This is an excerpt from Business Thinking for Designers and has been edited for length and clarity. To read the full, unabridged chapter, download Business Thinking for Designers for free today.
Business models
A business model is an outline of how a company intends to create and capture value. It describes what will be valuable to customers, how that value will be produced and delivered, and why it will generate revenue for the company. This outline is not only a foundation upon which business decisions are made, it’s also an effective description of the values designers are expected to help provide, so it’s important to understand the model you’re working in.
Selling products online—a.k.a. e-commerce—is a popular model in the digital world. They typically fall into one of three categories with matching acronyms. B2C businesses sell directly “2” Consumers. B2B indicates selling to other Businesses. And B2G is when you sell to Governments. In recent years, there’s also been the addition of C2C, in which consumers sell to one another via platforms like eBay or Indiegogo.
Within these e-commerce categories, business models vary significantly, as entrepreneurs have adapted successful offline models to work online. Examples include:
- Freemium: Giving a product or service away for free, then charging later when customers need additional features or services to get the most use out of the product. Examples include Mailchimp, Slack, or Skype.
- Marketplace: A platform where a fee or percentage of a sale is taken in without managing the inventory being exchanged in the sale. Airbnb and Etsy are e-commerce marketplaces that could be compared to a farmer’s market or flea market in the physical world.
- Subscription: In exchange for a regular fee, customers have ongoing access to a product or service. Think Netflix, Spotify, Orangetheory, or your local paper.
- Disintermediation (a.k.a. cutting out the middleman): Selling directly to customers by forgoing retail partners. This allows a manufacturer to lower costs and own the full relationship with the customer. Successful examples include Casper, Warby Parker, and Dell.
- Franchising: A company licenses the use of its business model, brand, and the rights to sell its products or services. McDonald’s, Allstate, and H&R Block are all franchises.
- Low Touch: Selling products and services with minimal interaction between the company and the customer. IKEA and EasyJet do this. So does SurveyMonkey.
- Razor Blade: A low profit-margin product that requires high-cost or high-regularity companion products. Disposable razor blades, ink-jet printers, and the Amazon Kindle all use this model.
- Reverse Razor Blade: A high profit-margin product that comes with low-cost companions products. The Apple iPhone is an example that enables access to loads of low-cost music, movies, and TV.
- Advertising: Rather than selling directly to consumers, businesses sell access to an audience to promote or sell products, services, or ideas. This is what Google does, as well as network television and radio.
As you might imagine, some companies have multiple business models at the same time. Apple is incorporating reverse razor blade, e-commerce, and subscription models across their portfolio, all at once.
Business strategies
While a business model describes how an organization creates and captures value, business strategies are how an organization aims to do those things better than competitors. There are typically several viable business models within a market, which means it’s ultimately the strategies that will lead to success or failure.
To gain a competitive advantage, there are three generic strategies companies use:
- Become a cost leader, or focus on selling at the lowest prices
- Create differentiation, or focus on selling a distinct product or experience.
- Target a niche customer base, or focus on being the only available supplier for a distinct need.
These generic strategies were popularized by Michael Porter in his 1985 book, Competitive Advantage: Creating and Sustaining Superior Performance.
Let’s look at how two companies in the same industry use similar models, but have vastly different strategies to gain a competitive advantage. Dell and Apple both use the disintermediation model to provide direct-to-consumer computer products. Dell chose the cost-leadership strategy, providing affordable, customized computers quickly through a well-oiled supply chain.
In the same market, Apple uses differentiation by focusing on premium, easy-to-use products with high-quality purchasing experiences, world-class design, and integrated products and services.
While the strategies for Dell and Apple are fundamentally different, both companies arrive at their strategies by answering two basic questions:
- Where does the company play? – Which customers, territories, and channels (e.g., box stores, online, phone, etc.) will the company target?
- How does the company win? – What will the company do to create a competitive advantage for itself?
When Dell and Apple determined their respective strategies, they chose different types of customers, channels, and methods to win their share of the market. The answers to these two strategic questions also inform whether a company or product is focused on growth or profit.
Growth focus: When a business aims to gain market share or diversify the products or services it offers, sometimes at the expense of short-term profits.
Profit focus: When a business aims to maintain profits over reinvesting in the production of new products.
The job of those “at the table” is to know how to make decisions that support the strategic focus. Are you pushing to create new products at a time when your company is focused on profits? If so, you’re out of step with the organization. Are you showing how accessibility improvements can help gain market share for your startup? If so, you’ll likely have an easier time gaining support. Take a few minutes now to consider whether or not your approach to design is in line with your company’s current business focus.
Perspectives of company health
To understand what strategies work, business leaders create a variety of objectives, measures, and targets for products and teams. To evaluate the overall company health, these objectives, measures, and targets are set across multiple perspectives, with each one focusing on a different aspect of the company.
While these aspects can vary from company to company, many approach overall health using four basic perspectives:
Financial: This is the traditional and cumulative view of company success. It looks at the monetary results of past decisions.
Customer: This perspective focuses on the people who buy a company’s products and the value provided to them.
Operational: Efficiency is the focus of this perspective, as well as how smoothly processes and teams are running.
Learning & growth: This perspective is all about employees. What are the key skills to be developed, the core processes needed to create products and services, and the cultural environment necessary for success?
Companies with long-term, viable business models prioritize these perspectives effectively to create value for internal and external stakeholders. In doing so, they also define their company cultures.
As designers become more aware of how objectives, measures, and targets relate to the prioritization of these perspectives, we can better evaluate the impacts of our solutions on the business. We are also better equipped to evaluate the culture of the organization itself.
