Business Model Generation Summary

Patterns

Unbundling Business Models

This theory holds there are three fundamentally different types of businesses. Customer relationship businesses, product innovation businesses and infrastructure businesses. Ideally a company should focus on one of these and create partners to handle the other two to avoid conflicts and undesirable trade-offs.

The Long Tail

This is a shift from selling a small number of hit items in large volumes to selling a very large number of niche items each in small quantities.  The author feels eBay is an example of this. Each item may not sell a lot but the total net volume is enough to create large revenue.  

The lower cost of producing professional level music in short films has allowed an army of creators to create niche content. For each creator it doesn’t need to be a worldwide best seller.  When YouTube hosts such a large range of indie creator work, people know they can find videos on just about anything they need they going to YouTube.  There’s been a similar effect in the book publishing industry we are just about anyone can get their stuff published in a small number of limited runs.  This is created an incredibly massive selection of niche topics and information like never before seen.

The difficulty of this type of business is finding interested niche buyers. Creating powerful SEO recommendation engines, user ratings and communities are what has made this possible.

Multi-Sided Platforms

This brings together two or more distinct interdependent groups of customers.  there is only value to one group if the other group is also present. Google and eBay of course or examples of this. The platforms value is driven by the size of its client base, a phenomenon known as the network effect. 

All of Google’s money is driven by Edwards revenue which only has value because nearly everyone uses Google to search.  Web servers and content owners of course use Google for free.  Google essentially has three services:

1. Web search.
2. Ad words or advertising.
3. Third-party content monetization known as AdSense.

Proprietary matchmaking algorithms and extensive IT infrastructure make all this possible.  Knowing exactly how many users you will bring to the table on one side must be a critically accurate calculation.  Your pricing to advertisers must cover your costs if you were going to give away all your other services for free. But if you don’t bring enough users to the table you will go in the hole.

Free as a Business Model

To me this is simply a multi sided platform pattern where at least one of the customer segments is able to benefit free of charge.  

Freemium:

Get the basics for free to pay for more.  Skype to this by offering free calls but the ability to call land lines and smart phones for a fee. 10% of its users were paying, generating $550 million annually.

Open source: freemium with a twist

This is a business model used by red hat where it takes the legal liability of a stable tested service ready version of open source software. They charge a subscription fee for this and promise to support this version for period of seven years.

Insurance is essentially freemium upside down.  A bunch of people put money into a pool and should disaster ever strike the minority is covered and receive benefits for free.

In order for premium to work the free platform must have extremely low cost.

The other alternative is called bait and hook. This is what mobile carriers do with free phones and inkjet printers do with ink, Gillette does with razors and razor blades.

Open Business Models

Incorporate intellectual property external research and development as we don’t have to research all R&D to win. Utilize people inside and outside of our company.