What is a Business Model in the first place?
If you search for the term “business model” or “digital business model”, you will always find the same terms. Some of the main candidates are: subscription “business” model, Freemium model, ad-supported, direct sales, etc.
The only problem: NONE of these are business models. They are revenue / pricing models.
Business Models and revenue models are two different things.
What’s the difference you may ask? Good question!
What a Business Model is not
A business model consists of the key aspects Value Creation and Value Capture. A revenue model only pertains to Value Capture.
The terms above (Subscription “business” model, freemium model, etc) say absolutely nothing about the value creation activities. They only give us a hint on how we charge the customer. Therefore, they are revenue models!
So if the Subscription “business” model really is a business model, these companies would run the same business model:
Netflix would run the same business model as Microsoft Office …
I guess Amazon Prime (with all its warehouses) would run the same business model as Adobe Photoshop …
As would Robinhood in the Gold subscription which of course is based on the same business model as your online newspaper …
We could list hundreds or thousands more examples.
But we know these are not based on the same business model!
Put it the other way: if we learn a lot about MS-Office, we will not have learned a lot about Netflix even though they both monetise on subscriptions.
So, what is a business model?
A business model is a holistic view and a plan of how a company creates value and captures value. It ranges across many functions and knowledge domains of a firm.
A business model contains at least two major aspects:
Value Creation: Create something that is of higher value for the customer than the sum of all the inputs used. The details are the inner workings of the business model.
Value Capture: How to make profits, i.e., sell at a higher price than the sum of all direct and indirect costs.
The Business Model Canvas show this in the two areas. But we’re are not discussing the canvas here.
The revenue model sits in the value capture section. And as we now know, it's not a good idea to confuse them with Business Models.
So how then should we name our Business Models? To be honest, the names are not important. They can even be counterproductive in that some people have made a sport of creating ever-new names. Some have a list of a dozen, others have some 50+ with others yet having “discovered” around 100.
The key is that they are centred around Value Creation!
And how do we do that?
Business Models classified based on Value Creation
The best is to start with the end product of the Value Creation activities and that is the end product or service that the company creates.
We already have a fairly strong framework for this. The Global Industry Classification Standard (GICS) developed by MSCI and S&P Dow Jones Indices has done this systematically.
“GICS® is an industry analysis framework that helps investors understand the key business activities for companies around the world.” (yes, not the revenue model!)
They have divided existing firms into 163 sub-industries at the most granular level. Only problem here: they are largely traditional industries.
Digital Technology Verticals
Given our sole focus on this site is on digital business models, we have simply done the same for digital companies.
The results are the following 11 digital technology verticals.
Asset Sharing & Service Intermediation
Content & Media
Software-as-a-Service
Social & Communication
Search & Vertical Search
eCommerce
Online Travel, Dining, experiences
Education Technology
Hardware / Software Technology platforms
Financial Technology
Digital Health Tech
The benefit of categorising business models based on Value Creation
Let’s come back to our examples from the beginning. Learning about MS-Office’s business model will teach us only somewhat about Netflix’s business model.
However, if we categorise MS-Office based on value creation as a Software-as-a-Service company, then we can transfer a lot of what we learned to thousands of other SaaS businesses!
SaaS businesses have a lot of business model elements in common with each other and much less so with Netflix (or content & media for that matter).
And to be even more clear: despite MS-Office and Netflix both using the subscription model, there are even massive differences in the details of their revenue models!
SaaS businesses like MS-Office have very different revenue characteristics than Netflix! For SaaS corporate accounts are significantly more valuable than individual accounts. Corporate accounts often make 50-90%+ of all revenue. On Netflix, key revenue metrics like ARR, churn, CLV are analysed very differently than on MS-Office (or SaaS). Even here, the big correlation is within the vertical and not the revenue model.
Key insight: Categorising business models based on value creation allows us to learn significant amounts of transferable knowledge rather than categorising them based on revenue models!
A great Starting point
Now, we have a starting point for our digital business models that is orientated by the Value CREATION process. Phew!
So, this is STEP 1.
I hope you enjoyed it. Next time, we will learn more about Digital Business Models!