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 business model.
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Tesla: from electric sport’s car to everyone’s electric car
It was 2006, when Tesla, with his co-founder Martin Eberhard, launched a sport’s car which broke down the trade-off between high performance and fuel efficiency.
Tesla, which for a few years had been building up an electric sport’s car ready to be marketed, finally pulled it off.
As Elon Musk would explain Back in 2012: “In 2006 our plan was to build an electric sports car followed by an affordable electric sedan, and reduce our dependence on oil…delivering Model S is a key part of that plan and represents Tesla’s transition to a mass-production automaker and the most compelling car company of the 21st century.”
Tesla had to find an effective market entry strategy that would enable it to validate the market.
The transitional business model in a nutshell
When companies like Tesla start to roll out their business models, they go through a phase of what I like to call the “transitional business model.”
A transitional business model is a model used for traction, in a market that doesn’t have to be big, or initially scalable.
A transitional business model is a model that will serve the purpose of gaining initial traction and market validation.
Therefore, it will help for the sake of the market entry and it will help also shape the long-term vision as it gets rolled out.
A transitional business model might seem obsolete in hindsight, yet that is the same model, which proves the viability of the idea while keeping it alive.
A transitional business model might not be scalable. Yet, that is the model that will help create an initial positioning, and get the funding (revenues, or capital) needed to roll out the scalable business model.
A transitional business model might not have a long-term vision, and yet it will help shape it.
Thus, a transitional business model works in the short-term to validate the market, to enable the technology and its ecosystem to mature while still having a reality check.
This is the core premise of a renewed business playbook, that doesn’t just rely on growth capital. It moves by (also) securing growth capital, but then it validates the market, step by step.
There are plenty of examples of transitional business models:
Facebook, a former college social network would open up to anyone just later on, as it gained substantial traction.
Netflix, moved from DVD rental company to streaming platform, only much later.
Google, before building the most powerful advertising machine ever built, it sold advertising through its salespeople.
Case Studies
Facebook:
Transitional Model: Initially, Facebook was exclusively for college students, limiting its user base.
Purpose: Facebook aimed to validate its concept and gain initial traction within the college market.
Evolution: It later expanded its user base to include everyone, becoming the social media giant we know today.
Netflix:
Transitional Model: Netflix began as a DVD rental service by mail, a model that wasn’t initially scalable.
Purpose: Netflix used this model to validate its rental concept and build a customer base.
Evolution: It later transitioned to a streaming platform, revolutionizing the way people consume content.
Google:
Transitional Model: Before becoming an advertising powerhouse, Google sold advertising through its salespeople.
Purpose: Google used this model to validate its advertising approach and generate revenue.
Evolution: It evolved into the dominant online advertising platform, fueling its growth.
Amazon:
Transitional Model: Amazon initially started as an online bookstore.
Purpose: Amazon began with books to validate the concept of online retail.
Evolution: It expanded into a vast online marketplace offering various products and services.
Airbnb:
Transitional Model: Airbnb started by renting out air mattresses in a small apartment.
Purpose: Airbnb used this model to validate the idea of short-term rentals in a sharing economy.
Evolution: It evolved into a global platform for booking accommodations of all types.
Twitter:
Transitional Model: Twitter was initially an SMS-based service with a 140-character limit.
Purpose: Twitter used this model to validate the concept of microblogging and real-time updates.
Evolution: It expanded into a social media platform with millions of users worldwide.
Uber:
Transitional Model: Uber began as a black car service for luxury transportation.
Purpose: Uber used this model to validate the idea of on-demand ride-sharing.
Evolution: It expanded to include various ride options and delivery services.
Apple:
Transitional Model: Apple initially focused on personal computers, such as the Apple I and II.
Purpose: Apple used this model to validate its innovative approach to computing.
Evolution: It expanded into a wide range of consumer electronics and services.
Microsoft:
Transitional Model: Microsoft initially developed and sold programming languages.
Purpose: Microsoft used this model to validate its software development capabilities.
Evolution: It evolved into a dominant software company, with products like Windows and Office.
SpaceX:
Transitional Model: SpaceX started with the Falcon 1, a small rocket.
Purpose: SpaceX used this model to validate its rocket technology and approach to space exploration.
Evolution: It expanded its capabilities and became a leading player in the space industry.
Key takeaway
Strategies take years to roll out entirely, and they might seem trivial only in hindsight. A transitional business model helps validating a strategy, before it starts to get rolled out.
As strategies take years to fully release their potential. Before committing a whole business to the desired path, a transitional business model helps to understand whether that is the right direction.
Key Highlights
Transitional Business Model: When launching a new business or product, companies often go through a phase known as the “transitional business model.” This model is used to gain initial traction and market validation in a niche market, even if it is not initially scalable.
Purpose: The transitional business model serves the purpose of validating the market entry and idea while shaping the long-term vision for the business.
Not Always Scalable: A transitional business model might not be scalable itself, but it helps create initial positioning and secure the funding needed to eventually roll out a scalable business model.
Market Validation: The transitional model helps validate the market, enabling the technology and ecosystem to mature while also providing a reality check for the business.
Examples: Several successful companies, such as Facebook, Netflix, and Google, started with transitional business models before evolving into their current forms.
Strategy Validation: A transitional business model allows businesses to validate their strategies before committing fully to a specific direction.
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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.
