The Simplest of all Business Models

Wi-Fi Signal logo

If you want to use Wifi at Pete’s Coffee & Tea you will have to buy something first.  At the counter they give you a code to use, that allows you about an hour of surfing time.

In many local coffee stores you technically have to buy something but once you do, you can stay parked in their tables for hours without buying anything. In Pete’s bigger competitor, Starbucks coffee, it is the similar unlimited free access plus access to premium extras like The Wall Street Journal.

Coffee shops complain about those who occupy tables for hours at a stretch, buy little or nothing and mooch on their bandwidth as well as electricity. Customers who do spend money at coffee shop and need good connectivity for an hour or two complain about the poor speed and difficulty in finding tables near outlets. General customers (who hire the coffee shop for, coffee) complain about the crowd and lack of seats to simply sit and enjoy their brew or have a conversation.

Free Wifi became a popular perk for coffee shops, restaurants and hotels to attract customers and keep them in their shops. If the customers chose your business over others because of free Wifi, you win. If the customers stay because of free wifi and continue to spend during their stay, you win. You have successfully used free wifi as lead generation tactic and customer retention  tool. (Freemium?). For instance, Panera bread saw its sales increase by 15% when they introduced free wifi.

On the other hand, what is free to customers, is not so to businesses. There are costs of operation (making sure there is enough capacity) and opportunity costs (both for the money spent on their big pipe broadband and the moochers). When everyone else offers free wifi it becomes difficult for a business to either stop offering it or start charging for it. Add to this customer dissatisfaction from providing poor internet service.

Look at where we are in the discussion. We are not talking about the compelling value proposition a coffee shop (or a restaurant) offers but talking about a perk. Let us not forget the primary job these businesses wanted customers to hire them for. If customers’ choice is made based on secondary and tertiary factors, the primary value proposition has become irrelevant. If a business fears their customers will walk next door for free wifi they are admitting that their product is an easily replaceable commodity.

That is a bigger problem they ignore while fretting about wifi costs. In focusing on free wifi as lead-gen activity they ignored the core customer segment they started with and the customer jobs they hoped to serve. While some may call free wifi (and Freemium?) as business model innovation, this is essentially losing sight of customer needs and your core competence.

If the customers didn’t hire your coffee shop for coffee, should you tie your business model to selling coffee? That is an incongruence between value creation and value capture.

On the other hand your strategy – to serve the most amazing coffee – need not be fixed. You can see the customer shift and decide your strategy is to serve those customers who have a connectivity need and are not satisfied with existing alternatives. You recognize customer issues with poor speeds in free wifi places and provide reliable speeds as differentiated feature. In such a case you cease being a coffee shop and become a workspace provider. And guess what, you now can charge for that value delivered.

The business model is back in sync with value capture matched to value creation.

That is exactly what is happening in Russia’s Clock Cafe.

“You don’t have to pay for coffee or tea or cookies. You should pay for time, and time costs — I hope — [are] not that expensive.”

And their target segment? Students and business folks who hire them for connectivity and hence pay for the value they get.  Nicely done. However, I think they fixed one mistake but introduced another – making coffee free. There really is no reason for them to offer free coffee, especially the premium kind they claim they deliver,

We have cappuccino, latte, espresso, Americano, and our coffee is not the cheap one

They are committing the flip side of free wifi at coffee shop mistake. Sooner or later they will run into the free wifi problem in reverse. Why bother with coffee or why not charge for it? Especially if the customers didn’t hire you for coffee?

When it comes to business strategy, starting with customer needs and choosing the ones that you can serve better than others remains the best approach. And when it comes to business models, charging for value you deliver remains the simplest of all approaches.

What is your strategy? What is your business model?

8 thoughts on “The Simplest of all Business Models

  1. I’m really intrigues to hear how the Russian coffee shop is faring 6 months or a year from now. Will they have just flip flopped their problems or has this owner found a unique solution to a common business problem? He realized that what he was selling wasn’t what the customers were actually buying and flipped his business model on it’s head.

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  2. Love it Rags. Something about coffee shops and jobs-to-be-done, isn’t there? (e.g. http://bit.ly/Xnu9Ep).

    I have another way to look at the wifi introduction, although it doesn’t alter the analysis you have here. Namely, that people were looking for the “third place” to do things. Now the rise of interest in a “third place” wasn’t specifically a coffee shop phenomenon. But it turns out coffee shops were well-positioned to fulfill the job of being a third place.

    Add wifi, and voila, you’ve got people coming in who are seeking to fulfill a different job than drinking coffee. Coffee is a secondary job. The first JTBD is a place to do intellectual work or mentally draining tasks in a place that offers a social feel (not available at home) while avoiding the pressure to do regular work (at the office).

    Smart move by Clock Cafe, and I bet we see more formalized offerings in America as well. Agree with your pricing position on coffee, wifi and the like. Indeed I expect the infrastructure of the cafe to even more accommodate two separate jobs-to-be-done:
    – Third place
    – Getting great coffee fast on the go

    Hutch

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  3. Hi Rags,

    I agree that aligning value creation with pricing strategy is the simplest business model around. In today’s world it may look like there is an increasingly wide variety of other models to earn a buck though..

    The origin lies in the fact that many entrepreneurs these days recognize that they do not provide a single service for a single job-to-be-done. Instead they recognize they are platform hosts that allow multiple parties (including themselves) to serve multiple user-segments for multiple jobs-to-be-done. The coffee-shop could also be seen as such a platform, allowing business users to meet and work, allowing tourists to have some security from the fact that the coffee is as good as it is at home and allowing others to feed on their need to stay (or get) awake.. The coffee-shop is a place for multiple parties co-creating all kinds of value

    Recognizing different segments by their jobs-to-be-done (in context) and offering different pricing options (bundled, or unbundled) based on how they like to consume the value offering and their willingness to pay for that, would be the way to go..

    This could include the “work -fast connected- all day with as many coffee as you want for a fixed fee”-offering as well as the “your-morning-shot-to-go”-offering or the “catch-up with a friend over coffee”-offering. A series of simplest business models, so to say.. Although far from a light task to figure out the best combination..

    And forgetting about the fact that the business model you are in is not defined by the way you charge for your service alone..

    Great post! Thx.
    Wim

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