Business model innovation - Not another Uber story

Successful products and services are desirable (people want it), feasible (it can be built), and viable (revenue is created). From my experience most organisations these days understand the importance of customer centricity. At the same time they overestimate the role of technology with a lot of talk and buzz about Artificial Intelligence, Blockchain, AR and VR. Let's talk about money. Let's talk about business models and revenue generation. You don't need to live at the edge of emerging tech in order to build successful products and services. In many cases established technology will do the trick. 

Read on if you want to know how to do this and yes I'm using Uber as an example...

Uber Technologies Inc, the world’s largest provider of personal transport has surely made it into the top 10 of water-cooler conversations. Digital, technology and disruption are frequently used buzzwords when telling the Uber story.

Uber was founded in 2009 and is currently present in 60 countries and more than 300 cities. Despite extensive media coverage (mostly about countries trying to ban Uber), few people actually understand what makes Uber successful. Even most conventional taxi drivers fail to understand how Uber manages to offer a service with drivers who don’t have a taxi licence.

Many believe it is innovative digital technology that allowed Uber to disrupt the taxi industry. It is not! Yes, Uber uses a responsive website and an app with features like GPS location and automatic credit card payment. But these have been standard technologies for many years – hardly innovative!

So what makes Uber successful?

Uber works because of its peer-to-peer business model running on a digital platform. This means that Uber is connecting people who offer a service with people who have a need.

But let’s take a step back and look at what exactly a business model is. You’ll be surprised that there is actually no universal definition of a business model. According to the St. Gallen University in Switzerland, a business model (see figure 1) provides answers to the following four questions.

  1. Who is your target customer?

  2. What do you offer to the customer?

  3. How is the value proposition created?

  4. How is revenue created?

Business model framework.jpg

Figure 1. Structure of a business model according to the St. Gallen University.

Let’s have a look at how Uber would answer these questions.

Uber offers its service to two types of customers:

  1. people who offer

  2. people who want a ride.

The requirements to become a driver are straightforward: a clean criminal record, a newish car and a mobile phone. To get an Uber ride, customers simply need to download the Uber app, register, and provide credit card details.

Uber’s value proposition is in providing a highly flexible source of income for people who own a car. Drivers can determine when and for how many hours they work.

The value proposition for passengers is in:

  • cheap, undercut market rates

  • a wide network of drivers

  • real-time information on where their ride is

  • automatic credit card payments.

Then Uber creates value internally by not having to deal with:

  • servicing and maintaining a fleet of taxis

  • rent

  • call centre agents

  • administration

  • parking fees

  • recruiting and training drivers and issuing permits.

This all means massive savings in fixed and variable costs.

Uber makes money by charging a commission of up to 30% from the drivers. Uber uses an automated algorithm to adjust prices and influence supply and demand in the market, resulting in significantly higher fares at times of high demand. 

So what does this all mean?

Looking at all this, it’s clear that Uber is not a taxi company – it’s an online platform that connects people. And that’s not new either. The peer-to-peer business model is used by many organisations, including eBay, Trade Me, Airbnb, and essentially every dating service.

Technology itself is seldom disruptive. If your industry is going to be disrupted, it’s going to be by legacy technology combined with a trivial, but effective, business model. And it’s likely to be an outsider, a start-up or an organisation from a different industry that’s not constrained by current industry logic and thinking, that disrupts you.

Instead of waiting for an outsider to change your business, you can look at ways to change it yourself. The process of innovating your own business model is a creative, and iterative process. The first step is in analysing and understanding your current business model.

Start by finding answers to the following questions:

  1. Who is your target customer?

  2. What do you offer to the customer?

  3. How is the value proposition created?

  4. How is revenue created?

The next step is to get an overview of existing business models. The St. Gallen University in Switzerland has analysed hundreds of successful companies and identified 55 distinct business model patterns.

Figure 2 shows the two business model patterns applied by Uber: peer-to-peer and digitalisation.


Figure 2. Peer-to-peer and digitalisation business model pattern cards.

There are two ways to analyse other business models:

  1. Look at the business models of companies that operate in a similar, comparable industry. For example, if your organisation is providing a commodity service like electricity, look at other service providers like insurance, banking, etc. If your organisation is selling lifestyle products like custom-made leather bags, look at organisations that sell motorbikes, watches, jewellery or smartphones.

  2. Try a more radical approach by applying the confrontation principle. Pick business models of companies that are polar opposites to your company’s business model. The goal is to radically push your thinking by asking questions like, How would McDonald’s run our business?

It’s important to take this seriously and to think beyond grilling burgers. The McDonald’s business model is based on the patterns franchise and self-service. As a result, McDonald’s has highly efficient processes in place. A hamburger is made in less than a minute and it takes only 30 minutes to train a new employee. What would these sorts of processes do to your business?

I recommend running four moderated full-day workshops focusing on the following activities:

Workshop 1 – Understand and describe your own business model

Workshop 2 – Ideate on how applying the similarity principle would change your business model

Workshop 3 – Ideate on how applying the confrontation principle would change your business model

Workshop 4 – Select the best ideas and plan how to integrate new patterns into your existing business model.

The implementation of a new or revised business model can be a significant challenge, especially for organisations operating in traditional industries. This challenge is best approached by following an iterative process of prototyping and testing with both potential customers and staff.

Escape competition by changing the rules of the game

Investing in innovative technology is not enough and by far no guarantee for a successful and sustainable business. Product, technology or service innovation can be copied by competitors in a relatively short time and with little effort. The only way to beat the competition is to stop trying to beat the competition (Mauborgne, R. & Kim, W.C. 2005. Blue Ocean Strategy).

And of course, I’m here to help, get in touch and let’s talk through your business model and how business model innovation can help.

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Posted by Dr. Sebastian Vetter