Kellogg PM: Week5 Business model design
Business model design
From previous week, we focused on product discovery and MVP. We want to be able to truly understand the mapping between problems and solutions. This is not in our head or assumption that we have in excel sheets. Rather, it’s more of testing in real world without overthinking and trying to be the best with customer feedbacks.
Business model design is what we study this week, if you are familiar with strategyzer’s book about Value Proposition Design or VPD. You can quickly notice that it’s the last step, we are looking for business model fit. Personally, I think this unit does not mean to say that we should get the fit this early but in a corporate setting we should keep the business model in mind. Unlike startups, the business model comes last. The very first thing you will do in a startup is to test that your product really creates value and if anyone is willing to pay for it.
From Business Model Canvas(BMC), I could imagine several components bringing up value to customers. I deepened my understanding on the business model, I learned more about model design within this week. If you think of a freemium business model, professor tells us to find the balance between free users and paid users. Monthly subscription model determine how much people would convert, if we really bring value to them. Not only that part is important but to design choices for customers to pick is also a tricky job.
Taking a step back from the freemium model, experience will play an important role guiding you through the design phase of the model. It’s not just to know which model exists but to know about model pros and cons. Without any experience at all like startups, the best way is to test and learn real fast.
Key learning
- Freemium — tricky part is to design the business model that could have balance between people who use our product for free and those who pay for us. Often times, the product or service is good enough so that customers are not willing to convert to paid users.
- Marketplace — Apart from the point that this business model is at least 2 ways market and how hard you have to build it. There’s a strong power of network effect that impacts valuation of the company, and in this scenario winner (might) takes all. But that is in contrast to a situation where the market is in favor of your business, you can still fail if the challenger provides a better solution.
The marketplace, popular business model with challenges
In a traditional e-commerce company you have to spend a lot of money on inventory costs including stock inventory, warehousing, shipping cost, logistics etc. That makes this model capital incentive. This operating model will then heavily rely on inventory management, and inventory forecasting. Even though you reach out to a third party you still can’t avoid previous tasks.
We all know the network effect by now, it’s not a simple thing to reach. Network effect first requires a big portion of your customers to be your platform. Either side of customers should not be way bigger or smaller, or else you would end up with a high attrition rate which diminishes the power of network effect.
With all operating thing in mind, in 2-ways market you should mitigate one-sided risk to ensure enough demand or supply for the other side. To mitigate this problem sometimes we can do “subsidy”. We might offer cheap commission, faster payment than other competitor, or something more secure.
Why and How marketplace(platform) fails?
According to the Harvard Business Review article in the recommended reading section, over the last 20 years 43 platforms succeeded which account for 17% of every platform businesses. Average life of a failed platform is around 4.5 years, breaking this data down onto standalone firms and acquired firms, their average life is 3.7 years, 7.4 years consecutively.
HBR grouped failed mistakes into 4 categories:
- Mispricing on one sided of the market
- Failure to develop trust with users and partners
- Prematurely dismissing the competition
- Entering too late
For pricing, the same as what I learned in this course. Platform requires underwriting one side of the market to make sure you have enough supply(normally) for the other side. Knowing which side to charge and which side to subsidize is tricky.
Trust is a crucial component of any business; there’s also no exception for marketplace. Customers or users want to have something predictable, for example payment mechanism, when they pay for it they should get a product or service that is described on the platform. Reliability is also what makes them feel confident hence creating trust among several parties including the company. If they want to access a website or withdraw their money, that should always be possible or predictable.
Overconfident in your business and dismissing the competition is always a no-go strategy. If you ever know that microsoft internet explorer used to capture 95% of market share before you might be surprised, it happens to me too. Then why do they lose to google’s chrome or other browsers. It takes several years for business to fail, which is really weird to me. This reminds me of Good to Great’s concept “Confront the brutal fact of reality yet never lose faith”, it’s hard in our emotions to be able to accept our own failure and announce it that we are wrong. When business started to fall, we could investigate with a beginner’s mind and forget every fame we got. I know it’s easier said than done.
Mistiming is the last topic when the market starts to be saturated, it’s harder to get into the market with pretty much the same offer. This requires business owners or entrepreneurs to rethink their value proposition.
Recommended reading
Articles
- The Pros And Cons of the Marketplace Model for E-Commerce
- Why Some Platforms Thrive and Others Don’t
- A Study of More Than 250 Platforms Reveals Why Most Fail
- How to Choose the Right Business Model for your Marketplace
- Anatomy of a Managed Marketplace
- What’s Next for Marketplace Startups? Reinventing the $10 trillion service economy, that’s what
Books
- The Business of Platforms: Strategy in the Age of Digital Competition, Innovation and Power
- Platform Revolution: How Networked Markets are Transforming the Economy and How to Make Them Work For You
- Machine, Platform, Crowd: Harnessing our Digital Future
