Over the years, business models have become much more sophisticated. The bait and hook business model (also referred to as the "razor and blades business model" or the "tied products business model") was introduced in the early 20th century. This involves offering a basic product at a very low cost, often at a loss (the "bait"), then charging compensatory recurring amounts for refills or associated products or services (the "hook"). Examples include: razor (bait) and blades (hook); cell phones (bait) and air time (hook); computer printers (bait) and ink cartridge refills (hook); and cameras (bait) and prints (hook). An interesting variant of this model is a software developer that gives away its word processor reader for free but charges several hundred dollars for its word processor writer.
In the 1950s, new business models came from McDonald's Restaurants and Toyota. In the 1960s, the innovators were Wal-Mart and Hypermarkets. The 1970s saw new business models from FedEx and Toys R Us; the 1980s from Blockbuster, Home Depot, Intel, and Dell Computer; the 1990s from Southwest Airlines, Netflix, eBay, Amazon.com, and Starbucks. Poorly thought out business models were a problem with many dot-coms.
Today, the type of business models might depend on how technology is used. For example, entrepreneurs on the internet have also created entirely new models that depend entirely on existing or emergent technology. Using technology, businesses can reach a large number of customers with minimal costs.
Perhaps the most overlooked dimension in developing a business model especially for a new product/service/business is the dimension of time, more specifically the timing of investments/expenses or cash flow out versus the receipt of revenues/accounts receivables or cash flow in. The principle issues are: 1) Essentially how much of the product or service has to be built before customers can make some level of either actual purchase decision and/or purchase commitment? 2) How much investment/expense is required to secure these revenues/commitments from customers? and 3 )How much risk is there in achieving net positive cash flow, given the required upfront investment and the future time to capture revenues/receivables cash inflow, within an acceptable timeframe, if ever?
These business model issues often make or break new ventures. Business models that are optimized to reduce the upfront investment, that accelerate the revenue/receivables cash inflow, that obtain cogent and reliable customer feedback often and earlier, and that take other measures to reduce the investment risk all have a higher probability of business success.
For example, in the entertainment industry, does one have to produce a movie for $100 million plus before any box office revenues can be derived, or can the business model be evolved by licensing certain established characters/signing leading movie stars for secondary licensing rights for fast-food chain promotional-tie-ins, movie merchandise licenses, etc. can generate pre-release cash inflow through licensing fees. Or a different entertainment business model might be to create and promote a "Weirdest Video" website platform for users to contribute the content and then based on site traffic, sell advertising for revenues. Here, the upfront investment for creating and promoting the site could be a fraction of the investment to produce a movie and the chances that it would be more popular than a movie may be much higher, as it can be tweaked as it is developed while a movie is an all or nothing production.
It comes down to a nitty gritty question: Can we make to order or do we have to create a new mousetrap and then wait to see if the world will come to it, or somewhere in-between?
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