A look at the business model from the product manager's point of view
Originally, this was a post that grew into 16 mini posts. I was always adding something that was missing and the fabric of the text kept growing. Finally, I decided to break everything into pieces, but with convenient navigation in each post. Here it is
You are here ➔ A look at the business model from the product manager's point of view
CANVAS 13 - Great guide on the business model, from the product manager's point of view
1 – Customer Problem
2 – Customer Segments
3 – Value Propositions
Value Proposition Formulation Map
4 – Customer Relationships
5 – Channels
6 – Revenue Streams
7 – Key Activities
8 – Key Resources
9 – Key Partners
10 – Cost Structure
11 – Eco-Social Costs
12 – Eco-Social Benefits
13 – KPI (Key Performance Indicators)
The business model is understanding how your business works, what is at its core, how it makes money, and how it spends it.
Repeatability and Scalability
When choosing a business model, it is important to consider its scalability and repeatability.
If the model is not repeatable, it will run out after a few cycles and a new one will be needed. The repeatability of the business model means you can reproduce it many times. However, with repeatability, the business model does not necessarily have to scale.
But if you have no scalability reserve, it probably indicates a problem that can lead to a lack of repeatability.
Scalability is not an absolute requirement. Offline businesses can live perfectly without scaling, especially when the owner works in their own establishment. They generate income and the owner is satisfied with them.
But at the same time, everyone can scale. Owners open more different restaurants in their city or sell franchises, for example.
Let's suppose you found a recipe for a delicious and unique dessert. You prepared it and sold it at a local festival, where it became popular and generated a good profit for you. Can this be considered a business model? If there is no repeatability, then no. But if you can systematically prepare this dessert and sell it at various events, then it is already a business model.
The recipe for a delicious and unique dessert that you prepared and sold at a local festival became popular and generated profits for you. If you can regularly prepare this dessert and sell it at various events, then it is already a business model. However, if you found a rare element in limited quantity, for example, essential oil with pheromones and made a batch of perfumes, this business model cannot be repeatable and your business will end.
To make this model more scalable and repeatable, you can make a series of strategic decisions. For example, you can hire cooks to increase production, open your own café, or even a franchise to distribute your brand and recipe. In this way, with the right strategic decisions, the initial simple idea can become a successful and scalable business model.
Now you have a plan to scale your dessert business, and you start to see more opportunities to grow. Perhaps you start experimenting with different flavors and textures for your dessert to attract more customers. Or you start working with local farmers to have access to fresh and high-quality ingredients.
You can also organize workshops to prepare the dessert, to attract people who want to learn how to make it themselves. Or maybe you start running a cooking blog or a YouTube channel to share your recipes and attract more people to your brand.
All these strategies can be used to expand your business. However, the key point is that all of them are based on the repeatability and scalability of your main business: selling a unique dessert.
In practice, however, this rarely happens and only up to a certain level of business development. After that, costs start to increase due to the complexity of the business. The ideal business is one where revenues grow proportionally with the number of customers, operating costs increase, but not too much, and there are no additional costs to produce each additional unit of product or service (marginal costs).
That is why digital technologies are so beneficial and why I am writing this for product managers.
The sale of mobile applications is an example of a successful business. Creating each new copy of the application does not require additional costs, that is, there are no additional costs to produce each new product. Thanks to this, the mobile application business is developing so quickly and includes various revenue generation models. When we eliminate the additional costs to produce each new product, our economic efficiency equation becomes much simpler.
Perfect business formula
Examples
Let's consider the example of the company Spotify. This company has problems with the quality of its products, mainly due to the high costs to obtain benefits. Why does this happen? Spotify pays for each playback of musical works to the record labels it collaborates with. Sometimes, these payments can represent up to 60% of the revenue. Most of Spotify's music content (about 98%) belongs to three major record labels: Warner Music, Sony, and Universal.
These costs arise because Spotify, although it operates as an IT company that offers music streaming through a mobile application and a website, does not own the music content itself. This is a problem generally described as "cost merge" (merging of costs), when the cost of the content or service is included in the total cost of the product or service.
Apple applies the same business model, reaching official licensing agreements with record labels to use their content. However, this is not entirely accurate, as Apple performs a complex analysis of each of its products, but in the end answers the question: does this product contribute to the increase of the company's total value, even if it does not generate profits? Precisely for this reason, Apple's operating systems have been free for a long time, despite requiring enormous resources for their development. The main point is that this directly affects the sales of laptops and indirectly affects the sales of all other devices, as users find it convenient to be in the Apple ecosystem.
YouTube is a great example of a company with low costs to create each new product. Adding a new video to the site is practically free for them. Since the beginning of YouTube, the costs of payments to content creators were not taken into account. Even considering the fact that now YouTube shares part of the advertising revenue with the creators, YouTube generates so much money for Google that they do not even include the YouTube Premium subscription in their new Google One subscription. This underscores how successful YouTube's business model has been.
Netflix, to reduce payments to rights holders and optimize costs, began creating its own content. This move not only helped reduce costs but also created a unique advantage for Netflix, as its content is only available on its platform. This attracted new users interested in exclusive content. However, this caused changes in the industry: content owners, such as Disney, HBO, Apple, and others, began creating their own streaming services. Upon the expiration of contracts, they can withdraw their content from Netflix, after which users who want to watch their movies will have to switch to their platforms.
It would be interesting to calculate how much we pay in total for different subscriptions.
General examples of business models
- Direct sale: This is the classic business model in which a company sells products or services directly to the final consumer. An example could be a retail store that sells products to consumers.
- Franchise: In this business model, a company grants the right to use its brand and business model to a third party in exchange for a fee. An example could be the fast-food restaurant chain McDonald's.
- Subscription: In this model, the company offers products or services in exchange for a regular fee. An example could be a video streaming service like Netflix.
- Freemium: In this model, the basic functions of the product are provided for free, but access to additional functions or services is provided in exchange for an additional fee. An example could be a mobile application with a free basic version and additional paid features.
- Advertising model: In this model, revenue is generated through advertising. An example could be a social network that offers free access to users and generates revenue from advertisers.
- Marketplace: This is a platform that connects sellers and buyers. An example could be the online store Amazon, which provides a platform for many independent sellers.
- User support: In this model, the company provides support or maintenance services for products or services that users have already purchased. An example could be Apple, which provides technical support and repair for its products.
- Brokerage model: This is a model in which a broker connects buyers and sellers and charges a commission for the transaction. An example could be a real estate website that connects property sellers and potential buyers.
- Shared economy: In this model, the company offers a platform that allows users to share resources. An example could be Airbnb, which allows people to rent their houses or apartments.
- Free model: In this model, the company offers free products or services to attract users to more expensive and profitable products or services. An example could be gaming companies that offer free games but then sell additional products or services within the game.
- And many more ...
Business models and innovations: The product manager's perspective
Innovative approaches to creating and selling products online are examples of applying insights in practice. They illustrate how insights can be applied at different levels of the business model, from the problem to the distribution channels.
The most important element in this process is the presence of insights. An insight can be related to the problem you are solving, or to the solution you are offering. It can be related to the distribution channels you are using, or to the activities you are performing. The insight can even be related to your key partners.
That said, an insight is always something more than just an observation. It is a deep understanding of a particular aspect of your business that allows you to see opportunities that remain invisible to others.
For example, the company Superhuman discovered an insight related to the problem of overloaded email in a specific category of professionals. Their solution, offering a fast and efficient email client for $30 a month, may seem too expensive for most people. But for professionals whose time is very valuable, this offer is extremely attractive.
It is also important to understand that an insight is not a one-time discovery. It is something that requires constant research, testing, and updates. After all, the world of product management is a world of constant changes, and what worked today may not work tomorrow. Therefore, the next article will be an article about CANVAS.
CANVAS is a tool for describing the business model developed by Alexander Osterwalder. This approach is one of the most well-known for building business models. A business model based on CANVAS is quite robust, offering a systematic approach to creating new business models and analyzing existing ones. It proposes looking at the business from the inside and the outside. It is key in business because it is the most common and therefore helps communicate effectively with entrepreneurs. Therefore, it is important for the product manager to know it, both for the reasons mentioned above and because the product they are managing can and should generally be marked on this CANVAS map.
To conclude, I would like to say that the most important skill of a product manager is the ability to see opportunities where others see problems. This requires a deep understanding of the business, creative thinking, and a willingness to experiment. Precisely, these are the product managers who are capable of creating products and services that truly change the world. And CANVAS is a good helper in this.