Reading twelve model innovation examples for the pattern that repeats

Business model Business model change is talked about in the abstract and made in a small number of concrete moves. Below are twelve model innovation examples, drawn from companies that made the move in public, each with the condition that had to hold and what usually gets skipped.

The arithmetic in each entry is a worked illustration, not a company's published figure. Prices are the publicly listed ones.

What to take away

Changing what triggers the money

1. One-time sale to recurring charge: Adobe's Creative Cloud switch. Adobe said in May 2013 that Creative Suite 6 was the last perpetual release and moved buyers onto subscriptions. The all-apps plan is listed at $59.99 a month.

The product has to keep earning its place monthly, and the loss rate has to be measurable. At 3% a month, 69% of a cohort remains after a year and average life is 33 months. Forgotten: the cash gap, because revenue that used to arrive at once now arrives over years.

2. Hourly to fixed fee: LegalZoom's flat-fee filings. LegalZoom advertises LLC formation at $0 plus state filing fees, and $249 plus state fees for its top package. It works only if your variance on this work is small.

On a fee built from a hundred hours at 200, working 130 hours gives an effective rate of 154. Forgotten: that the change moves risk onto you and should therefore raise the price.

3. Single rate to base fee plus usage: Twilio's phone numbers. Twilio lists a US local number at about $1 a month, with per-minute usage on top. The structure needs some cost that exists regardless of volume.

At 300 units, structures of 0 base with 12 a unit, 1,200 with 8, and 2,400 with 4 all total 3,600. At 150 units they are 1,800, 2,400 and 3,000. Forgotten: that this decides which customers you keep.

Changing who pays

4. Charging the user to charging a third party: Duolingo's free tier. Duolingo gives the app away and charges advertisers, with Super listed at about $12.99 a month or $83.99 a year and Max at about $29.99 a month. It needs an audience worth paying for and a way to prove it.

Forgotten: the delivery cost of the people who will never pay, which now sits entirely against the paying party.

5. Selling direct to selling through a reseller: Anheuser-Busch InBev's wholesalers. In the US, brewers sell to independent wholesalers who sell to retailers, a tier that typically takes 25 to 30 percent of the shelf price. It needs a margin structure that leaves room for someone else.

Forgotten: that you lose the relationship, and with it the ability to see why customers leave.

6. One payer to two: American Express. Cardholders pay an annual fee, $695 for the Platinum Card, and merchants pay a discount rate above what the Visa and Mastercard networks charge. Each charge has to pay for a distinct thing you can name.

Forgotten: that a fee schedule nobody can explain in a negotiation is a fee schedule you will discount away.

Changing what is sold

7. Bespoke work to a defined package: Warby Parker's $95 frames. Warby Parker sells glasses from $95 including prescription lenses and does its own lens finishing in company-run labs.

It needs variance between instances to be genuinely small. Forgotten: the documentation that lets someone other than the founder deliver it, which nobody schedules because no client is waiting for it. The capacity argument in full is in service models.

8. Product to product plus service: Apple and AppleCare+. Apple sells the iPhone and then a service contract, listed at $9.99 a month or $199 for two years on recent models. The service needs a delivery organization with a different cost shape from assembly.

Forgotten: that these are two businesses with two margins, and blending them describes neither. Apple reports services gross margin near 70 percent against roughly 35 percent for products.

9. Selling the item to selling the outcome: Rolls-Royce Power by the Hour. Airlines pay Rolls-Royce a rate per engine flying hour instead of buying maintenance event by event, with availability commitments attached. Michelin has offered comparable per-mile tire contracts to truck fleets.

It needs measurement both parties accept before the work starts. Forgotten: writing the remedy for a shortfall in advance, which is a contract question rather than a commercial one.

Changing how delivery works

10. Moving work off the most expensive people: CVS MinuteClinic. MinuteClinic visits are staffed by nurse practitioners and physician assistants rather than physicians, at cash prices commonly around $99 to $139. It needs written method and a defined review point.

Four senior people with 44 working weeks and 22 sellable hours each hold 3,872 hours. Requiring a senior on half of everything caps the firm at 7,744 delivered hours; at 15% it is 25,813. Forgotten: that it takes a year and shows up in no quarter's numbers.

11. Automating a step that used to be manual: Tesla's Model 3 line. Tesla over-automated final assembly, and Elon Musk said in 2018 that excessive automation was a mistake and that humans are underrated.

It needs the step to be the actual constraint. Forgotten: that automating a non-binding step changes throughput by nothing at all, which is why the constraint has to be identified first, as MIT's operations management course sets out.

12. Subcontracting delivery: general contractors. General contractors such as Turner Construction subcontract most trade work while keeping their own superintendents and project managers on site. It needs separate margin tracking for in-house and subcontracted work.

Forgotten: that review and the client relationship stay on the same senior calendar, so the ceiling does not move.

Reading these onto your own company

For each candidate, write three sentences. What has to be true for this to work. What capability we do not currently have. What we would see in six months if it were failing.

If the third sentence is hard to write, the change has no stopping rule and will be defended indefinitely.

A model change versus a pricing change is defined in model innovation, cheaper alternatives are in pricing architecture, and each option's arithmetic is in unit economics. Financing the gap between deciding and arriving is covered by MIT's entrepreneurial finance course.

Common questions

Which of these is most often attempted and least often finished?

Number ten. It is the one with the largest payoff, no client waiting for it, and a twelve month lead time, which is a combination that guarantees it gets postponed.

Can two of these be done together?

Technically yes, and then neither result is attributable. If both are genuinely urgent, do the reversible one first and quickly, rather than both slowly.

Is a model change ever the wrong answer to a real problem?

Often. Most suspected model problems are discount authority problems, and fixing a discount threshold takes a week and costs nothing.

How do we know we have the capability yet?

Try the change on a bounded group with an end date. That is the only test that is not a self-assessment.