Here is Why Business Model Innovation is Powerful

A Business Model Problem – Copying Everyone Else

Business model innovation is too often overlooked by firms. I ran across a great example today of the kind of opportunity that is available. Check out this graphic from Lean Analytics by Alistair Croll and Ben Yoskovitz:

This shows the response to the question – “how do you set your price?”

The response is mind-boggling.  More than half of the firms surveyed just take prices from their competitors. A quarter use cost-plus, which is a terrible tool too. But at least it relates to some kind of real number from inside your own firm. 18% guessed.

Eighteen percent guessed!

And just over 20% based their price on data gathered from their own customers.

At a minimum then, 70% of firms put no strategic thought at all into how they set prices, which, arguably, is one of the most important metrics in your business.

Business Model Opportunity – Make Up Your Own!

Innovative new products and services work best when they are supported by an innovative business model. If 70% of firms aren’t even thinking about how they set their prices, then how many are thinking about innovating their entire business model.

Not very many.

This is a huge opportunity – this is a big part of why business model innovation is so powerful.

Here are some ideas for taking advantage of this opportunity:

• Be a Lean Startup. Lean startups turn into innovative firms, because they are built on an experimental, data-driven culture. If you are using lean startup correctly as an approach, then you will end up as one of the 21% of firms that sets your price based on customer data. Better yet, your entire business model will be based on hypothesis testing. Lean Analytics provides a great set of tools for doing this. Croll & Yoskovitz match metrics with where you are in the growth trajectory:
  1. Empathy: where you identify a real problem for people that needs solving.
  2. Stickiness: where you prove you have a solution to the problem that works.
  3. Virality: where you structure your solution so that the idea will spread.
  4. Revenue: where you start making money.
  5. Scale: where you get big.
• Use Lean Startup Principles in an established firm. Lean Analytics suggests that intrapraneurs go through the same five steps with new innovations as startups, but with one big additional step: find an executive sponsor. In a large firm the process looks like this:
• Test Your Business Model Like a Scientist. The point with all of this is that you can build a new business model based on data. The stats on pricing show that only about 20% of firms are doing this right now. Imagine the advantage you can gain if you base your entire business model on genuine feedback from customers.

When you get right down to it, innovation is about solving real problems for people. That’s how you create value. Even if your solution to a problem is genuinely novel, it’s extremely hard to get people to listen to your idea if you cram it into the same old business model that they’re used to seeing.

That’s why copying from competitors is such a bad idea. There’s nothing distinctive about that.

So go out and talk to people. Identify real problems that they face, and build a hypothesis about how to solve one of them. Then test that hypothesis carefully. If you do that, you’ll build an innovative business model on top of your core innovation.

The thing that makes business model innovation so powerful is that so few people do it. You should give it a try.

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Tim Kastelle is a Lecturer in Innovation Management in the University of Queensland Business School. He blogs about innovation at the Innovation Leadership Network.