Turns out revenue model design is important. And it’s a product matter first.

When one business model is not enough anymore — 3 business design lessons from 2018

I have collected here some of my notes and thoughts on a few key “business design” lessons from 2018.

I argue that in 2018 the major threats to successful digital companies did not arise from technology evolution or shifts in customer behaviors, but from their business models.

With the three examples presented here I also want to explore the idea that success in digital is not driven by the adoption of a specific business model, but by the ability to monetise a product or ecosystem in different ways — or, in other words, to implement a multimodal business model.

I think all companies should consider these trends, to strengthen and diversify their strategy in 2019.

1. All Facebook scandals ultimately stem from its business model

Today we are in the “age of product”, and no other company has influenced the current product-centered culture more than Facebook. With a success built on meticulous product experience design and almost zero budget invested in traditional marketing channels, the company contributed to promote the idea that “product is everything”, and that growth cannot be delegated to marketing or sales but needs to be engineered into the product fabric.

However, in 2018 Facebook was hit by various scandals centred around the fact that the company was monetising its users’ data with little or no understanding of the consequences of their business model.

By giving access to various third-party companies engaging in data harvesting — Cambridge Analytica and many other large corporations — not only did Facebook failed to safeguard its users’ privacy but they also contributed to amplify fake news and malicious political contents that impacted the 2016 US election and other important events globally.

Having contributed to define the current digital product culture, the evolution of Facebook needs to be analysed more in details to advance our understanding of how sustainable competitive advantage is created and preserved.

Data misuse is not our friend, it’s our business model

Consumers are fully aware of the interconnection between product and business model. During the summer of 2018 Facebook launched an advertising campaign to rebuild its reputation that was largely ineffective, and ended up being subverted. Not surprisingly, the majority of Facebook billboard takeovers targeted its business model (below some examples from Twitter).

The first lesson here is that, despite having a global multi-app ecosystem, Facebook came under a lot of pressure when its main revenue model was under attack, as they couldn’t rely on alternative models.

This also suggests that the company did not pay enough attention to how their business model was designed. The business model cannot be investigated or evolved separately from the product, or delegated to the financial, sales or revenue department. It is a core component of the product design that needs to evolve in parallel with the experience design, to build sustainable long-term value.

2. Apple no longer reporting device unit sales signals a more radical business transformation

For many years, Apple was the only company in the smartphone business — and probably one of the few in the overall tech manufacturing industry — to regularly report device unit sales. This until the company’s earning call on Thursday 10 of November 2018, when Apple announced they would stop reporting iPhones, Macs and iPads unit sales.

Started as a way to signal strength in a hypercompetitive tech manufacturing industry, the decision to stop reporting unit sales doesn’t indicate only a change in the way Apple relates to its competitive environment, but a more fundamental shift in the company strategy and business model.

Users not buyers

On one hand, with the smartphone market becoming more mature and showing declining growth rates, Apple’s main expansion areas are becoming more and more saturated. Meanwhile, new hardware products such as Watch and Home Pod are not offering comparable growth opportunities, at least for now.

On the other hand, most consumers today own at least one device and are less likely to switch to a different operating system and hardware manufacturer. In fact, iOS and Android have been retaining almost 90% of their customer bases for many years now.

This means that Apple’s strength lies in its ecosystem — iOS and Apple Store — built on a total active device base of 1.3/1.5 billion devices, and accessed every day by highly loyal and valuable customers.

As Horace Dediu pointed out, the decision to stop reporting unit sales signals a more profound business model transformation for the company. Apple is no longer seeing its business as “selling devices” but as creating and keeping customers. When a device is sold to a new customer, the company aims at using that foothold to expand its share of wallet, selling other hardware components or services. The launch of a service business was pivotal in this sense. Apple Services is an umbrella term that comprises a growing set of services, including Music, iCloud, and App Store revenues. The service business reached $10 billion of revenues per quarter in 2018 and is now as big as Facebook.

Lisa Jackson’s announcement “making devices last longer” during the September 2018 Key Note is another sign of the fundamental shift from transactions to relationships. The model of selling more units is illogical in a world where products last longer.

Apple can no longer rely on one business model

This is a big shift for the whole tech manufacturing and IoT industry.

Not so long ago, it seemed that most tech manufacturers were tied to the idea that they had to replicate the success formula of the iPhone. That is, if you wanted to be a market leader in your segment you had to create a product that mixed high quality materials, beautiful design, top notch functions, and a simple UX. The first players in the smart home market, for instance, created beautifully designed, over spec’ed devices. This approach ended up producing a list of high-end, very expensive products with a Nordic minimalistic design. Unfortunately, very few companies were able to replicate iPhone’s success in their segment.

Meanwhile, in the last years a new breed of relatively cheaper smart devices has come to the market, that build their success on a multi-faceted business model where hardware is seen as an enabler and “lock-in mechanism”, while integrated services drive revenues. Amazon’s Echo family and Peloton are examples of companies that implemented such models, playing with a mix of hardware, services, content and marketplace revenues in a dynamic way, depending on market and competitive fluctuations.

These success stories built on diversified revenue models have changed the way Apple and many other companies think about business models in the consumer tech and IoT market.

3. Uber launched its subscription programme, Blue Apron moved away from it

In October 2018 Uber launched a new subscriptions programme called Ride Pass. In exchange for a monthly fee, riders can access pre-set rates for an unlimited number of rides each month saving up to 15% of their monthly expenditure, according to the company.

Uber had been testing subscription services for years and designed the new programme to offer riders more consistent prices and make it a reliable and affordable alternative to driving. Ride Pass is not just a retention tool, it is organically integrated in the product to make the experience better for certain types of customers.

If you think this is a clear sign that subscriptions are the answer to all your problems in 2019, think again.

An example of a company going in the opposite direction is Blue Apron. The meal-kit subscription company went public in 2017, but its stock has been slowly unravelling ever since — and ultimately fell below $1 this year.

The company lack of growth was blamed to the limits of its subscription model, as customers concerns and frustrations emerged due to a lack of control over the locked-in plans. Launched in 2018, the new turnaround strategy pursues a more flexible service model, offering more choices and control over the meal plans, and expanding distribution through retailers (Costco, Jet.com) to make it easier to access the service.

Some analysts interpret these shifts as a proof that a certain revenue model is better than the others. Conversely, I believe that there isn’t a dominant business model in tech today, and that the key is implementing multiple ways to organically monetise your ecosystem.

Conclusions: what to do when one business model is not enough anymore

Facebook 2018 scandals showed that relying on a single revenue model is risky, even if you own one of the biggest ecosystem in digital today. Meanwhile, Apple is completing a multi-year transformation process centered around the idea that they can monetise iOS users in multiple ways, and not just through hardware sales. And finally, don’t believe the hype. Subscriptions per se are not going to solve all your problems. Designing and testing different organic ways to monetise your ecosystem will.

The first takeaway is that business design is not something just for the financial or sales departments and it’s not about finding ways to get revenues without “harming the user experience”. In this product age, business design is a product matter first, a lens to organically drive product and growth thinking.

The second takeaway is about multimodal business models. It is very hard for established companies to make business model transitions without going through dramatic changes that require relevant investments in their products. With the tech market getting more and more mature and growth opportunities becoming scarcer, companies are looking to adopt multiple revenue models as early as possible in their evolution to survive in difficult times. Companies that can organically and elegantly design two or three revenue streams in their product or ecosystem have more chances to generate sustainable competitive advantage in the long term.

All established digital players that have not been serious about investing on strengthening and diversifying their business model strategy have no excuses now.

Sources: asymco.com and the various podcasts that Horace Dediu hosts are an incredibly rich source of inspiration about Apple and digital trends in general. While I was writing this, I also saw a great post by Connie Chan on digital business models evolution in China, and decided to adopt the term “multimodal business model”.