Tech Capital Partners Blog

Many before me have written about Business Models (in fact the reason I decided to write this is because of David Crow’s blog post last month titled Business Models) but in many cases the focus has been on specific business models and not necessarily on the subject of how to classify and select which models make sense for a particular business. I’ve gathered and organized a variety of information on this particular subject and it will hopefully be useful for some of you out there and provide more context around the various models. This post has been split into two parts: Part 1 describes an approach to determine the business model archetype of any business and Part 2 will outline the various descendant models of each Business Model Archetype.

Background
Early on in my research I compiled a list of the business models employed by a variety of companies operating online in some way or another. It was apparent that certain models worked well for some companies and others not so well. Shortly after I started to compile this list I discovered a paper written by researchers belonging to the SeeIT Project at the MIT Sloan School of Management. The paper describes a Business Model Classification framework and the differences in financial performance of various business models. The classification framework assisted me in creating — in combination with the list of business models I’d been aggregating — a systematic approach to identify the most appropriate models for a particular business.

Purpose
For some of you, what follows may seem like an academic exercise that doesn’t add any real world value because what you really want to know is “what model is going to make me money?”. If that is the case then maybe you’ll be more interested in Part 2, but do me a favor and keep reading the rest of this paragraph before you decide if you want to continue. When a business is struggling to “find” the best business model, in many cases management tends to review the various models that are out there and then try to apply them to their business to see what fits. It’s akin to people building a product and then trying to figure out the problem it solves after the fact. In many cases this is the wrong approach because you’re starting at the end point. You shouldn’t first identify a business model and then see if it fits to your business. Instead, try to identify exactly what the business does, and then apply that knowledge to the various models that are out there. This may seem like a trivial exercise when your business is, for example, wholesale/retail but what you may not realize is that you’ve probably already done this exercise intuitively. The choice of business model for a wholesaler/retailer is in most cases an obvious one so you don’t consciously think about it. In one quick thought you jump right to the end of the process and determine the model should be a pure play online retailer, or a catalogue retailer, etc. For some businesses however, the path from “My company does X” to “The business models that work for my business are Y” is not that easy or intuitive. The purpose of this post is to assist anyone out there who is having this problem and is struggling to figure out which models are applicable. It will hopefully allow a company to say “This is what we do, this is where we fit, and the models that can work for us are…”. Let’s get started…

Defining Business Model Archetypes

Step 1: What rights are being sold?

The first thing we need to do is identify the type of rights you are selling. The options are:

• Ownership of an asset
• Use of an asset
• Matching of a buyer and seller

Step 2: What is the transformation of the asset?

Secondly we need to determine how much the business transforms the asset. In most cases this only applies if you are selling the ownership of an asset. Options are:

• Significant
  • Purchase an asset, make considerable changes/additions and then sell
• Limited
  • Purchase an asset, sell with no or minor changes/additions

The steps above can be summarized in the following selection table:

Based on the table above you can determine if a business’ basic archetype is Creator, Distributor, Landlord, Broker.

Definition of Basic Archetypes

• Creator: A Creator designs the product, procures the materials/resources needed and transforms these elements into a finished product. Even if the entire manufacturing process is outsourced, one is still a Creator so long as the majority of the design was their doing.
  • Example: Dell Computer designs the computer, buys the required components and assembles the computer according to the customers customizations.
• Distributor: A Distributor buys a product and in most cases resells the identical product to someone else. They can sell through the wholesale or retail channel. In some cases the identical product isn’t sold but it may be packaged differently or value-added services may be offered in conjunction with the product.
  • Example: Future Shop buys merchandise and resells through their retail stores. On certain products they provide extra services such as extended warranty or bundling for additional value.
• Landlord: A Landlord sells the right to use an asset but ownership of the asset remains with the landlord. The right to use the asset can be indefinite or for a specified period of time. The asset does not need to be a physical asset but can also include intangible assets or any other asset that has value and can be “lent out” in exchange for something.
  • Example: Microsoft – People who purchase Windows for their computer are actually purchasing the right to use the software (a license in this case). Ownership remains with Microsoft.
• Broker: A Broker in its simplest form assists in matching potential buyers and sellers. A broker at no point takes ownership of the asset, instead they connect the interested parties and make money through fees charged to either or both sides of the transaction.
  • Example: eBay allows sellers to post assets and buyers to bid on those assets. eBay never takes possession of the asset but receives a commission for the sale and charges a listing fee.

Step 3: What type of asset is it?

For the third step we dig a bit further and take the framework to the next level. We now need to identify the Type of Asset that is being sold. The options are:

• Financial assets
  • Includes cash and other financial instruments like like stocks, bonds, insurance policies, etc.
• Physical assets
  • Includes durable items (computers, cars) as well as non-durable items (food, clothes).
• Intangible assets
  • Includes legally protected IP (patents, copyrights, trademarks, and trade secrets), as well as other intangible assets like the organizations knowledge, goodwill, and brand image.
• Human assets
  • Includes people’s time and effort. People are not “assets” in an accounting sense but their time (and knowledge) can be “rented out” for a fee.

Examples

• Amazon Books (Distributor/Physical Asset):
  1. Amazon is selling the ownership of an asset
  2. Amazon does not transform the asset, therefore asset transformation is Limited
  3. The asset is a Physical Asset
• Google Search (Landlord/Intangible Asset):
  1. Google is “selling” the use of an asset. Their search engine service.
  2. Step 2 is N/A because Google is selling the use of an asset
  3. The asset is an Intangible Asset
• eBay (Broker/Physical Asset):
  1. eBay matches buyers and sellers of physical assets.
  2. Step 2 is N/A
  3. The asset is a Physical Asset
     • not everything on eBay is a physical asset but for the purposes of this example we’ll assume this is the case.

Basic Business Model Archetypes

The following table is the combination of determining the type of asset being sold and identifying which rights are being sold. The result is sixteen detailed business models. I left out models that don’t apply to the Internet (Entrepreneur, Physical Landlord, Financial Trader) and others that are illegal activities (Human Creator, Human Distributor).

Definitions:

• Manufacturer
  • Creates and sells physical assets
  • Example: Dell Computers designs/assembles computers and sells them online.
• Inventor
  • Creates and then sells intangible assets
  • Example: This model is rarely used but an example would be developing patents and selling them outright. The creation of a web properties with the sole intention of selling them could fit into this category.
• Wholesaler/Retailer
  • Buys and sells physical assets
  • Example: Well.ca, an online retailer of health & beauty products.
• Intellectual Property Trader
  • Buys and sells intangible assets
  • Example: The practice of buying/selling web domains. The purchase of business.com by RH Donnely is a good example of this.
• Financial Landlord
  • Lets others use cash (or other financial assets) with certain conditions. There are 2 types of Financial Landlords:
    • Lenders provide cash to clients for a limited time and receive a fee in return usually in the form of interest.
    • Insurers provide clients with the option to access financial reserves if they experience losses and receive a fee in return usually called premium.
• Intellectual Landlord
  • Licenses or otherwise gets paid for limited use of intangible assets. There are 2 types of Intellectual Landlords:
    • Publisher provides limited use of information assets
      • Example: Licensing software (Microsoft).
    • Attractor attracts people’s attention using content and then “sells” that attention to advertisers
      • Example: Many web sites “attract” users with original content and then place ads on their web site to generate revenue.
• Contractor
  • Sells a service provided primarily by people, such as consulting, education, etc.
  • Example: UPS
• Financial Broker
  • Matches buyers and sellers of financial assets
  • Example: Microlending – Prosper matches and consolidates people who are willing to lend money with people who need a small loan and charges a fee to facilitate this.
• Physical Broker
  • Matches buyers and sellers of physical assets
  • Example: eBay
• Intellectual Property Broker
  • Matches buyers and sellers of intangible assets.
  • Example: Ad networks such as AdBrite. Publishers are looking to sell space on their web site and advertisers are looking to buy advertising space. Ad Networks facilitate this transaction and take a share of the money.
• Human Resources Broker
  • Matches buyers and sellers of human services
  • Example: Workopolis and Monster.

Examples

Continuing the example from above with the new information we have on the Basic Business Model Archetypes gives us the following:

• Amazon Books is a Wholesaler/Retailer because
  1. Amazon is Distributor
  2. The asset is a Physical Asset
• Google Search is an Intellectual Landlord because
  1. Google is a Landlord
  2. The asset is an Intangible Asset
• eBay is a Physical Broker because because
  1. eBay is a Broker
  2. The asset is a Physical Asset

Onward

Part 1 only gives us half of the picture. In Part 2 we will explore the various models that can be employed for each Archetype and discuss the models that intrinsically generate revenue and the options available for the monetization of models that do not intrinsically generate revenue.

I realize that without Part 2 I’m leaving you hanging but in the meantime I would love to hear your thoughts on this approach, some of your own examples, differing opinions, disagreements etc.

If you’re interested in reading the complete paper on which this post is based it can be found on the SeeIT Project website.

Update: Part 2 of this piece has been added, to continue reading see: Selecting a Business Model, Part 2

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