Spotify is a two-sided marketplace where artists and music fans engage. Spotify has a free ad-supported service and a paid membership. Founded in 2008 with the belief that music should be universally accessible, it generated €11.7 billion in 2022. Of these revenues, 87.4% or €10.25 billion came from premium memberships, while over 12.6% or €1.47 billion came from ad-supported members. By 2022, Spotify had 489 million users, of which 205 million premium members and 295 million ad-supported users.
Freemium
The freemium is usually a growth and branding strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through either marketing or sales funnel. The free users not converting in customers help spread the brand.Dropbox generated over 90% of its revenue via its self-serve channels to convert users into paying customers through in-product prompts and notifications, time-limited free trials of paid subscription plans, email campaigns, and lifecycle marketing. Dropbox generated over $2.1 billion in revenue in 2021, with an average revenue per paying user of $133, based on 16.79 million paying users.
Subscription-based
Netflix is a subscription-based business model making money with three simple plans: basic, standard, and premium, giving access to stream series, movies, and shows. Leveraging on a streaming platform, Netflix generated over $29.6 billion in 2021, with an operating income of over $6 billion and a net income of over $5 billion. Starting in 2013, Netflix started to develop its own content under the Netflix Originals brand, which today represents the most important strategic asset for the company that, in 2022, counted almost 223 million paying members worldwide.
Consumption-based
Amazon generated over half a trillion dollars in revenue in 2022, of which $220 billion from online stores, over $117 billion from third-party seller services, $80 billion from AWS, almost $38 billion from advertising, over $35 billion from subscription services, almost $19 billion in physical stores, and over $4 billion from other sources.
Commission-based
Airbnb is a platform business model making money by charging guests a service fee between 5% and 15% of the reservation, while the commission from hosts is generally 3%. For instance, on a $100 booking per night set by a host, Airbnb might make as much as $15, split between host and guest fees. As a peer-to-peer platform, once the transaction between host and guest goes through, Airbnb will collect a fee from both key players. For example, from a $100 booking per night set by the host, Airbnb might collect $3 as a hosting fee. While it might increase the price for the guest at $116 ($16 above the price set by the host) to collect its guest fees of $12 and taxes for the remaining amount.
In 2022, Airbnb generated $63.2 billion in gross booking value on over 393.7 Million Nights and Experiences Booked, an average revenue per booking of $161, $8.4 in revenue, and an average service fee of 13.3%.
Hidden Revenue
Google is a platform, and a tech media company running an attention-based business model. As of 2021, Alphabet’s Google generated over $257 billion in revenue. Over $209 billion (over 81% of the total revenues) came from Google Advertising products (Google Search, YouTube Ads, and Network Members sites). They were followed by over $28 billion in other revenues (comprising Google Play, Pixel phones, and YouTube Premium), and by Google Cloud, which generated over $19 billion in 2021.
Razor and blade
The razor blade business model, also known as the razor-razorblade model, involves selling a product at a lower price to then selling a related product later for a profit. The razor and blade business model has been popularized by King C. Gillette, founder of the safety razor company Gillette, which sold a durable razor at cost while selling disposable blades at a premium. It costs Apple $501 to make an iPhone 14 Pro Max, and the company sells it at a base price of $1099. This makes Apple’s base markup on the latest iPhone model at 119% Apple is the only tech company able to sell its tech products at a such a premium, thanks to a combination of hardware, software and marketplace.
This is what’s called a reverse razor and blade strategy. Where the blade (in this case the App and software ecosystem) becomes what justifies a wide premium on the core product.
Direct
Tesla is vertically integrated. Therefore, the company runs and operates the Tesla’s plants where cars are manufactured and the Gigafactory which produces the battery packs and stationary storage systems for its electric vehicles, which are sold via direct channels like the Tesla online store and the Tesla physical stores.
Indirect
In 2022, most of Apple’s sales (62%) came from indirect channels (comprising third-party cellular networks, wholesalers/retailers, and resellers). These channels are critical for sales amplification, scale, and subsidies (to enable the iPhone to be purchased by many people). In comparison, the direct channel represented 38% of the total revenues. Stores are critical for customer experience, enabling the service business, and branding at scale.
Key Highlights
Ad-supported Model (Example: Spotify): Spotify offers both free ad-supported services and paid memberships. In 2022, it generated €11.7 billion, with the majority of revenue (87.4%) coming from premium memberships and the rest (12.6%) from ad-supported users.
Freemium Model (Example: Dropbox): Dropbox uses a freemium model to convert users into paying customers through various strategies like in-product prompts, free trials, and email campaigns. In 2021, Dropbox generated over $2.1 billion in revenue.
Subscription-based Model (Example: Netflix): Netflix operates on a subscription-based model with basic, standard, and premium plans. In 2021, it generated over $29.6 billion in revenue, with nearly 223 million paying members worldwide.
Consumption-based Model (Example: Amazon): Amazon’s revenue in 2022 exceeded half a trillion dollars, with significant portions coming from online stores, third-party seller services, AWS, advertising, subscription services, physical stores, and other sources.
Commission-based Model (Example: Airbnb): Airbnb charges both guests and hosts fees for bookings. In 2022, it generated $63.2 billion in gross booking value on over 393.7 million nights and experiences booked.
Hidden Revenue Model (Example: Google): Google generates a substantial portion of its revenue from advertising, particularly Google Search, YouTube Ads, and Network Member sites, accounting for over 81% of its total revenue in 2021.
Razor and Blade Model (Example: Apple): Apple sells its products, like the iPhone, at a premium price, with a substantial markup. This model is complemented by the App and software ecosystem, allowing Apple to justify higher prices.
Direct Model (Example: Tesla): Tesla follows a direct sales approach by manufacturing its cars and battery packs at its own facilities and selling them directly to customers through online and physical stores.
Indirect Model (Example: Apple): Apple’s sales primarily come from indirect channels (62%), including third-party cellular networks, wholesalers/retailers, and resellers. These channels play a crucial role in amplifying sales, scaling, and offering subsidies.
Case Studies
1. Ad-supported Model: Revenue is generated primarily through ads shown to users of the service.
Spotify: Provides both a free ad-supported service and a premium subscription.
YouTube: Allows users to watch videos for free but shows ads before and during video playback. YouTube Premium subscribers can watch ad-free.
Hulu: Offers a basic subscription that is cheaper but includes ads. For an increased price, subscribers can watch content ad-free.
2. Freemium Model: Offers basic services for free, while advanced features or ad-removal come at a cost.
Dropbox: Allows users a certain amount of storage for free, with premium plans offering more storage and features.
Evernote: Provides basic note-taking functionalities for free, with advanced features like offline access, more storage, and collaboration tools available in premium versions.
LinkedIn: Users can create profiles and connect with others for free, but advanced networking and job search features are part of LinkedIn Premium.
3. Subscription-based Model: Users pay a regular fee (often monthly or annually) to access the service.
Netflix: Charges users a monthly fee to access its vast library of films and TV shows.
Microsoft 365: Users pay a subscription fee to get access to a suite of productivity tools including Word, Excel, PowerPoint, and more.
Adobe Creative Cloud: Instead of buying software licenses outright, users pay a monthly fee to access a suite of professional creative tools.
4. Consumption-based Model: Charges users based on the amount of resources or services they consume.
Amazon AWS: Charges businesses based on the computing power, storage, and other cloud resources they use.
Electricity Companies: Charge households based on the amount of power they consume.
Ride-hailing services like Uber: Charges passengers based on the distance and time of the ride.
5. Commission-based Model: Takes a percentage or fee from transactions made through the platform.
Airbnb: Takes a commission from both hosts and guests for each booking.
eBay: Charges sellers a fee based on the final selling price of their item.
Etsy: Takes a commission for each sale made through its platform.
6. Razor and Blade Model: The primary product is sold at a low price (or given away for free), but complementary goods or services are sold at high margins.
Gillette: Sells razors at a low price but replacement blades, which consumers need to buy regularly, have high margins.
Printers: Many companies sell printers at competitive prices but make their profit from the sale of replacement ink cartridges.
7. Direct Sales Model: Products are sold directly to the consumer, eliminating the need for middlemen.
Tesla: Sells cars directly to consumers through its own stores and online platform.
Dell: Initially built its business by selling PCs directly to consumers, bypassing traditional retail channels.
8. Indirect Sales Model: Uses intermediaries or middlemen to bring products to market.
Apple: While it sells products directly through its own stores and website, a significant portion of sales also comes through third-party retailers and cellular networks.
Nike: Sells products through its own branded stores and website, but also relies heavily on third-party retailers.
Business modelinnovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
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 business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.
In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.
A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.
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).
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.
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.
