Is Your Business Model Out of Date?


Saul Berman thinks the freemium business model pioneered by Silicon Valley startups is a lot of bunk.

But... he admits, it has also managed to totally disrupt all kinds of industries. And that should get every executive's attention, he writes in his book "Not for Free: Revenue Models for a New World," due out next week.

Berman is an IBM executive who leads a management consulting division that works primarily with huge corporations, so his book is mostly directed at folks working in big business. But Berman makes a point in his book that applies to companies of all sizes and, I think, especially to local businesses that are trying to compete with the big businesses next door.

His point in short: It's time to shake up how your company makes money. Companies that give away free stuff have reset consumer expectations -- and their loyalties -- permanently, says Berman. So that same old revenue model you've been using is not going to work as well as it used to. Chances are, there's an upstart out there offering the same thing much cheaper (if not free) and your customers are going to find it.

So how do you update your revenue model for this so-called "new world"? I called him up to talk about it.

Berman says the first step is to rethink how you segment your customers. Instead of breaking them down along the traditional age and sex lines, segment them in terms of their behavior. How do your customers use your product? How do they want to pay for it and when? Once you establish what they want, you can remake your strategy. Here are three methods Berman recommends:

1. Change how you price
Rethink the way you charge your customers for your product -- not just how much they pay, but also when they pay and whether they pay for a whole product or pieces of it. Would renting your product or moving to a subscription model help your bottom line?

Practitioners:

  • Rent the Runway flipped the retail model by allowing women to rent pricey designer gowns for a four-day period at a cost of $50-$200. The startup was able to tap a sector of the market that couture hadn't been able to reach before -- it launched in 2009 with 20,000 members.
  • Time Warner is considering switching up its old-school cable subscription model, as more and more customers consider "cord-cutting." Instead of offering a basic package, the company would let customers pick individual channels or maybe even select programming on certain days of the week.
  • After a British regulatory agency declined to approve a Johnson&Johnson cancer drug because it wasn't cost effective, the company made a deal to charge the government only for patients whose conditions improved.
2. Change who pays
Consider shifting the cost of a product away from the person who consumes it to a third party, like advertisers or "their first cousins," sponsorships and product placements. With tiered pricing, companies can offer their products for free to customers willing to listen to advertising, and for a price for those who want to skip it.

Practitioners:

  • Best Buy, best-known as a purveyor of all things electronic, is creating an original content media network with how-to videos, tech guides and behind-the-scenes looks at popular movies. It's a value-add for customers that generates revenue from advertisers, not the consumer.
  • Walmart brought third-party ads into its stores and onto its website -- a double win considering the retail giant gets revenue from the ads and from increased sales of the products they carry.
3. Change how you package your product
Find new ways to "take the value of what you have and break it apart or extend it to other businesses," Berman says. Offer your product to your customer in a new way, or to a different segment. Add value at different points along the chain, or expand to nearby markets.

Practitioners:

  • The Four Seasons hotel sells a very specific ambiance of luxury in the rooms it rents by the night. But the company also lets guests take a little piece of it home by offering signature amenities, like robes and towels, for sale.
  • As print advertising started slumping, Meredith Corp., the media company that owns Better Homes and Gardens magazine among others, expanded its business without relying so much on straight advertising. So it purchased a number of digital media shops to create its own full-service marketing network called Meredith Integrated Marketing. "They've taken some of their value around brand and skills and created a new revenue stream around that," Berman explains.
Berman warns that shifting to "newer [revenue] models may cannibalize your short-term business" by disrupting your current revenue streams. Even so, evolving is the only way to stay on top in the long term.
What new revenue models are you trying?