On the one hand, there is an idea for a new product, service, revenue stream or business.
On the other, there is the business model that exploits it.
Entrepreneurs, management teams, businesses and organisations often fall into the trap of making no distinction between these two. They have no process for separating the two elements from one another and frequently fail to untangle their core idea from the business model it first arrived with.
It is easy to assume that because an idea arrives along with some logic for how money can be made from it, that’s the way its going to be. The idea and the business model become neatly packaged up as one and the same. It’s difficult for people to break out of their norms and assumptions to look at their idea from a different perspective.
By only considering one business model however, organisations run the risk of ruining a perfectly good idea with a less than ideal business model. Usually, there are many potential business models and many different ways that money can be earned from the same idea—at least one of which may be your key to substantial success!
Allow me to demonstrate with an example.
Clothes Horse was a New York start-up that helped online shoppers choose the right size clothes for their body shape even when a shopper was unsure about sizing variations and quirks between different brands.
If an online store was using the Clothes Horse platform, Clothes Horse had access to sizing data about their clothes. As an online shopper, you could then use the Clothes Horse app to discover your sizing by answering a few simple questions about your height, weight and body type. Clothes Horse then put these two pieces of information together using some clever algorithms and calculated which size would provide the best personal fit. On top of that, Clothes Horse was also able to compare your sizing to a whole bunch of data about the average sizes of a plethora of brands to provide you with a more accurate recommendation. (Click on the image below to enlarge it).
In testing, they found that this intelligent sizing increased online conversion rates by around 13% and reduced costly returns too (normally, more than 60% of clothing returns are driven by fit).
Can have many different business models…
In the beginning, Clothes Horse worked by adding a ‘What size am I?’ button to each product page and, with the backoffice data entered by the retailer about their clothes, they were able provide an effective service to both the online consumer and the store. They were also working on developing a full shopping profile for users based on brands they liked on Facebook—a profile that consumers would eventually be able to take with them as they shopped across the web.
I wasn’t able to glean the exact business model Clothes Horse were using but, as we shall see, there are many different models that could have been used to turn Clothes Horse into a profitable venture, each of which would potentially result in a radically different business. Clothes Horse could…
- Sell their app and reference database to retailers as an installable software combination that sits on the retailer’s web servers and integrates with their website. This would incur a one-off fee and the Clothes Horse database would be updated on a regular basis in much the same way as Microsoft and Apple release regular software updates.
- Sell an app direct to consumers for whom it would act as a single profile through which consumers could shop at any retailer. This would incur a one-off fee for each consumer in the same way as apps are bought through iTunes or Google Play.
- Sell their app to retailers as a software as a service (SaaS) tool that integrates into the database of each retailer. This could be charged for on a monthly subscription and priced dependant upon volume of use or size of retailer.
- Give away the app and reference database to retailers as a free SaaS tool but take a small percentage cut of each online sale that Clothes Horse facilitates.
- Offer the app and reference database to retailers as a pay-as-you-go SaaS tool whereby the retailer is only charged each time an online customer users the Clothes Horse functionality.
- Offer retailers an end-to-end service wherein Clothes Horse measures sample clothes from a retailer (saving the retailer the effort of adding their own sizing measurements to the Clothes Horse database). Clothes Horse could then charge the retailer for both this personal service and the use of the app and reference database.
- Operate a franchise model in which the reference database remains central but Clothes Horse franchisees receive commission on every retailer they sign up to Clothes Horse. This model could also be combined with the end-to-end service above, whereby franchisees could receive commission for each new item of clothing they measure and add to the reference database.
- License their intellectual property to one or several major clothing retailers for exclusive use online.
- License their intellectual property to one or several major e-commerce developers for integration within their backend systems.
- Approach manufacturers of the clothes themselves, charging for sale of the data that Clothes Horse gathers on consumer body sizing and best fit to enable the manufacturers to improve garment sizes.
- Offer consumers a sophisticated sizing service (similar to that of the Left Shoe Company) in which each consumer is measured using a full body scan, after which they use the Clothes Horse app to obtain almost perfect sizing recommendations. This could even be extended to allowing consumers to try clothes on using their own personal online avatar.
The list of business models here is not definitive nor exhaustive, nor is each individual business model necessarily mutually exclusive from another, but it’s clear from this list alone that there were all manner of business model configurations that could deliver for Clothes Horse. The central idea is the same throughout—a huge database of clothes, covering lots of different brands, that is matched to individual consumer sizes—but this one idea can be exploited in many different ways.
Which means that…
It is vital to separate your central idea from your business model. Doing so will enable you to maximise your idea’s potential and to avoid ruining it with a weak or less than optimal business model. You may have immediate gut reactions as to which models in the list above would be the most viable and/or the most profitable for Clothes Horse but it’s clear to see that without exploring the full range of possibilities, the organisation could miss a truly lucrative opportunity.
So, next time you’re exploring an idea, take the time to exhaustively explore the different business models that you could use to exploit it. Think about which model will best maximise your revenue, meet your risk profile and deliver the best value to your customers. You never know what opportunities are out there until you start uncovering them!