A Business Model Innovation Strategy Guide

How to Transform Your Company

Highlights

  • Your business model can be redefined by adjusting any one of the four company constructs of customer markets, products and services, value proposition and profit model.
  • A business model innovation strategy is the process of adapting, refining, combining or otherwise changing one of more of these constructs to achieve differentiation, competitive advantage and increased value.
  • Innovating the business model is quite often the single most important growth strategy for satisfying company constituents, including customers, shareholders, stakeholders, employees and the public at large.
Johnny Grow Revenue Growth Consulting

Industries are shifting, markets are converging and customers have more choices. Profitable business models are less durable than they used to be. That's why a business model innovation strategy is essential for sustained growth and company viability.

But as most executives will tell you, changing the company is not easy. In fact, a whopping 94 percent of executives surveyed by McKinsey said they were dissatisfied with their company's ability to adapt and evolve.

Most everyone agrees that company transformation is critical to sustained growth and profits. But few agree what it means and even fewer agree how to go about it. This post will share research and our experience to bring much needed clarity to these ambiguities.

Although we've been at this a long time, I'm not suggesting our business model innovation strategy is the only method available, but it's one method that has achieved repeated successes for over two decades.

Business Model Innovation Starts with Strategy

Until you define business model innovation, any attempt to execute this growth strategy will be haphazard and any measures of success arbitrary.

Too many experts define the company operating model as something that creates value for customers and the company. That's true, but too esoteric to be helpful.

We suggest avoiding the near limitless theoretical concepts and opinions on this topic. Instead, take a more practical and profit driven approach. Recognize that the company foundation rests on four building blocks. Changing one of more of these constructs can create differentiation, competitive advantage and increased value – any one of which results in additional customer and company value.

Business Model Innovation Tenants

The business model innovation strategy considers each of the above constructs to be variables. Each can be exercised or manipulated to find or create new value that transforms the company.

1

Customer Markets

Customer target markets categorize or group customers by shared criteria. Most companies use explicit criteria such as firmographics (i.e., company size, industry, location) or demographics (i.e., contact title, role, buying authority). Implicit criteria such as customer behaviors, digital footprints or sentiment are actually far more effective for branding, precision marketing and sales conversions but are a more advanced technique.

Company transformation considers how new or different customer segments, personas or even Ideal Customer Profiles (ICP) may create new revenue streams or emerging markets.

2

Products & Services

Products, services and solutions define not just what you sell but how you sell. Stepping up this value does not require changes to the product or service itself and may instead consider new or different ways to get products to market. Considerations may include new ways to source products. Or new distribution channels, such as distributors, resellers or other partnerships. Or it may define a hybrid approach of both direct and indirect channels. These changes may extend market reach, reduce operating expenses and increase margins.

Manipulating your product portfolio may find that selling higher volumes of fewer products delivers improved demand forecasting and significantly higher margins and profits. Or selling more add-on products or services increases revenues to existing customers, lowers the cost of sale and increases customer retention.

You may find shifting product sales to a subscription model creates an annuity revenue stream and much higher long-term profits. Or that shifting your product into a platform solution creates far reaching extensibility. Or adopting a freemium model accelerates customer acquisitions.

One of the best methods to identify product or product fulfillment growth opportunities is white space mapping. This technique identifies latent customer demand and high margin growth markets.

3

Value Proposition

Your value proposition, sometimes called your unique selling proposition, is what you promise to deliver to your customers. It should be relevant, simple, succinct, measurable and convincing. It may be solidified and communicated in your brand messaging. The most strategic value propositions are built on the company's sustainable competitive advantages.

Contrast drives customer decision making. So, unless your value proposition shows a big enough surplus benefit between their problem and your solution the status quo will prevail. Unless your value proposition shows a big enough difference between your product and the competitors, the customer will choose the most familiar or low-cost solution.

Any change to the value proposition will likely impact the company operating model. Changes may include new premium products that increase margins or low-cost products that grow revenues. Changes may include new ways for customers to acquire, consume, use or benefit from products. Or changes may include a shift in focus from competitive products to customer service or the delivery of relevant, personalized and rewarding customer experiences.

Value is determined by the customer based in large part how your company or products solve their problems. If you can find a better way to solve their problems you can innovate your business model.

4

Profit Model

The profit model is sometimes referred to as the company operating model or revenue model. But irrespective of name it defines how the company makes money. Changes to the profit model must start with company goals; not just a desire for more profits. Some companies want to prioritize revenues and growth, while others focus on profits. Different goals will create different options.

Improving the profit model may start by modifying the cost structure, such as how you organize your human, asset, technology and other resources. Or how you alter fixed and variable cost structures. Or how you reengineer business processes. There are many options to shift or remove costs.

Consider how to modify the revenue model in parallel. That may include new ways to package products, such as upsell, cross-sale, kits or bundles. Or how you disaggregate broader products into piecemeal solutions. It may include new service or support contracts, renewals, freemium solutions or annuity revenue streams. It may consider a new customer strategy, such as Customer Relationship Management or Customer Experience Management, to increase customer lifetime value or customer retention.

Takeaway

Exercising these four business operating variables will identify many alternatives to unlock new value and revenue growth. Measurement and prioritization will determine the best alternative.

That decision can then be compared to the four types of business model innovation to balance risk and reward. And then you can apply a business model innovation framework to convert your strategy into execution and a tangible result.

See how a business model innovation strategy exercises four company constructs to step up the company’s operating model for additional value and accelerated revenue growth.

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