We’re used each day to deal with products or services that become an essential part of our daily lives. From websites like Facebook and Google. Entertainment services like YouTube and Netflix. Products like Apple’s iPhones and Mac computers.
Anything around us is driven by a few companies that make up for most of our experiences. Yet we know a lot about those products and services, as we use them on a daily basis.
But we know very few about how those companies work, what their back-end looks like, how they monetize, what keeps them going, and what makes them successful, what is their motivation and why they “act” the way they do.
In the past years, I’ve been studying any business as a hobby, until I turned this passion into the FourWeekMBA. I’ve been quite surprised to find out how a few people know the way the companies that most influence their lives work.
A few realize why those companies’ algorithms or organizations are structured the way they are. And how it all ties out to their bottom line and the motivation of their founders, shareholders and a core community around it.
That insight made me want to dig deeper and deeper to dissect more and more companies, as I realized I could add a lot of value to more and more people. The first step to unlock this understanding is to grasp the difference between front-end and back-end business.
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Back-end business vs. front-end business
There is a part of any business that anyone can see. Usually, this is the customer-facing side of a company. Everything that deals with customers, from its segments, channels relationship and how a value proposition and perception about a product or service is delivered.
While this side is important, there is an even more critical part, the back-end business. The back-end business is anything hidden from the eyes of customers. Things like the key activities and resources an organization has in place to make its product and service valuable in the eyes of its customers. Other operational activities like inventory and manufacturing management, accounting and finance, distribution, IT and engineering, and human resources are all part of back-end business. This also implies the cost structure and partnership in place that makes the company able to thrive in the marketplace. And the way a business monetizes its resources.
Why is back-end business the key to unlock insights
Front-end business is the first step to unlocking a clear understanding of the companies that most influence our lives. However, if you want to understand what motivates those companies, you need to open the hood and look under it. You’ll figure out things that you would have never imagined.
For instance, would you imagine that a search engine like Google pays billions of dollars in partnership each year, to have millions of people going back to it each day?
Do you know that Facebook makes 99% of its money from advertising? Or that Netflix spends billions of dollars on content production? That Google is still mostly owned by its two co-founders and Amazon is still mostly owned by its founder? And that Amazon lower its margins on purpose to accelerate growth?
When you do understand those key aspects of a business, you can say you grasped the business back-end of a company, which in turn might make you a better executive or entrepreneur.
Key Highlights:
Invisible Business Dynamics: Despite using products and services daily, most people have limited knowledge about how the companies behind them operate. Understanding the inner workings of these companies can provide valuable insights into their motivations, strategies, and success.
Front-End vs. Back-End Business: Businesses have a customer-facing side (front-end) and a hidden operational side (back-end). The front-end deals with customer interaction, segments, channels, and value perception. The back-end encompasses crucial activities, resources, operational management, partnerships, cost structures, monetization strategies, and more.
Importance of Back-End Business: While the front-end provides a surface-level understanding of a company, the back-end is the key to unlocking deeper insights. By examining the back-end, one can discover unexpected details about a company’s motivations and strategies.
Examples of Back-End Insights: Exploring the back-end reveals intriguing facts, such as Google’s significant partnership expenses to maintain user engagement, Facebook’s heavy reliance on advertising revenue, Netflix’s massive content production expenditure, the ownership distribution in companies like Google and Amazon, and Amazon’s deliberate margin reduction for growth acceleration.
Benefits of Understanding Back-End: Gaining a comprehensive understanding of a company’s back-end enables better decision-making for executives and entrepreneurs. It reveals critical aspects that influence a company’s trajectory and success.
A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
In an asymmetric businessmodel, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the businessmodel. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
A transitional business model is used by companies to enter a market (usually a niche) to gain initial traction and prove the idea is sound. The transitional business model helps the company secure the needed capital while having a reality check. It helps shape the long-term vision and a scalable businessmodel.
The minimum viable audience (MVA) represents the smallest possible audience that can sustain your business as you get it started from a microniche (the smallest subset of a market). The main aspect of the MVA is to zoom into existing markets to find those people which needs are unmet by existing players.
Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable businessmodel. And as the product is offered at wider and wider market segments, it’s important to align product, businessmodel, and organizational design, to enable wider and wider scale.
The market expansion consists in providing a product or service to a broader portion of an existing market or perhaps expanding that market. Or yet, market expansions can be about creating a whole new market. At each step, as a result, a company scales together with the market covered.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
In the FourWeekMBA Revenue Streams Matrix, revenue streams are classified according to the kind of interactions the business has with its key customers. The first dimension is the “Frequency” of interaction with the key customer. As the second dimension, there is the “Ownership” of the interaction with the key customer.
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall businessmodel.
A pricingstrategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricingstrategy aligns the customer with the company’s long term financial sustainability to build a solid businessmodel.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
