What is your business model?

May 6, 2011 | By More

The original product that launched an innovative new business model

A business model describes the rationale of how a business creates, delivers, and captures value, usually translated to mean how do you generate revenue or make money.

The often used example is the selling of razors – the real big money is made not in the selling of razors (which may make a small profit), but in the selling of the blades since they need replacing often.

This model is extended to many businesses today: printer companies like HP and Epson make most of their profits selling the ink cartridges; telcos sell sophisticated mobile phones at below list price but recover many times their costs when subscribers pay their monthly phone charges over 2 years.

In a different way, the business model for airlines has also evolved in the past 30 years. Initially it was merely selling seats to cover the costs of flying the plane – which means the prices are high since the costs of flying from A to B have to be fully recovered, including all the ground operations.

United Airlines uses Denver International Airport as one of their mega-hubs

Then the US airlines discovered the ‘hub and spoke’ model where they were able to reduce their operating costs substantially, thereby reducing the ticket prices. Their business model focused on operational efficiency. But there is a limit to reducing costs.

... but drinks are extra.

This has now been threatened by low cost airlines whose model is to fill the seats on the planes long before they are scheduled to fly – empty seats make no money once the plane takes off.  This means low cost airlines offer deep discounts to ensure seats are filled early for each flight, making travellers buy tickets months ahead if they want impossibly cheap tickets.  Filling the plane early  became the business model – in addition to the lower cost base that low cost airlines start with.

In the case of high-tech, it was relatively straightforward and easy – once, long ago.

That was when computers first appeared. After the initial realisation that computers were able to increase productivity, it was easy to ‘sell a box’ if you are a computer manufacturer.

Then Apple showed that if you ‘sell the box’ and ensured the software is well integrated, you can make a lot more money (ie profit). The model for selling computers changed to selling software (remember razors and razorblades?) The place to buy is at the AppStore.

Computer manufacturers like HP, Dell and Acer even though they are much bigger than Apple, are unable to follow suit because they have no control over the software – that belongs to Microsoft.

Today, we have come full circle with the iPhone – when you sign up the service with your telco for the iPhone, guess what, Apple gets a cut from those monthly fees too! As a result, Apple as a company today is valued more than even Microsoft! Who says you cannot have high tech razor blades?

As of Jan 2011, over 10billion apps have been downloaded to 160 million iPhone®, iPod touch® and iPad™ users worldwide

Of course, the majority of business models are still about selling a product or service, which you have to get right. (Read more about Understanding what Users Need.)

So, what is your business model?

 

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Category: Managing your business, What's Next?

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About the Author ()

EngTong, pioneer and innovator. Graduated from Imperial College London with an MBA from Cranfield School of Management. Lived in Scotland, England, California, Beijing and led teams in Italy, France, Japan, Taiwan and Malaysia to do the impossible. Now based in Singapore and believes the future is to blend the sophistication of western management practices with the strength of Asian Values. Trained as a Chartered Engineer. Member of IET, Associate of City and Guilds and a certified SixSigma Champion.

Comments (1)

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  1. A Arthur says:

    You hit the nail right on the head. The LC Airlines are successful today because of their right business models in line with today’s life style. They also carry out the unbundling of services whereby you pay for what you want, and on board air stewardess are kept to a minimum. Back in the 80s the People’s Airlines in the United States had the no-frills model also and it only cost less than $200 for a round trip from London to New York City. They did not have provisions for passengers to book early in order to realize cash early, and the market was not ready. It flopped.

    Perhaps there may come a day where airlines may offer a regular $10 for a trip (which they are offering on a promo and very early bird basis now) for travels within 4 hours flight or maybe throw in more free tickets, and they make more money from ancillary services.

    One might be surprised that a lot of people will pay for first in the queue, first few front row seats, for mineral water, for food, for check-in at counter, for some extra luggage, for a pillow and even for a wheel chair.

    Operational efficiency is also the key. If you pay for a 15kg luggage and it weighs 16 kg, you must pay for the excess 1 kg. However, the other normal airlines will let you through.