How to make an as-a-service business model work.
It’s a question that is often pondered by founders. Why is evolving a business model so fraught with difficulty? And why is it often the case that second and third waves of startups with the same idea or technology have a better success rate than previous ones?
The answer lies with a startup’s ability to innovate in response to the technological change that surrounds them, and their success in evolving with changing customer needs. It is easier for a new business to find a place for their product or service in the current environment than for an existing business to lift their gaze and develop.
And it’s evolve or perish in the competitive world of startups. We live in an age of multiple technologies. Layers of technology upon layers of technology. A great idea will be left behind if a founder is slow or fails to capitalise on the growth of other technology such as connected devices.
Thinking about technology as a design language makes sense. Years ago, the architect trying to create a well-lit space may have traditionally relied on windows. Then fuel lamps gave them an alternative, before finally electricity really lit the way. For that architect their goal hasn’t changed, but technology has changed the way by which they operate. The architect that was switched on to technology changes thrived, whilst those who relied purely on sunlight, were left in the dark. This lesson is relevant for all businesses.
The Rolls-Royce of successful business model innovation
One of the most successful business model innovations is the “power-by-the-hour” business model of the British aircraft turbine manufacturer, Rolls-Royce.
Rolls-Royce was historically a product business constructing engines that, for a large one-off sum, became the property of the aircraft manufacturers and operators.
But these days Rolls-Royce operates in a very different way. The new business model does not sell engines, but instead the airlines pay only for the operating hours of the engines. The engine remains the property of Rolls-Royce, and the company is also responsible for the maintenance and repair of the engines.
This business model is based on a performance-based contracting approach. It is not the value of the engines that is calculated, but the flight performance hours that can be achieved with the engine. Cost factors such as operation, maintenance and repair are already included in the price.
With this innovation, Rolls Royce has not only created advantages for itself and its customers, but also made it possible for low-cost airlines who can better afford the new business model.
Businesses like Rolls-Royce recognise that the way that businesses transact and customer needs are ever changing.
Hilti, the Liechtenstein tool manufacturer is another example of a company that pulled off one of the most successful innovation coups of all time. And it’s all because they had the insight to realise that customers want holes not drill hammers.
It focussed on the problems of drill users and introduced a service-based business to lease drills with full maintenance through long-term subscription contracts with guaranteed availability of the tools.
For founders of new startups the learnings from these businesses are clear. And it’s not all about the product. In fact, it is less about the product and more about being a solution to a problem. Ideally a very sticky solution that is not just a product solution but rather a turnkey solution that is deeply embedded and invested in solving the customers’ problem.
For a founder to thrive in the competitive business environment they may not even need to adjust their product. Instead a startup may be better served by time spent evaluating, modifying or potentially rethinking their business model whilst producing the same product.
Continuous business model innovation
Business model innovation is now a recognised part of the life cycle of successful businesses and the cycle is getting shorter. Business model innovation once took place every 14 years, now this is more like every five years according to analysis.
Founders who are already selling product but can also think more broadly about their offer and innovate their business model will stay ahead in their industry and create competitive advantages. But the challenge is to define exactly how to innovate.
At its most basic, a business model is simply the way that the business brings value to customers and how it creates revenue streams from this value. Innovating is a reappraisal of the customers’ needs that might result in a new value proposition. This then means that resources and processes will change to adopt to the new way of meeting customers’ needs.
The COVID-19 pandemic has seen many businesses innovate to meet changing customer needs. In the hospitality sector restaurants provide in-home gourmet experiences, whilst bars deliver cocktails. In increasingly overpopulated cities we might see customers needing transport more than car ownership. Always-on customer development enables a founder to test various hypotheses and learn.
Business model innovation is not always easy and can take founders out of their comfort zones but the results can be dramatic and a business can become a true disruptor. This is something that will also create an unbreakable bond with investors who are eager to see the long-term plan to be part of their customers’ life.
- Benjamin Chong is a partner at venture capital firm Right Click Capital, investors in high- growth technology startups.