WHY YOUR FIRM HAS AN INCOMPLETE BUSINESS MODEL
By Tim Williams, Ignition Consulting Group
If you’re like most agencies and other professional firms, you’re likely missing a critical component in the model upon which you have built your business. While there are many definitions of “business model,” we like the three-cornered framework of:
CREATING VALUE by offering specific solutions to well-defined target markets.
DELIVERING VALUE via an effective organizational structure and production model
CAPTURING VALUE with a defined cost structure and an innovative revenue model
Did you catch that last part about “innovative revenue model?” That’s the piece of the model that’s missing in the majority of professional services firms. Most firms actually don’t have a revenue model of any kind; instead they look at cost data (actual or estimated) and turn it into a price.
Having a revenue model means determining how your company creates value and what that value should be worth to your clients. If you think about most successful companies, one of their distinguishing characteristics is not only unique products and services, but a distinctive revenue model.
Tesla charges a fixed price for any one of their models. If you want additional features once you’ve purchased the car, most of them can be activated with a software download to your iPhone. Each desired feature carries an additional price, but you pay if and when you want them rather than having to decide when you first buy the care.
Part of Uber’s popularity is due to its hassle-free pricing and payment system. Riders don’t have to worry about carrying cash; Uber has your credit card and charges it automatically.
The 2012 Summer Olympic Games in London featured a revenue model never before used in the Olympics: pay your age. Your ticket price was determined not just by your age bracket (child, adult, senior) but your actual age in years. This innovative approach help produce higher-than-expected attendance.
A new restaurant reservation system called Tock, which allows users to book a table at some of the world’s finest dining establishments, collects payment for your meal(s) in advance.
Speakeasy, an inventive new online platform created by industry innovator John Winsor, connects brands, agencies and media companies with top tech experts, operating on the basis of a subscription, not a traditional fee-for-service.
Even industrial machinery can employ innovative revenue models. Rolls-Royce, one of the world’s leading suppliers of jet engines, charges airlines not for the engines themselves, but for what they call “uninterrupted flying time.”
Professional firms like agencies usually have a good understanding of their cost structure, but haven’t given any real thought to the other side of capturing value: a revenue model that’s as creative and innovative as the other dimensions of your firm.
To help spark some thought, consider the question “What is the job we help customers get done?” The answer to this question forms your “Customer Value Proposition,” a framework developed by Clayton Christensen and his colleagues at Harvard. The more important the job, the greater the value to the client.
This could lead to creating different versions of your services: premium and basic. The premium version of what you do could include guaranteed access, priority treatment, multiple concept choices, faster turnaround, 24-hour production, etc. The economy version involves stripping out value so you can lower the pricing, such as working during off-peak periods, limiting client access to agency personnel, standard turnaround times, etc. As our colleague Ron Baker likes to say, “Not every client gets to sit in the front of the plane.”
Author and pricing strategist Rafi Mohammed in his book The 1% Windfall suggests that businesses of all types should think beyond traditional pricing and consider how variations of different methodologies could apply to their business, including:
- Licensing: “Rather than buying your product/service, I’m interested in contracting to use it.”
- Subscription: “I’d like to use your product/service for fixed period of time, but I don’t need to own it.”
- Interval ownership: “I don’t need to own the whole product/service, but I am interested in owning part of it.”
- Success fee: “I’m interested in your product/service but would like you to share the risk with me.”
- Future purchase options: “I’m not sure if I’ll use your product/service in the future. However, I’m willing to pay a fee today to lock in a price for tomorrow if I need it.”
- All inclusive: “I’d like to use as many of your services as I want without having to consider every individual purchase.”
- Two-part high/low pricing: “To receive your best pricing on your basic products/services, I am willing to pay an up-front fee.”
Unusual approaches for a professional firm? Most definitely. Some of these methods may be completely impractical for your firm, but others might inspire some creative thinking about how you could price in ways that transcend just counting up your firm’s cost of inputs (hours).
You’ve likely spent years fine-tuning your operating model, your production model, and your cost model; now it’s time to devote the same attention to the one thing that can boost your profits more than any other — an effective, differentiating revenue model.