The Crucial Link Between Your Product and Its Business Model
There is an incredibly important, yet often overlooked, link in the world of business: The pairing of a product and its business model.
It's like the harmony of the perfect wine with your meal; get it right, and it's a match made in heaven. Get it wrong, and well... it's a bit of a mess.
The Link
Your product might be the star of the show, but its business model is the stage on which it performs.
Business not just about having a great product; it's about how you bring it to your customers. Imagine selling a luxury car the same way you'd sell a candy bar. Sounds off, right? That's exactly my point.
A mismatch between the two can lead to failure, regardless of your product's quality.
Value Creation and Value Capture
At its core, the relationship between a product and its business model is about value creation and value capture.
A product creates value by solving a problem or fulfilling a need. The business model, on the other hand, is how a company captures value from that product.
Value Creation—The Product
This is all about the product itself.
- What does it offer?
- How does it improve the customer's life?
The value could be practical (like time-saving), emotional (like a piece of art that evokes feelings), or social (like a social media platform connecting people).
Keep in mind that customers not only get value from positive things. They derive value from negatives, too.
Avoiding impractical things, emotional hardships or social discomfort provides value, too. Sometimes people value avoiding more than gaining (Loss Aversion).
Value Capture—The Business Model
Providing value for people is great. Providing value for others, however, should provide value for yourself.
I.e., earn you money.
This is where the business model comes in. It's the strategy for making money from the product's value. This includes pricing, distribution, marketing, sales, and after-sales services.
The Fit: Alignment Between Product and Model
The 'fit' between a product and its business model is important. This fit depends on various factors:
- Customer Needs: Their expectations about and how they prefer to access and pay for the product.
- Product Nature: Whether the product is a one-time purchase or demands some sort of recurring payment or requires continuous engagement.
- Market Dynamics: How competitors price and—more important—deliver similar products. This includes the general market trends, too.
Some Examples
This has been rather theoretical. Let's look at some examples to make it more understandable.
Kodak
Kodak brought photography to a mass market as the first company. They also invented the first digital camera.
So, they were set up for success?
The opposite. In January 2012, Kodak filed for bankruptcy.
Since emerging from bankruptcy, Kodak has continued to provide commercial digital printing products and services.
What went wrong?
Kodaks business model based on the Razor-and-blade model. The main revenue driver were the film cartridge people needed to take a picture. Just like you need blades for your razor.
So, a digital camera didn't fit their business model. Hence, Kodak ignored their disruptive innovation.
Electric Scooters
Electric scooters offer you a quick ride from A to B.
A pay per use is the perfect business model here. Unlock it, ride it, lock and leave it.
Now, imagine a subscription model where you rent one specific scooter that's tied to you. It would provide way less value. Your scooter is in one place, you are somewhere else.
So, a pick-it-up pay per use business model is far superior for this product.
As you see, a mismatch between a product and a business model can lead to failure, regardless of the product's quality. But even if you got it right, you need to review the fit from time to time.
Evolve Over Time
Your business model mustn't be set in stone.
Markets change, new tech arrives, marketing and distribution channels evolve, you gain and lose access to strategic partners.
But most influential: Your consumer preferences change.
And so should business models.
Try new strategies with small batches of customers. Be ready to pivot and adapt new strategies.
Your business cannot thrive without fitting products other. And you can't sell superior products with an inferior business model.
The game is about creating a seamless experience where the product fulfills the customer's need, and the business model ensures that this is profitable and sustainable.
So, when you think of your (next) product or business idea, remember: it's not just what you sell; it's also how you sell it.
Your Takeaway
- Conduct Market Research: Understand not just what your customers want, but how they want it.
- Prototype Business Models: Test out different business models for your product on a small scale. See what resonates. Pivot if required.
- Seek Feedback: Don’t wait for feedback; ask for it. Use surveys, social media, or (preferably) direct conversations. Don't just ask classic product feedback questions. Evaluate your business model, too. Some questions:
- What inconveniences do you experience when you access/use our product/service?
- What would encourage you to use our product/service [more frequently]?
- Are there additional services or products you wish we offered?
- If you had to explain our pricing to a friend, how would you justify it?
- Imagine you're in charge of our company for a day. What's the change you would make?
- How do you see us changing in the next five years? What do we need to change to stay relevant?
- What would make you choose a competing service/product over ours?
- Stay Informed: Markets evolve. Keep learning, keep adapting. What new trends, tech or innovations could you employ?