find is a change in business plan can be the way a new company interrupts or disrupts the market. So let’s talk about a few of them. One that’s fairly clear is and an older example is Netflix. Maybe you remember a company called Blockbuster which used to rent videos. They were in a retail store, and you’d borrow them for a day or two (and then of course if you didn’t bring them back there were late fees). Netflix was helped with a technological change: DVDs became flat, which were very easy to mail. They changed the business model. Instead of going to a store, you could choose one online and they would mail it to you. You could keep it as long as you needed it, but you could only watch one movie in sequence so you had to send it back. That model really ended up changing the game for Blockbuster which no longer exists. Technology changed again and it became easier not to have to use the mail. Now there’s the streaming option.
Another example is Zipcar. If you think about the rental car business, the traditional model is for business people or visitors. You find rental car outlets at airports, train stations, bus stops, and the like. You rent the car for the day or the week, and they’re fairly expensive.
But what if you’re an urban dweller and you don’t have your own car? There’s a model that could say, “Maybe I could rent it just for the hour.” Zipcar thought that through. There were a couple of critical elements they needed in their business model. They needed to have a bunch of cars. They needed to have them very close to where urban dwellers were because people wouldn’t be willing to walk very far to get one. They needed to have a model where you didn’t have to go to a counter and get a key. They actually have a model where you can unlock the car remotely with a pass card. This also has a membership model. So they get paid a monthly fee to belong to that. This membership model gives them a second revenue stream in addition to when you actually borrow the car and it also encourages loyalty.
Disruptive Business Model in Hotel Chain
The great thing about business models is you can apply these across multiple industries in places you wouldn’t expect. There’s a business hotel chain called Guest Quarters who applied a very similar model to the hotel business. There are many businesses who have employees travel to major cities and want them to stay in the city center when on business, but the city center has luxurious hotels with very high prices.
What if you could get a functional small room, Wi-Fi, low desk, double bed, and all you really need right in the city center? Their business model is very close to that. They created a membership model. Companies subscribed to this and become members. There’s a revenue stream from the company which incentivizes the company encourages their people to use this chain.
When you check into one of these hotels, they use the same kind of kiosk that you find at an airport to get a boarding pass: an electronic key so the hotel doesn’t need a lot of staff in the lobby. The membership side encourages companies to require their people to use this hotel. They also save time and efficiency on the billing side because they bill the company directly so that only members can stay. Having a lot of individuals have to settle up a bill and then submit them all into expenses takes a lot more time, so there’s more benefits to the company to use that hotel. But the main thing is it’s a way to stay in the city center for pragmatic business purposes, and it’s much less expensive.
Key Ingredients to a Strong Business Model
The key to a new, strong business is thinking through the business model and putting all the elements together of what is important to the value proposition, who the specific audience is, and how you can put the pieces together to make sure you have a good revenue stream that more than covers your costs.
About Barry Horwitz
Barry established Horwitz & Co. to help senior management teams grow their businesses in a strategic and sustainable way. He leverages his experience from a career focused on growth initiatives in a broad range of industries in his work with early-stage and middle market companies. At the Boston Consulting Group, he helped Fortune 500 companies assess competitive situations and develop growth strategies. As a co-founder and COO of a venture-backed Internet startup, he raised over $12 million in funding and led the company’s growth for three years. As VP of marketing and strategy for a billion-dollar retail chain, he developed the growth strategy for the core business while also initiating the launch of a new business unit that was later sold off successfully.
In addition to his consulting work, Barry teaches courses in strategy and entrepreneurship at Boston University’s Questrom School of Business. He earned his MBA at Harvard Business School and his Bachelor’s degree in economics at Colby College.