Companies are often faced with the question of whether their current business model is still appropriate. We show the currently most successful and also most distributive business models and how they earn money. We also give examples of companies already working with these business models.
News, Social Media, or regular pub discussions. Lots of people are currently discussing “disruptive Business” models and sometimes they are even already fed up with the disruptive world. But why is this topic, so important for everyone and what do we have to know about it? This article should help to understand why these new disruptive business models are so important and why everybody should at least have an understanding of the basics of the most successful business models.
Especially in tough times, it is necessary to have an understanding of where the business could develop. Looking at business models is crucial to understand how to newly position your company and how to generate extra income. New business models can also help companies to be more resilient to market dynamics and also diversify their portfolio.
Additional read: 11 digital business models you should know incl. examples
Disrupt or be disrupted
The quote “Disrupt or be disrupted” is being said a lot in Silicon Valley. Everybody there is constantly looking for an opportunity or niche to disrupt industries with new innovative business models. So it’s no wonder, that there is a lot of talking is going on in this field. But let me say one thing first: There are usually never completely new business models involved. Existing business models are typically simply used for a new industry, a new product, or a new service.
As an example, one can also see here how certain industries have already had to deal with a disruptive business model. So the classic taxi service was put under a lot of pressure by Uber, as they had a platform and connected the drivers and guests via the Internet, instead of dialing a new number in each city or looking for taxis.
Successful disruptive business models often focus on the customer again. New technologies have changed customer behavior, and thus this change also enables models that meet these needs. Subscription models, platforms, digital ecosystems and many more are worth mentioning.
Another principle is also important. Many successful companies also combine these business models and use different models for different parts of their companies. The right combination of innovative products and innovative business models can play a major role in success. – But so is the question, what is really a disruptive business model?
What is a disruptive business model?
Disruptive business models are a type of disruptive innovation that brings a new idea or technology to an existing market. Disruptive market entrants usually capture unmet-demands in the existing market. This can either be a Low-End or High-End repressed demands where either the more price sensitive customers or the more premium customers gets addressed.
The following graphic shows 9 significant business models that can be disruptive for industries and that everyone should at least be familiar with. Either focusing on Low-End Disruption (e.g. Freemium) or High-End Disruption (e.g. User Experience Premium).
9 disruptive business models for companies
This list of disruptive business models are neither exhaustive nor complete. Here we will actively address only the 9 most important business models that have been responsible for the most important innovations in many markets and briefly explain why it works, what the reason is, and which companies are an example of this business model. The goal is that everyone can understand the most important business models and also the basic principles are shown.
1. Freemium Model
One of the most frequently used business models. The consumer receives a product or service free of charge. Either only basic functions are offered and for premium functions, no branding or extension of the services, the customer must then pay. This way you can quickly reach a broad customer base, scale your business into new markets, and generate incomes when converting customers into paying ones.
This model is especially applicable for products or services that have low marginal costs (additional costs per additional customer) or where marketing and customer information has a higher value than the operating costs. The key for such models is also the conversion. You need to find a free solution that is attractive to a customer, but also not perfectly satisfying, so they are willing to pay for the premium.
Typical examples: Spotify, Linkedin, Xing, Canva.com, MailChimp
2. Subscription Model
Products and services can usually also be offered as subscriptions. An amount that would normally only occur once is split or a new service is created that is billed periodically. The aim is to bind the customer in the long term. In contrast to the one-time purchase, the customer benefits from improvements and extensions of the service.
Non-divisible products can also be converted into a subscription here. Amazon has already provided an example with this system how products such as detergents, cosmetics, etc. Can also be delivered automatically regularly. Subscription is very powerful as this allows you to generate income over time and grow your company without too much “highs and lows”.
Typical examples: Amazon, Netflix, Internet Provider
3. Free offerings
A model that has gained in popularity, especially through Google. For many entrepreneurs, this is also the most incomprehensible business models, but it has great potential for some services. Since such business models usually evaluate customer data for advertising or personalized offers, it is interesting to use a lot of information about customers.
When you are considering only a free service, then you also need to plan for a long ramp-up phase. This means you are investing for a long period of time before you reach the critical mass of users to have a profitable business.
Typical examples: Google, Facebook
4. Marketplace Model
For some industries, marketplaces already had or have great disruptive potential. The business model used here is usually a digital marketplace that connects the seller and buyer on a common platform. Money is usually generated via brokerage fees, commissions, or fixed transaction costs. However, it is also possible to use membership fees on the platform or to generate money through advertising/premium positioning services.
Typical examples: Amazon, Alibaba, Uber, eBay
5. Sharing Economy – Access-over-Ownership Model – Renting & Leasing
In the classic sense, the sharing economy is referred to as letting. Goods or services that can usually only be purchased or made available to another person for a limited period of time. There is the example of car sharing. The car is made available for a certain period of time and a number of km for another person against payment. In general, this can be applied to all products, whether from private individuals or companies, real estate, or intangible assets.
Typical examples: Airbnb, Sharoo, Mobility, Lyft
6. User Experience Premium
This is a premium model that can be easily observed using Apple. A good customer experience adds value to an exchangeable product. The service, the brand, and especially the experience of the customer are improved and premium prices are charged.
Typical examples: Tesla, Apple and Premium-Brands
7. Pyramid Model
The model is a typical sales model that has been available for years. Especially due to the easy billing by technical aids, these pyramid models can be quickly built up and easily managed. It is especially interesting for products with high margins and which can be easily explained.
Typical examples: Amazon Affiliate, Microsoft, Dropbox
8. Ecosystem – Create your own ecosystem
To bind customers to an ecosystem in the long term through a “lock-in” process in a service is a dream for every entrepreneur. For example, if you have a mobile phone from Apple or with Android, you are probably included in this ecosystem. You buy the hardware and use software that may only be compatible with the same system. This makes the change difficult and also prevents new competition from gaining a foothold.
Recommended reading: What is a digital Ecosystem?
Typical examples: Apple, Google
9. On-demand Model
Time is money, that is the structure of this business model. The immediate access is sold or also the premium access to “time”. The delivery, the product, or the service can be called up at a certain point in time. Video-on-demand, taxi (over) on-demand, and many other systems are good examples. Companies or persons goods or time provide their services for persons without goods and time but with money.
Typical examples: Amazon Prime, Uber, Upwork, Cloud Services
Top-Down or Bottom-Up Disruption
There are two different types of disruptions. The first is when a company comes into the market and starts making products or services for people who can afford to pay more. This is called top-down disruption. The second is when a company comes into the market and makes products or services that are cheaper and more accessible to everyone. This is called bottom-up disruption.
The most famous example of top-down disruption is Apple. They started by making computers for rich people who could afford to pay a lot of money for them. But then they made the iPod, which was a lot cheaper and more accessible to everyone. And now they make the iPhone, which is also targeted at premium clients but slowly offering also other offerings for a broader mass.
The most famous example of bottom-up disruption is Walmart. They came into the market by offering products that were cheaper than what people were used to paying. And now they offer even cheaper prices, and they’re the biggest company in the world by taking over huge market shares from other retailers.
So, which is better? Top-down or bottom-up?
There are pros and cons to both approaches.
Top-down disruptions can be more profitable because you’re targeting people who are willing to pay more for your product. But it can also be harder to pull off, because you have to be able to make a product that’s good enough to convince people to switch from what they’re already using.
Bottom-up disruptions are usually easier to pull off because you’re not trying to convince people to switch from something they’re already using. You’re just offering a cheaper alternative. But it can be harder to make a lot of money from bottom-up disruptions because you’re targeting people who are less likely to have a lot of money to spend.
So, there’s no right answer. It depends on your goals and your capabilities. If you want to make a lot of money, top-down disruption is probably the way to go. But if you just want to make a difference and help as many people as possible, bottom-up disruption is probably the way to go.
Technologies have changed our world and will continue to do so. We have to realize that classic business models like buying and selling at a premium will no longer work alone. It is, therefore, worthwhile to take a critical look at the 9 major trends in business models (further read: 11 Digital Business Models) and to examine them for your own use. So it may be that you can build up new business fields or even use your own knowledge to get involved in other industries.
Once again, it is important to emphasize that these are examples. A successful business model can consist of various elements and combine different income streams.