Should your startup be business model driven?

Zipcar CEO Scott Griffith described Zipcar as business model company. He was likely alluding to the shift  from buying and owning for expected future usage to on-demand rent culture. You likely are thinking isn’t that what other car rental companies do, but I will give benefit of doubt to  Zipcar and interpret this fine granular renting. The essence here is how he saw his venture – as an entity that is business model driven and if I may take it to extreme, a business whose sole purpose is about business model disruption and business model innovation.

There is considerable obsession around business model. When you read advice columns from startup accelerators and their ilk., you will see the chatter on business model canvas, what is the right canvas, business model innovation, recurring revenue, subscription model etc.

In the words of Netflix CEO Reed Hastings I would like to say here, forget the focus on business model and business model driven venture strategy. All this obsession about business model is just plain wrong.

Now that I made by bottom line, let me start over from the beginning by asking

What is a business model?

Most treat business model as just monetization models – Ad revenue, affiliate income, subscription model, pay per use etc. That is only part of the equation. Scamming is also a monetization model but is that a viable business model?  Does the money you take as your revenue represent your fair share?

The correct and complete definition of business model should include first the total value created and then how you get your fair share.

Business model is how you create value for your target customers and how you get your fair share of that value.

If you did not help create value you cannot get your share – well you can but you should not and it isn’t sustainable. Value creation is the prerequisite.

If you look at value creation, the obvious step before that is customers with their unmet needs. You create value through your product or service innovations that fulfill those unmet needs better than any other alternatives available.  If you see customers and their unmet needs as the invariable here then it is not too hard to see that there is no such thing as a business model company. There are only customer driven companies. And if you choose to be business model driven company at the expense of customers and their needs you will find yourself getting disrupted.

Once you established clear value the simplest way to get your fair share is what Instapaper’s Marco Arment said – charge for it. Does this mean there is no need or room for innovations on the second part of equation – the monetization model (what most incorrectly call as the business model innovation)?

Absolutely not. Such innovations should be second order after you have clearly established your customer segment and your value creation innovation. Examples of such monetization model innovations include (but not limited to)

  1.  In the value chain with just you and your customers you can introduce a third (or a fourth) player with each indirect value flows. You create content that is of value to customers, who create value to third parties and you get your share from these third parties.
  2. If customer value realization occurs only in spurts then you can design a subscription model that is aligned with value realization.

But if the job customer hired your product for gets better alternatives and your product gets fired because of that reason then it does not matter how you choose to get paid for the job.

The questions you ask are not

  1. Does by business produce recurring revenue?
  2. Does my product create switching costs?

but

  1. Do customers get recurring value from my product (and hence am I getting a fair share of that recurring value add)?
  2. Does my product continue to improve to stay relevant such that it creates better value than any other alternatives?

Not the shift from you to customers in the second set of questions.

There are no business model companies, only customer centric companies.

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