Why, When, and How to Launch a Business Model Transformation?
A flashy new competitor arrives on the scene. Everyone is talking about that one new thing they do. You start itching. Panic strikes. Quick, redirect and go where they are going! We must have that [fill in the blank] feature yesterday. We are behind!
Hang on. Stop and think. Yes, the break-neck speed of innovation and the accelerating power of technology mean we need to remain vigilantly aware of what is happening around us. But let’s be clear about one thing: the right direction is all about your customers—not your competition.
Everyone holds a megaphone these days, thanks to all the reviews and opinions on social media. Well-informed customers make sure the rest of the planet knows the pros and cons of a company and its offerings. That means that—more than ever before—customers navigate options more fluidly. So, don’t fall into the trap of panicking your way into a new business model out of fear of being left behind. What you offer today might be what they want again tomorrow.
Your customers are the most important people on the planet, so get to know what’s on their minds. Learn how they react to new features, pricing and products. The good news is that in many cases you won’t need to spend a penny. Let someone else’s expense and effort inform you about what features your customers do and do not value, their willingness to pay, and how they live their lives. In short, treat your competitors’ market entry as free research. However, remember, the new guys won’t get everything right on the first try. Ever. So before you play “follow the untested leader with a lot of VC backing but no idea how to turn a profit,” ask yourself these questions and take them seriously before you make a bet as big as a business model transformation.
1. Why should we launch a new business model?
2. When should we launch a new business model?
3. How should we develop a new business model?
Why to Consider a New Business Model?
There are four main reasons to change your business model. First, if your cost structure has or can shift dramatically—up or down—it’s time to shift. In considering a new business model, think about what is included in the product or service offering and how you make money. Take airlines: they used to all serve meals on flights, allow you to bring several pieces of luggage, and to select your seat for free. Now most airlines have deconstructed everything you care about, stripped everything out and offer you an “entry price,” on top of which you need to build back up to those features; which of course ends up much more expensive than the singular price they offered back in the day. The airline industry went to a building block model with more flexibility for a higher price. This makes sense as the cost of doing business for airlines has risen while willingness to pay has fallen and customers have alternatives to air travel. Airlines had to shift to something customers could afford, and that they could afford.
Second, if you can provide a better, more affordable customer experience or value, which will keep you market competitive and help you grow, then do it. Third, if new and attractive alternatives to your business are introduced or becoming available, you should start planning for a new model. Finally, if regulation changes the openness or competitiveness of your sector, you will have no choice but to look at what and how you sell in a new way. An industry that has had one business model for decades that is predicated on long, rigid contracts, many restrictions, and high prices for a service—where their cost of doing business is declining as they scale—is ripe for change. A good example is the telecom industry. The old model of calculating your monthly mobile phone bill for long-distance calls, text messages, roaming and data were per call, per MB, per text message, or per minute of roaming. Furthermore, you had to sign a long-term contract with high switching fees (like the loss of your phone number) to change carriers. Now most telecoms offer a single price for unlimited domestic calls, text messages, data and roaming, and you can move to another carrier within a month and even retain your phone number. To varying degrees, the telecom industry faced all four of the major factors that should encourage a shift in model. They had no choice but to change.
When to Consider a New Business Model?
When you are ready to enhance your customer’s lives with improved affordability, flexibility, or engaging features, you could be ready for a transformation. New technologies, a good idea by a new market entrant, increased regulation, more options, and changes in cost structure can all be an impetus to change. When these conditions emerge, you should prepare for a transformation (before someone else does). If you are reacting to a good idea by a competitor, though, remember that it takes time to assess what parts of their launch are valuable and what parts are not. If you react too soon, you will copy both their successes (likely not as well) and their failures (probably as well). With some patience, you will let them pay for the mistakes while you harness the wins. Timing is everything—whether you have the first-mover advantage or not. Just be careful you don’t wait too long and try to make things too perfect. You won’t get everything right on the first go, but once you are 90% ready, go anyway. You can always adjust when you know more.
How to Develop a New Business Model?
Commit to a methodology to guide you so that you have a roadmap to follow. I am a fan of the Design Thinking methodology for business model transformations because it is practical, widely available, and it centers completely around your customer. The most successful change initiatives achieve three things: They make your customers happier, your employees happier and your business stronger. So, a methodology that is aligned to those constituents is a good start.
Before you begin any process of change, though, commit to some non-negotiables in your new model. Decide on the tenets and design principles that echo your values and objectives for the transformation. The tenets of your model explain what you are trying to achieve for your customers. The design principles will lay out what to touch—and what not to touch—from your current business model. With my current leadership team, we didn’t start planning anything specific until we had the business model tenets and design principles clearly in sight. Below is what guides us still today through this transformation.
Sell what the customer wants to buy, not just what or how we want to sell.
- Don’t reinvent the wheel.
- Limit restrictions.
- Increase personalization.
- Remain price competitive.
- Create a beautiful and seamless customer journey from first impression to renewal.
Remember that doing what’s right for your customer—not a rapid response to a competitor—is what will drive a successful business model transformation. Panic will never inspire customers or employees to get you where you want to go… but with a good plan and good reason, you will.