How to Hack an Existing Business Model
Xerox ignored the personal computing movement. Kodak missed the digitization of film. Blockbuster was defeated by streaming. Taxi commissions never imagined they could be disrupted. All of these examples illustrate one simple fact: every business model fades. Companies which stand the test of time constantly experiment with new ways to capture, package, and distribute value to their customers–even at the expense of their current business model.
According to Tom Hulme and Colin Raney, former business designers at IDEO, existing companies should follow a four-step process to identify, evaluate, and test new business models:
- Understand your existing business model
- Understand your customers' needs
- Design the new customer experience
- Design your new business model
How to Understand Your Existing Business Model
To understand your existing business model, gather your team and use the framework above:
- Start with who your business currently serves and how it serves them. Under "Market Segments," list out the distinct groups that your business serves. Under "Value Proposition," write down what value you offer to those customer segments. Try to use the same language your customer would use to describe the benefit they receive from your products or services, rather than your internal lingo.
- Then, define how your value proposition is packaged and distributed. Under "Pricing Model," detail your pricing strategies. Are your customers paying a fixed price per unit, a variable rate determined by supply and demand (e.g. Uber's Surge Pricing), or a subscription? Under "Channel," describe how your value proposition reaches your customer segments (e.g. physical retail, online, etc.) and how those customers are directed to those channels (i.e. marketing).
- Next, specify how the business captures and/or creates value in the first place. Whom must you work with ("Partners"), what skills are required internally ("Capabilities"), and what expenses are involved ("Costs") in order to develop and distribute value to your customers?
- Finally, focus on how the business plans to grow and compete. How does your business plan to grow in the next five years ("Growth Strategy") and how do you plan to respond to current and emerging competitive threats ("Competitive Strategy")?
As you map out your existing business model, make a note of the following:
- Assumptions. Are you making a logical leap in what your customer's need or where they want to receive that value? Example: The recording industry assumed that people want to own music, when most simply want access.
- Tensions. Are there any obvious or burgeoning conflicts in how you create and distribute value? Example: Netflix wants to distribute new films as soon as possible, but their partners (studios) want some delay so they can rack up box office tickets, DVDs, and paid downloads.
- Trade-offs. In your business model, what tradeoffs are you making, and what sacrifices are you asking customers to make? Example: Zara can rush out new designs cheaply because they prioritize speed and price over product quality.
- Limiting Factors. What limits your ability to create, package, and distribute value? Example: Facebook can only reach people with internet access, which is only about 40% of the global population.
How to Understand Your Customers' Needs
After you've completely mapped your existing business model, move on to understanding what your customers need. Specifically, look for your customers' unmet and emerging needs. The best way to do this, of course, is to get out of the office and in front of your existing and potential customers. Conduct an intercept, recreate the customer experience, or track the startups in your space.
As you explore customer needs and generate new ideas, try to answer the following questions. We've used Netflix as an example to get you started.
- Are there customer segments or customer use cases we're ignoring or forgetting? Could Netflix offer a special subscription option to users that routinely travel abroad and can't access their favorite shows due to licensing restrictions?
- Are our assumptions about what customers need (and are willing to sacrifice) still true? Are customers still most interested in "professional" content, or should Netflix find a way to feature talent that you might find on popular YouTube channels?
- Is there a way to resolve a tension in our current business model? What if having a Netflix subscription included discounted movie theater tickets and/or you could pay an additional fee to see new releases sooner?
- How could we rewrite the limits of our existing business model? Could Netflix partner with Facebook to expand Internet access across the globe?
After you've generated new ideas and spent time directly with your customers, agree (as a team) on two to three new ideas to take the next step. These ideas should be the ones that are best aligned with 1) outside needs and 2) internal passion.
How to Design the New Customer Experience
Businesses are value creating systems that serve their customers.
– Colin Raney
When you're developing a new business model, it's easy to fall in love with an estimated profit margin and forget that success ultimately hinges on delivering the best experience for the customer. Before you break out the champagne and celebrate your ideas, it's critical to map out exactly how the customer will experience the product or service. Just as Airbnb did, take a page from the best storytellers on the planet and literally storyboard the planned experience step by step. This process will help you understand the customer experience, as well as which resources you'll need to deliver each step in the journey.
Once you've mapped out the ideas, it should become clear which are less valuable or less feasible. The surviving ideas are now ready for the final step.
How to Design Your New Business Model
Now that you've storyboarded new customer experiences, plug each remaining idea back into the business model framework. As you do so, ask yourselves:
- Why should we do it? Is there a clear path to growth and category dominance?
- What do we need to deliver? What value are we promising to customers, and how do they expect to receive it?
- How will this change our organization? Do we have the necessary capabilities and organizational structure to execute this idea?
- What are the risks? What happens if we fail? What unintended consequences could happen if we succeed?
- How can we prototype or pilot this? How do we learn as much as we can with investing as little as possible? What assumptions are most critical to test immediately, and how do we design that test?
The mistake that many organizations make at this stage is demanding an iron-clad business case before an idea can even be tested. Because so many variables are unknown and so many assumptions are still untested, any business case will be an exercise in showmanship, rather than feasibility or profitability. Instead of a business case, demand a safe-to-fail prototype. Or as Spotify would say, demand a skateboard.
Takeaway: The instant a new business model is implemented, it begins to become obsolete. Organizations should take a systematic approach to identifying, developing, and testing new business models long before their existing streams of revenue are threatened by upstarts.