Developing a business can follow four business model pathways based either on interactions with one group of customers (the product model, the solutions business model,) or two or more groups of customers (the matchmaking business model, the multi-sided business model).
An ongoing collaborative research project, led by Bayes Business School professor Charles Baden-Fuller and involving scholars from around the world, has developed a fundamental typology of business models based on customer interactions. These interactions can be either dyadic—involving interactions with one customer group—or triadic, involving interactions with two customer groups who are each interacting with each other. (Airbnb is an example of triadic business model, bringing together homeowners and travelers.)
The two dyadic business model pathways are the product business model and solutions business model. The product business model relationship with the customer is transactional and doesn’t require any prior connection to the customer.
The mechanisms for monetization is often based on the unit price of the product although variations are possible. For example, some product business model companies use the ‘razor blade’ pricing structure built on a combination of cheap durables (the razor blade handle) and expensive consumables (e.g., the razors).
The solutions business model is relational and, in contrast to the product business model, requires interactions with the customer before the good or service can be delivered. Rather than offering a standard product at a pre-set price, the solutions business model requires companies to develop a relationship with customers in which they earn their customers’ trust, identify their needs, and tailor the offering to those needs. Monetization is based on value.
The final two business models involve interactions with two (or more) different sets of customers connected by the business. The first of these triadic business models is the matchmaking business model, in which the company creates a marketplace that brings together buyers and sellers. airBnB and eBay are two examples. Success with this business model begins with identifying and engaging with two sets of customers and bringing them into the marketplace at the same time. A high level of trust must be established with both groups. Monetization is based on fees.
The second of the triadic business models is the multi-sided business model, the most sophisticated of the four business model pathways in the business model zoo. As with the matchmaking business model, the multi-sided business model requires companies to identify two different sets of customers. With this business model, however, the company creates a different offering for the two sets of customers offerings that not only meet the needs of the two sets of customers but also creates additional value between the different customers.
The Hulu streaming service is an example. The two sets of customers for this service are users and advertisers. For users, Hulu offers a free service, which carries advertisements, and a fee-based service with no ads. For advertisers, Hulu offers access to targeted prospects, which includes not only running the advertiser’s videos, but also banner ads and video overlays displayed with the video, and innovative additional benefits such as instream purchasing (viewers can order from the advertiser as they watch Hulu’s offering).
The research in the business model zoo details threats as well as opportunities that each of the business models can draw from the other business models. Below are some examples.
For product business model companies: Engage with customers to develop an offering that is better tailored to the customer, thus moving your company towards the solutions business model. Such engagement can be expensive and is best achieved by digitizing critical elements of your offering.
For solutions business model companies: Competitors who offer low-priced product business model alternatives can threaten your position in the market, notably because their lower costs enable to operate at a larger scale. If such a threat appears on the horizon, is there a way for you to transform your complex solution into a simpler product business? Another solution is to move in the other direction, adding a second set of customers to create a multi-sided business model—for example, by bringing in advertisers.
For matchmaking business model companies: The matchmaking business model can be a low-margin business. One of the best ways to increase profitability is to offer additional services and products based on the product or solutions business models. Auction houses increase their profitability, for example, by offering valuation services; similarly, airBnB, one of the most innovative of the matchmaking business model companies, offers to prepare properties for rental.
For multi-sided business model companies: Companies seeking to create a multi-sided business should be wary of bringing in customer groups who do not add value. A prototypical multi-sided business such as the Google search engine works because each of the three customer groups (advertisers, content producers, and users-searchers) add value to the other customer groups. Companies in the computer gaming industry, on the other hand, are more successful as product or solutions business model industries: Gamers don’t want to deal with another customer group such as advertisers.
More detailed discussions of the opportunities and threats linked to the business models, as well as other resources and topics related to the business models are available on the site.
Business Model Zoo. Charles Baden-Fuller, Stefan Haefliger, Alessandro Giudici. https://www.businessmodelzoo.com/
Further Relevant Resources:
Charles Baden-Fuller’s profile at Bayes Business School
https://www.bayes.city.ac.uk/faculties-and-research/experts/charles-baden-fuller
Stefan Haefliger’s profile at Bayes Business School
https://www.bayes.city.ac.uk/faculties-and-research/experts/stefan-haefliger
Alessandro Giudici’s profile at Bayes Business School
https://www.bayes.city.ac.uk/faculties-and-research/experts/alessandro-giudici
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