Let’s face it – the business world moves fast these days. Consumer preferences change on a dime, new technologies emerge overnight, competition intensifies constantly, and disruptive business models threaten established companies all the time. It’s enough to give any executive heartburn!

In this rapidly evolving environment, smart companies realize they can’t just sit still and keep doing things the same old way. To stay successful over the long-term, organizations need to take a hard look at their business models periodically and consider making tweaks or even bigger changes to adapt to market realities.

Now, while it’s tempting to want to throw everything out and transform things dramatically, that’s often not realistic or advisable for most mature companies. The risks of major reinvention are massive. However, incorporating thoughtful modifications to an existing solid business model can pay huge dividends in terms of boosting revenues, profitability, market share and overall longevity.

In this article, we’ll explore some of the most popular alternative business models companies should consider when looking to improve their performance. We’ll overview options like subscriptions, franchising, multi-sided platforms and more. We’ll also discuss best practices for assessing the pros and cons of different models deeply and implementing changes smoothly.

My goal is to provide a comprehensive guide for business leaders who know they need to evolve their approach to creating, delivering and capturing value in the face of market forces. With the right level of rigor, discipline and patience, existing companies can successfully innovate their business models and set themselves up for success over the next decade. Let’s dive in!

Common Alternative Business Models

Many alternatives to the traditional, product-driven business model exist. Below we overview several of the most popular options companies consider when looking to improve performance.

Subscription Model

The subscription business model entails customers paying a recurring fee, usually monthly or annually, to have ongoing access to a product or service. This model has grown enormously in popularity with the rise of software as a service and has spread to many other industries. 

Key advantages of subscription models include predictable, recurring revenue that can be counted on to cover fixed costs. The model also fosters ongoing relationships between businesses and customers, allowing for upselling additional offerings over time. However, subscriptions can be challenging to sell initially and companies must focus heavily on reducing customer churn.

Franchising  

Franchising allows companies to establish outlets in new locations by entering agreements with independent franchisee partners who pay an upfront fee and ongoing royalties to utilize the parent company’s brand, products, and business systems. This model provides opportunities for rapid expansion and leverages local franchisee knowledge.

However, franchisors sacrifice some control and must closely monitor franchisees to ensure brand standards are upheld. Profit sharing with franchisees also reduces potential earnings. Strong legal agreements and close franchisee alignment are critical to success.

Multi-Sided Platforms

Multi-sided platforms create value by facilitating interactions between two or more interdependent groups of customers. They leverage network effects to grow, with additional users on one side making the platform more valuable to users on another side. Examples include payment networks like Visa, ridesharing platforms like Uber, and travel sites like Expedia.

Platforms can achieve massive scale and profitability by extracting value from the transactions they enable. But they require significant upfront investment and face “chicken and egg” challenges during launch. Ongoing balancing of different sides’ needs is also key to avoiding losing demand.

Freemium Model

The freemium model involves offering a free, basic version of a product to attract users and upsell a premium, paid version with advanced features. This model is commonly used for digital services and software. It allows for rapid user acquisition and organic growth fueled by word-of-mouth and social shares.

However, conversion rates from free to paid versions are often low. Companies must offset low ARPU with very large user bases and limit functionality of free versions to drive upgrades. Ongoing product refinement and marketing are critical to monetizing freemium models successfully.

Experience Selling

Experience selling revolves around customers paying for memorable experiences provided by businesses. This can include elaborate dining experiences, adventure tourism, entertainment venues, retreats, and more. Experiences are inherently social and shareable.

Selling experiences can achieve high profit margins and enable deeper customer engagement. But experience providers need capabilities in event production, hospitality, and design. They must also continually refresh offerings to attract repeat customers.

Razor and Blades Model

This model involves selling a durable base product (the razor) at low margins or a loss, while earning high margins selling complementary consumables (the blades). Printers and ink cartridges are a classic example. The upfront hardware effectively locks in future high-margin sales. 

Razor and blade models create customer stickiness and recurring revenue. However, replacement consumables must be integral to product functionality and competitively priced to prevent alternatives. Providing razors below cost also requires adequate long-term revenue from blades to achieve profitability.

Assessing Business Model Options 

When evaluating potential new models, companies should take a structured approach weighing all key factors and implications. Rushing into significant model changes without thorough vetting risks major disruption. Below we discuss important analyses leaders should undertake when reviewing options.

Analyzing Costs and Revenue Streams

Every model has distinct cost and revenue dynamics. Leaders should model out in detail the full profit and loss economics for any new model under consideration based on current pricing and cost assumptions. This includes estimating any incremental investments required in people, facilities, equipment, marketing, etc. as well as projecting monthly and annual cash flows. 

Sensitivity analysis should also be conducted to determine break-even points and results under different scenarios. Modeling out economics will provide critical insight into financial viability and help determine appropriate pricing.

Understanding Target Customers 

An in-depth perspective on the preferences and behaviors of target customer segments is needed to evaluate new models. Surveys, interviews, and focus groups should be conducted with current and prospective customers to assess reactions to proposed model changes. This market research will reveal potential adoption rates, price sensitivity, feature requirements, and more.

Quantitative data and qualitative feedback collected will enable leaders to refine models and pricing for optimal appeal and positioning. Customer perspectives are invaluable for mitigating risk.

Evaluating Competitive Landscape

Understanding the competitive landscape is also key when contemplating business model pivots. Leaders should thoroughly analyze competitors and substitutes that could impact the success of any new model. This includes direct competitors, emerging startups, providers of adjacent products or services, and companies with rival business models.   

Assessing competitors’ pricing, features, strengths, weaknesses, and potential responses will enable informed model decisions. Competitor analysis should steer companies away from markets lacking adequate profit potential and guide differentiation. 

Aligning with Company Vision and Capabilities  

Proposed business models should be evaluated for strategic alignment with a company’s overall vision and core strengths. Leaders must determine if new models fit with long-term growth plans, reinforce or enhance current competitive advantages, and leverage existing infrastructure, people, and processes.

When possible, new models should be natural extensions versus radical departures requiring entirely new capabilities. However, some models may be so transformative that broader evolutions in strategy and operations are justified. Alignment assessments will vary for each company.

Implementing New Business Models

Once thorough evaluation has been conducted, companies must deliberately implement and scale new models. Moving too quickly risks subpar execution, while excessive delays give competitors openings. Follow best practices of piloting, communicating changes, and adapting operations.

Pilot Testing and Iteration

Prior to full implementation, companies should pilot test new models with small customer segments. Pilots provide real-world validation of assumptions made during assessments. They enable refinement of pricing, features, marketing, and customer experience based on feedback and performance data.

Many iterations may be required over months to optimize models. Patience is key – premature scaling without sufficient piloting raises the chances of failure. Companies should establish clear success metrics in advance to determine when pilots warrant broader rollout.

Communicating Changes

Both internal and external communications are critical when transitioning to new business models. Companies should clearly explain to employees across all levels how the model works and how roles may evolve. Address concerns via training and emphasize upside opportunities.

Externally, market positioning and messaging must be tailored for new models and value propositions. Creative marketing drives customer trial and anchors perceptions around updated brands. Communicate consistently across channels throughout the transition.

Adapting Operations and Culture

Most new models require operational changes to support execution. For subscriptions, onboarding, billing, and account management processes must be established. Multi-sided platforms require robust technology to facilitate interactions. More dramatic model changes like results-based services may necessitate product redesign.

Updating processes, performance metrics, training, and even internal structures will be necessary. Changes should align with any needed cultural shifts, like adopting more customer-centricity. Adjustments take time – factor into rollout plans.

Conclusion

Business model innovation is a proven avenue for growth, but only with careful, deliberate evaluation and implementation. Companies must resist chasing trends and instead do the hard work of analyzing alternatives against current economics, customers, competition, and strategic vision. Piloting and iterating on changes is vital prior to scaling new models.

With rigorous assessment and disciplined execution, incumbent businesses can intelligently evolve their models to improve financial performance, expand markets, and stay relevant over time. In dynamic environments, evaluating options and making savvy moves proactively is far better than reacting belatedly to deteriorating results. Leadership teams that approach business model assessment and change as a continuous competency will keep their companies thriving.