Professional Documents
Culture Documents
Patterns
Patterns
Patterns
ern
“Pattern in
architecture is the
idea of capturing
architectural design
ideas as archetypal
and reusable
Christopher
Architect
Alexander,
descriptions.”
This section describes business models with similar characteristics,
similar arrangements of business model Building Blocks, or similar
behaviors. We call these similarities business model patterns. The
patterns described in the following pages should help you Patterns
understand business model dynamics and serve as a source of
inspiration for your own work with business models. 56 Unbundling
Business Models
We’ve sketched out five business model patterns built on 66 The Long Tail
important concepts in the business literature. We’ve “translated”
these into the language of the Business Model Canvas to make 76 Multi-Sided
the concepts comparable, easy to understand, and applicable. A Platforms
88 FREEas a Business Model
single business model can incorporate several of these patterns.
108 Open Business Models
Concepts upon which our patterns are based include Unbundling,
the Long Tail, Multi-Sided Platforms, FREE, and Open Business
Models. New patterns based on other business concepts will
certainly emerge over time.
patterns
March–April 1999.
businesses: Customer Rela- tionship 2 • The Discipline of Market
Leaders: Choose Your
businesses, product innovation busi- Customers, Narrow Your
Focus, Dominate Your
nesses, and infrastructure businesses. • Each Market. Treacy, Michael,
Wiersema, Fred. 1995.
type has different economic, competitive,
and cultural imperatives. • The three types [ ex·am·ples ]
mobile telecom
may industry, private
banking industry
co-exist within a single corporation, but
ideally they are “unbundled” into separate
entities in order to avoid conflicts or
undesirable trade-offs.
u n b u n d l i n g business M o d e l s
1 John
2
HagelSinger, who
and Marc
coined
the term “unbundled corporation,” Hagel and Singer
believe that companies are composed of three Bundle describe the role of
Customer
very different types of businesses with
d Relationship businesses as finding and
different economic, competitive, and cultural
58
acquiring customers and building
imperatives:
relationships
Customer Relationship businesses, product
with them. Similarly, the role of product innovation
paTTerns
3 On the
different factors, they can conflict with each other
or produce undesirable trade-offs within the
following pages
we same organization.
show how the idea of unbundling
applies to business models. In the
example, we describe the conflicts and
Unbundlin first
undesirable trade-offs created by a Unbundle
g “bundled” business model within the private
d
banking industry. In the second example we
show how mobile telecom operators are
unbundling and focusing on new
core businesses.
u n b u n d l i n g business M o d e l s
Private Banking:
Three Businesses in
60
One
Swiss private banking, the business of provid- Zurich-based private banking institution
ing banking services to the very wealthy, was Maerki Baumann is an example of a bank that
patterns
long known as a sleepy, conservative industry. has unbundled its business model. It spun off its The figure opposite
Yet over the last decade the face of the Swiss transaction-oriented platform business into a depicts the traditional
private banking industry changed consider- separate entity called Incore Bank, which offers private banking
model, describes
ably. Traditionally, private banking institutions banking services to other banks and securities
trade-offs, and
were vertically integrated and performed tasks dealers. Maerki Baumann now focuses solely
unbundles it into
ranging from wealth management to brokerage on building Customer Relationships three basic businesses:
to financial product design. There were sound and advising clients. relationship management,
reasons for this tight vertical integration. Out- On the other hand, Geneva-based Pictet, product innovation,
sourcing was costly, and private banks preferred the largest Swiss private bank, has preferred to and infrastructure
management.
keeping everything in-house due to secrecy and remain integrated. This 200-year-old
confidentiality concerns. institution develops deep Customer
But the environment changed. Secrecy Relationships, handles many client
became less of an issue with the demise of the transactions, and designs its own financial
mystique surrounding Swiss banking practices, products. Though the bank has been successful
and outsourcing became attractive with the with this model, it has to carefully manage
breakup of the banking value chain due to the trade-offs between three fundamentally
emergence of specialty service providers such different types of businesses.
as transaction banks and financial product
bou-
tiques. The former focus exclusively on
handling banking transactions, while the latter
concen- trate solely on designing new financial
products.
u n b u n d l i n g business p a t t e r n s
Trade
Offs
1 The bank serves two different markets The Private Banking
with very different dynamics. Advising the Model
wealthy
is a long-term, relationship-based 1
business. Selling financial products to
private banks is a dynamic, fast-changing
6 advise
product r&d
intimate
personal
r el at ionshi
2
business. mar ket ing p 61
key account weal t hy
2 The bank aims to sell its products to platform individuals
management custom-tailored management &
competing banks in order to increase wealth manage- families
patterns
other product ment services private banks
revenues—but this creates a conflict of
pr ovider s fi nancial private banks
interest.
pr oduct s personal independent
3 The bank’s product division pressures br and/t r ust transaction fi nancial
advi- sors to sell the bank’s own products product ip net wor ks
management sales force advisor s
to clients. This conflicts with client interest transaction
pl at f or transaction
5
in neutral advice. Clients want to invest in pl at f or m
m
the best products on the market, regardless
of origin.
3
4 The cost- and efficiency-focused transaction
4
platform management management & advisory fees
platform business conflicts with the
hr: r&d product & performance fees
remuneration- intensive advisory and financial
hr: private bankers transaction fees
products business, which needs to attract
costly talent.
5 The transaction platform business • Relationsh • Product Innovation • Infrastructu
requires scale to drive down costs, which is ip Business Business re Business
difficult to achieve within a single bank.
the Mobile
Telco Infrastructure
Management
62
Mobile telecommunication firms have started
unbundling their businesses. Traditionally they
patterns
voice
network maintenance
dat a
marketing
service
revenues
Product
Innovation
u n b u n d l i n g business p a t t e r n s
network
maintenance
services
provisioning network
infrastruc- Equipment Manufacturers
ture telco s
operation & Telcos such as France Telecom, KPN, and Vodafone have outsourced
maintenance
network operation and maintenance of some of their networks to equipment
manufacturers such as Nokia Siemens Networks, Alcatel-Lucent, and
Ericsson. Equipment manufac- turers can run the networks at lower cost
because they service several telcos at a time and thus benefit from
economies of scale. 63
economies of scale
patterns
acquisition
Unbundled Telco
retention After unbundling its infrastructure business, a telco can sharpen its focus on
voice branding and segmenting customers and services. Customer relationships
network install ed
brand data custom comprise its key asset and its core business. By concentrating on customers
operators retail er
customer content base
base
and increasing share of wallet with current subscribers, it can leverage
invest- ments made over the years acquiring and retaining customers. One
marketing service revenues of the first mobile telcos to pursue strategic unbundling was Bharti Airtel,
now one of India’s leading telcos. It outsourced network operations to
Ericsson and Nokia Siemens Networks and IT infrastructure to IBM,
allowing the company to focus on its core competency: building Customer
Relationships.
r&d
Content Providers
new
u n b u n d l i n g business M o d e l s
Patterns
serving customers, or
building strong Customer
Relationships
64
µ3
patterns
KP
CR CS
KA VP
Product and service KP
innova- tion, infrastructure
acquired from third
parties
C$
R$
C$
patterns
K V CR CS
A P
KA VP CR CS
KR C
H
KR CH
C R
$ $
R$
patterns
the Future of Business Is
Selling Less of More.
number of niche products, each of which Anderson, Chris. 2006.
2 • “The Long Tail.” Wired
sells relatively infrequently. • Aggregate Magazine. Anderson,
Chris. October 2004.
sales of niche items can be as lucrative as
[ ex·am·ples ]
the traditional model whereby a small Netflix, eBay,
YouTube, Facebook,
number of bestsellers account for most Lulu.com
20 on a small
Focus
%
number of
The products,
each selling in high
Long
volume
Tail
concep
Sales
t
# of
was coined by
Chris
Anderson
to describe a
shift in
the media business from
selling a very large number of niche
selling a small number of
items, each in relatively small
“hit” items in large volumes
quantities.
toward
Anderson described how many infrequent sales
can produce aggregate revenues equivalent to or simple
even exceeding revenues produced by focusing softwar
on “hit” products. e
Anderson believes three economic triggers with
gave rise to this phenomenon in the media professional
industry: results.
2. Democratization of distribution: The Internet 3. Falling search costs to connect supply with
1. Democratization of tools of production: has made digital content distribution a demand: The real challenge of selling niche
Falling technology costs gave individuals commod- ity, and dramatically lowered content is finding interested potential buyers.
access to tools that were prohibitively inventory, commu- nications, and transaction Powerful search and recommendation engines,
expensive just a few years ago. Millions of costs, opening up new markets for niche user ratings, and communities of interest have
passionate amateurs can now record music, products. made this
produce short films, and design much easier.
THe l o n g Tail
69
paTTerns
Focus on a large number of products, each selling in low
volumes
Anderson’s research focuses primarily on the movie is rented relatively infrequently, aggregate concept applies outside the media industry as
media industry. For example, he showed how revenue from Netflix’s vast niche film catalog well. The success of online auction site eBay is
online video rental company Netflix moved toward rivals that from the rental of blockbuster movies. based on a huge army of auctioneers selling and
licensing a large number of niche movies. While But Anderson demonstrates that the Long buying small quantities of “non-hit” items.
Tail
each niche
# of Products
The Transformation of
the Book Publishing
t he l o n g t ail
70 Industry
patterns
Old Model
We’ve all heard about aspiring authors who carefully craft and submit
content
manuscripts to publishing houses in the hope of seeing their work in acquisition
publishing –
print—and face constant rejection. This stereotypical image of
sales broad
publishers and authors holds much truth. The traditional book
content broad
- (ideally audience
publishing model
publishing "hits")
is built on a process of selection whereby publishers screen many authors retail
knowledge network
and manuscripts and select those that seem most likely to achieve mini-
content
mum sales targets. Less promising authors and their titles are rejected
because it would be unprofitable to copyedit, design, print, and promote
books that sell poorly. Publishers are most interested in books they can
print in quantity for sale to large audiences. publishing / marketing wholesale revenues
the l o n g tail
71
patterns
A New Model
Lulu.com turned the traditional bestseller-centric publishing model on
platform communities
its head by enabling anyone to publish. Lulu.com’s business model is of interest
development
based on helping niche and amateur authors bring their work to logistics online niche
self-publish- profile
market. ing services authors
- marketplace
It eliminates traditional entry barriers by providing authors the tools to platform
for niche niche
craft, print, and distribute their work through an online marketplace. This print-on- content lulu.com audiences
demand
contrasts strongly with the traditional model of selecting “market- infrastruc-
ture
worthy” work. In fact, the more authors Lulu.com attracts, the more it
succeeds, because authors become customers. In a nutshell, Lulu.com is a
multi- sided platform (see p. 76) that serves and connects authors and
readers with a Long Tail of user-generated niche content. Thousands of sales commissions
platform management
authors use Lulu.com’s self-service tools to publish and sell their books. & development (low) publishing
This works because books are printed only in response to actual orders. service fees
The failure of a particular title to sell is irrelevant to Lulu.com, because
such
a failure incurs no costs.
LEGO®’s New Long
t he l o n g t ail
72
Tail
patterns
The Danish toy company LEGO started This requires transforming the supply chain
manu- facturing its now famous interlocking infrastructure, and because of low volumes
bricks in 1949. Generations of children have LEGO has not yet fully adapted its support LEGO
played with them, and LEGO has released infrastructure to the new LEGO Factory model.
thousands of kits around a variety of themes, Instead, it simply tweaked existing resources +
including and activities. LEGO users can
space stations, pirates, and the Middle Ages. In terms of a business model, though, LEGO make their own
But over time, intensifying competition in the took a step beyond mass customization by designs
and order them
toy industry forced LEGO to seek innovative enter- ing Long Tail territory. In addition to
online
new paths to growth. It started licensing the helping users design their own LEGO sets,
=
rights to use characters from blockbuster LEGO Fac- tory now sells user-designed sets
LEGO Factory
movies such as Star Wars, Batman, and Indiana online. Some sell well; some sell poorly or not at +
Jones. While such licensing is expensive, it all. What’s important for LEGO is that the user- LEGO allows users
proved to be an impressive revenue generator. designed sets expand a product line previously to post and sell
In 2005 LEGO started experimenting with focused on a limited number of best-selling kits. their designs online
user-generated content. It introduced LEGO Today this aspect of LEGO’s business accounts =
Factory, which allows customers to assemble for only a small portion of total revenue, but it LEGO Users
Catalog
their very own LEGO kits and order them is a first step towards implementing a Long Tail
online. Using software called LEGO Digital model as a complement—or even alternative—
Designer, customers can invent and design their to a traditional mass-market model.
own buildings, vehicles, themes, and
characters, choosing from thousands of
components and dozens of colors. Customers
can even design the box containing the
customized kit. With LEGO Factory, LEGO
turned passive users into active participants in
the LEGO design experience.
the l o n g tail
73
LEGO Factory: Customer-Designed
Kits
patterns
KP KA VP CR CS
LEGO Factory builds a
LEGO has to provide Long Tail community
and manage the around customers who
platform and logistics are truly interested in
that allow packaging niche content and want
Thousands of new,
and delivery of custom- to go beyond off-the-
customer-designed kits
made LEGO sets shelf retail kits
LEGO Factory substan- perfectly complement
tially expands the scope LEGO’s standard sets
Customers who build of the off-the-shelf of blocks. LEGO Factory
KR CH
new LEGO designs and kit offering by giving connects customers
post them online become LEGO fans the tools to who create customized
key partners generating build, showcase, and designs with other cus-
content and value sell their own custom- tomers, thus becoming
LEGO has not yet fully designed kits LEGO Factory’s existence a customer match-
adapted its resources depends heavily on the making platform and
and activities, which are Web channel increasing sales
optimized primarily for
the mass market
C$ R$
LEGO Factory aims to generate small revenues from a large number
LEGO Factory leverages production and logistics costs already of customer-designed items. This represents a valuable addition to
incurred by its traditional retail model traditional high-volume retail revenues
patterns the l o n g tail
74
Pattern
Long Tail
The value proposition
ofLong Tail business A Long Tail business
a
model can serve both
model is characterized by
the l o n g tail
profes- sional and
offering a wide scope of
amateur content
Niche content “non-hit” items that may
producers, and may create
providers (professional co-exist with “hit” Long Tail business a multi-sided platform
and/or user- products. Long Tail models
focus on niche (see
generated)
key areinthe
partners this business models may customers. 75
pattern. p. 76) catering to users
also facilitate and build on
and producers alike.
user-generated content.
patterns
KP V C C
The key resource is the
KA P R S
platform; key activities
include platform develop-
ment and maintenance
and niche content
acquisition and
production.
K C
R H
C R
$ $
patterns
Markets.” Harvard Busi-
ness Review. Eisenmann,
customers. • Such platforms are of value to Parker, Van Alstyne.
October 2006.
one group of customers only if the other 2 • Invisible Engines: How
Software Platforms Drive
groups of customers are also present. • The Innovation and Transform
Industries. Evans, Hagiu,
platform creates value by facilitating Schmalensee. 2006.
3 • “Managing the Maze of
interactions between the different groups. • A Multisided Markets.”
Strategy & Business.
multi-sided platform grows in value to the Evans, David. Fall 2003.
78
Segments ≥
Multi-sided platforms, known by economists as multi- ously in order to create value. The platform’s value 2
sided markets, are an important business for a particular user group depends substantially on
paTTerns
Segment One example is Metro, the free daily newspaper Operators of multi-sided platforms must ask them-
paTTerns
that originated in Stockholm and can now be found selves several key questions: Can we attract
in many large cities worldwide. It launched in 1995 sufficient numbers of customers for each side of
and immediately attracted a large readership the platform?
because it was distributed free of charge to urban Which side is more price sensitive? Can that side
commuters in train and bus stations throughout be enticed by a subsidized offer? Will the other
ATEN
Stockholm. This allowed it to attract advertisers side
ILIT
FACRACTIO
and rapidly become profitable. Another example is of the platform generate sufficient revenues to
Microsoft, which gave its Windows software
INTE
coverfollowing
The the subsidies?
pages outline three examples of multi-
development kit (SDK) away sided platform patterns. First, we sketch Google’s
for free to encourage development of new multi-sided platform business model. Then we show
etc applications for its operating system. The larger how Nintendo, Sony, and Microsoft compete with
number of applica- tions attracted more users to the slightly different multi-sided platform patterns.
Windows platform and increased Microsoft’s Finally, we describe how Apple has slowly evolved
etc revenues. Sony’s Playstation 3 game console, on the into an operator of a powerful multi-sided platform.
other hand, is an example of
a multi-sided platform strategy that backfired. Sony
subsidized each console purchased in hopes of later
Segment collecting more game royalties. This strategy
Model
80
patterns
The heart of Google’s business model is its Value Proposition of providing Google’s Value Proposition to advertisers depends heavily on the number of
extremely targeted text advertising globally over the Web. Through a service customers it attracts to its Web site. So Google caters to this second group
called AdWords, advertisers can publish advertisements and sponsored links of consumer customers with a powerful search engine and a growing num-
on Google’s search pages (and on an affiliated content network as we will ber of tools such as Gmail (Web based e-mail), Google maps, and Picasa (an
later see). The ads are displayed alongside search results when people use online photo album) among others. To extend its reach even further, Google
the Google search engine. Google ensures that only ads relevant to the search designed a third service that enables its ads to be displayed on other, non-
term are displayed. The service is attractive to advertisers because it allows Google Web sites. This service, called AdSense, allows third parties to earn
them to tailor online campaigns to specific searches and particular demo- a portion of Google's advertising revenue by showing Google ads on their
graphic targets. The model only works, though, if many people use Google’s own sites. AdSense automatically analyzes a participating Web site’s
search engine. The more people Google reaches, the more ads it can display content and displays relevant text and image ads to visitors. The Value
and the greater the value created for advertisers. Proposition to these third party Web site owners, Google’s third Customer
Segment, is to enable them to earn money from their content.
KP KA VP CR CS K K VP C CS
P A targeted ads R adver t iser s
free search web surfers
targeted monet izing cont ent
ads advertisers content
KR CH K C cr eat or s
R H
Google offers
distinct Value
C$ R$ C R Propositions
three to
interdependent
$ $ Customer
Segments
Multi-sided p l a t f o r M s
81
patterns
As a multi-sided platform Google has a very distinct revenue model. It makes Google’s Key Resource is its search platform, which powers three different
money from one Customer Segment, advertisers, while subsidizing free services: Web search (Google.com), advertising (AdWords), and third-party
offers to two other segments: Web surfers and content owners. This is logi- content monetization (AdSense). These services are based on highly complex
cal because the more ads it displays to Web surfers, the more it earns from proprietary search and matchmaking algorithms supported by an extensive
advertisers. Increased advertising earnings, in turn, motivates even more IT infrastructure. Google’s three Key Activities can be defined as follows: (1)
content owners to become AdSense partners. Advertisers don’t directly buy building and maintaining the search infrastructure, (2) managing the three
advertising space from Google. They bid on ad-related keywords associated main services, and (3) promoting the platform to new users, content owners,
with either search terms or content on third party Web sites. The bidding and advertisers.
occurs through an AdWords auction service: the more popular a keyword,
the more an advertiser has to pay for it. The substantial revenue that Google
earns from AdWords allows it to continuously improve its free offers to
search engine and AdSense users.
KP KA VP CR CS K KAplatform VP CR CS
management,
targeted ads
P managing
services, targeted ads
adver t iser s expanding adver t iser s
free search web reach free search web
monet izing surfers monet izing surfers
K content CH KR content CH
cont ent cont ent
R owners search owners
Google has one main pl at for m
Revenue Stream that
subsidizes other
offers
(Revenue Stream R keyword auctions C R keyword auctions
platform costs
is replaced by $ free $ $ free
“free”)
Mu l t i-side d p l a t f o r M s
K KA VP CR CS
P
high per-
for mance har dcor e
console gamers
KR CH game
console devel oper
audience s
Sony and Microsoft dominated the game console market until
Nin- tendo’s Wii swept the sector with a fresh approach to
C R hardware
sales at a loss
technology and an astonishingly different business model. Before
$ $ royalties
launching the Wii,
Nintendo was spiraling downward, rapidly losing market share, and
tee- tering on the edge of bankruptcy. The Wii console changed all that
PSP/Xbox Focus and catapulted the company to the market leader position.
Video game consoles, today a multi-billion dollar business, provide good Traditionally, video console manufacturers targeted avid gamers
examples of double-sided platforms. On one hand, a console manufacturer and competed on console price and performance. For this audience of
has to draw as many players as possible to attract game developers. On the “hardcore gamers” graphics and game quality and processor speed
other hand, players only buy the hardware if there is a sufficient number were the main selection criteria. As a consequence, manufacturers
of interesting games available for that console. In the game industry, this developed extremely sophisticated and expensive consoles and sold
has led to a fierce battle between three main competitors and their respec- them at a loss for years, subsidizing the hardware with two other
tive devices: the Sony Playstation series, the Microsoft Xbox series, and revenue sources.
the Nintendo Wii. All three are based on double-sided platforms, but there First, they developed and sold their own games for their own consoles.
are substantial differences between the Sony/Microsoft business model Second, they earned royalties from third party developers who paid for
and Nintendo’s approach, demonstrating that there is no “proven” the right to create games for specific consoles. This is the typical pattern
solution for a given market. of a double-sided platform business model: one side, the consumer, is
heavily subsidized to deliver as many consoles as possible to the market.
Money is then earned from the other side of the platform: game
developers.
Multi-sided p l a t f o r M s
Same pattern, but
different business 83
model: Nintendo’s Wii
patterns
KP KA VP CR C
S
"famil y"
casual
consol e
access gamer s
KR to
CH game
console devel oper
users & s
cheap Sony and Microsoft competed with costly, proprietary, state-of-the-art
game
develop- technology aimed at avid gamers and subsidized it in order to gain
ment costs
C R profitable
ha rdwarees
sal
market share and keep hardware prices affordable. Nintendo, on the
$ $ royalties
other hand, focused on a market segment that was far less sensitive to
technological performance. Instead, it lured customers with its motion-
controlled
“fun factor.” This was a much cheaper technological innovation
Wii Focus compared to new, more powerful chipsets. Thus, the Nintendo Wii was
Nintendo’s Wii changed all this. Like its competitors, the Wii is based on less costly
a double-sided platform business, but with substantially different to produce, allowing the company to forego commercialization
elements. Nintendo aimed its consoles at the huge audience of casual subsi- dies. This is the main difference between Nintendo and rivals
gamers rather than the smaller “traditional” market of avid gamers. It Sony and Microsoft: Nintendo earns money from both sides of its
won the hearts double-sided Wii platform. It generates profits on each console sold to
of casual gamers with relatively inexpensive machines equipped with a consumers and pockets royalties from game developers.
special remote control device that allows players to control the action To summarize, three interlinked business model factors explain the
with physical gestures. The novelty and fun of motion-controlled commercial success of the Wii: (1) low-cost differentiation of the prod-
games such as Wii Sports, Wii Music, and Wii Fit attracted enormous uct (motion control), (2) focus on a new, untapped market that cares less
numbers of casual gamers. This differentiator is also the basis for the about technology (casual gamers), and (3) a double-sided platform
new type of double-sided platform that Nintendo created. pattern that generates revenues from both “sides” of the Wii. All three
represent clean breaks from past game sector traditions.
Apple’s Evolution
Mu l t i-side d p l a t f o r M s
into a Platform
84 Operator
patterns
The evolution of Apple’s product line from the iPod to the iPhone
high- lights the company’s transition to a powerful platform business
model pattern. The iPod was initially a stand-alone device. The
iPhone, on the contrary, evolved into a powerful multi-sided platform
for which Apple controls third party applications through its App
Store.
Multi-sided p l a t f o r M s
85
patterns
Switch to multi-sided Consolidation of
ipod platform business ipod & platform business iphone &
model iTunes model appstore
Apple introduced the iPod in 2001 as a stand- In 2003 Apple introduced the iTunes Music In 2008 Apple consolidated its platform strat-
alone product. Users could copy their CDs and Store, which was closely integrated with the egy by launching its App Store for the highly
download music from the Internet onto the iPod. The store allowed users to buy and popular iPhone. The App Store allows users to
device. The iPod represented a technology plat- down- load digital music in an extremely browse, buy, and download applications directly
form for storing music from various sources. At convenient way. The store was Apple’s first from the iTunes Store and install them on their
this point, though, Apple was not exploiting the attempt at exploiting platform effects. iTunes iPhones. Application developers must channel
platform aspect of the iPod in its business model. essentially connected “music rightsholders” sales of all applications through the App Store,
directly with buyers. This strategy catapulted with Apple collecting a 30 percent royalty on
Apple to its position today as the world’s each application sold.
largest online music retailer.
patterns Mul t i-sid ed p l a t f o r M s
86
Sided
Multi-
Pattern
Platform
The value
proposition
Mul t i-sid ed p l a t f o r M s
usually creates value in Business models with a
three main areas: First, multi-sided platform
attracting user groups pattern have a distinct
(i.e. Customer structure.
Segments); Second, They have segments,
customer two or more
matchmaking between each
of which has its own Value
Customer Seg- Proposition and associated
ments; Third, reducing Revenue Stream. Moreover, 87
costs by channeling one Customer Segment
transactions through the can- not exist without the
patterns
platform. others.
KA VP CR CS
KP
The key resource
required for this business
model pattern is the
platform.
The three Key Activities
are usually platform
manage- ment, service KR CH
provisioning, and platform
promotion.
C$ R$ Each Customer
Segment produces a
different revenue
stream.
more One or may enjoy
segments
free offers or reduced
prices subsidized by
revenues from other
Customer Segments.
The main costs incurred Choosing which segment
under this pattern relate to to subsidize can be a
maintaining and crucial pricing decision
developing the platform. that determines the
success
of a multi-sided
platform business
model.
FREE as
a
Business
Model
free a s a business M o d e l
Def_Pattern No. 4
free • In the free business model at least [ ref·er·ences ] 89
patterns
the Future of Business.”
Wired Magazine.
to continuously benefit from a free-of- Anderson,
Chris. February
charge offer. • Different patterns make the 2008.
2 • “How about Free? The
free offer Price Point That Is Turn-
ing Industries on Their
possible. • Non-paying customers are Heads.” Knowledge@
Wharton. March 2009.
financed by another part of the business 3 • Free: The Future of a
Radical Price. Anderson,
model or by another Customer Segment. Chris. 2008.
[ ex·am·ples ]
Metro (free paper),
Flickr, Open
Source, Skype,
Google, Free
Mobile Phones
Advertising: A Multi-
free a s a business M o d e l
Advertising is a well-established revenue source to and from work. Competitors using the same
that enables free offers. We recognize it on model soon followed, but Metro kept them at
television, radio, the Web, and in one of its most bay with a couple of smart moves. For example,
sophisticated forms, in targeted Google ads. it controlled many of the news racks at train Minimizes costs by Assures high circulation
In business model terms, FREE based on and bus stations, forcing rivals to resort to cutting editorial team to through free offer and
adver- tising is a particular form of the multi- costly hand distribution in important areas. produce a daily paper just by focusing on
“good enough” for a distributing in high-
sided platform pattern (see p. 76). One side of
commute read traffic commuter
the platform is designed to attract users with
zones and public
free content, products, or services. Another transport networks
side of the platform generates revenue by Metr
selling space to advertisers. o
One striking example of this pattern is
KP KA VP CR CS
write & produce acquisition
Metro, the free newspaper that started in a daily paper
distribution distribution retention
Stockholm and is now available in dozens of agreements with ad space in high
circulation
cities around the world. The genius of Metro free paper advertisers
patterns
One industry crumbling under the impact of for articles when readers can view similar con-
to its site daily. Those figures make Facebook
the world’s largest social network. Yet users FREE is newspaper publishing. Sandwiched tent for free on Web sites such as CNN.com or
are less responsive to Facebook advertising between freely available Internet content and MSNBC.com. Few newspapers have succeeded
than free newspapers, several traditional papers have in motivating readers to pay for access to pre-
to traditional Web ads, according to industry
already filed for bankruptcy. The U.S. news mium content online.
experts. While advertising is only one of
industry reached a tipping point in 2008 when On the print side, traditional newspapers
several potential Revenue Streams for
Facebook, clearly a mass of users does not the number of people obtaining news online for are under attack from free publications such
guarantee huge adver- tising revenues. At this free outstripped those paying for newspapers as Metro. Though Metro offers a completely
writing, privately held Facebook did not or news magazines, according to a study by the different format and journalistic quality and
disclose revenue data.
Pew Research Center. focuses primarily on young readers who previ-
Traditionally, newspapers and ously ignored newspapers, it is ratcheting up
Facebook magazines relied on revenues from three the pressure on fee-for-service news
sources: newsstand sales, subscription fees, providers. Charging money for news is an
and advertising. The first two are rapidly increasingly difficult proposition.
mass declining and the third is not increasing Some news entrepreneurs are experiment-
customized
ad space on quickly enough. Though many newspapers ing with novel formats focused on the online
high t r a ffi c advertis ers have increased online readership, they’ve space. For example, news provider True/Slant
social network
global we failed to achieve correspondingly greater (trueslant.com) aggregates on one site the
free social audien b
network ad sales force ce advertising revenues. Meanwhile, the high work of over 60 journalists, each an expert in
fixed costs that guarantee good journal- a
facebook.com
ism—news gathering and editorial teams— specific field. The writers are paid a share of
free accounts remained unchanged. the advertising and sponsorship revenues
fees for ad space on facebook Several newspapers have experi- gener- ated by True/Slant. For a fee, advertisers
mented with paid online subscriptions, can publish their own material in pages
with mixed results. It is difficult to charge paralleling the news content.
free a s a business M o d e l
Free Advertising:
Pattern of
94
patterns
Multi-Sided
Platform s
free a s a business M o d e l
With the right product
KP KA VP C C
or service and high R S
traffic, the platform
becomes
interesting to
95
advertisers, which in
turn allows
charging fees to subsidize
free products and
patterns
services.
KR CH
C R
$ $
free a s a business M o d e l
Freemium with a
Twist 97
patterns
Business models in the enterprise software while protecting them from the uncertainties new release—the traditional software revenue
industry are usually characterized by two traits: surrounding a product not officially “owned” by model—it sells subscriptions. For an annual
First, the high fixed cost of supporting an army anyone. Red Hat benefits because its software fee, each client enjoys continuous access to
of expert software developers who build the kernel is continuously improved by the open the latest Red Hat release, unlimited service
product; Second, a revenue model based on source community free of charge. This substan- support, and the security of interacting with
selling multiple per-user licenses and regular tially reduces Red Hat’s development costs. the legal owner of the product. Companies are
upgrades of the software. Naturally, Red Hat also has to earn money. willing to pay for these benefits despite the
Red Hat, a U.S. software company, turned So rather than charging clients for each free availability of many versions of Linux and
this model upside down. Rather than creating major other open source software.
software from scratch, it builds its product on
top of so-called open source software developed Red
voluntarily by thousands of software engineers Hat
around the world. Red Hat understood that K KAsof t war e VP CR CS
support services self-service &
companies were interested in robust, licens-
P software
versioning &
free (linux)
open source
based
sof t war
direct access to
engineers sel f -
ing fee-free open source software, but were
testing e ser vice
reluctant to adopt it due to concerns that no (linux) open users
source
single entity was legally responsible for provid- devel opmen
ing and maintaining it. Red Hat filled this gap by
t
community
KR cont inuousl y
upgraded,
CH ent er pr is
serviced, redhat.com e
offering stable, tested, service-ready versions of red h at (linux) guar clients
software & ant eed red h at global
freely available open source software, particu- software branches
larly Linux.
Each Red Hat release is supported for seven
years. Customers benefit from this approach C cost structure contains
R professional subscription
because it allows them to enjoy the cost and elements of a service
stability advantages of open source software,
$ company $ free software
of
Skyp
free a s a business M o d e l
e
98
Skyp
e
patterns
backend software and the servers hosting user million in 2008, though the company and its
accounts. owner, eBay, do not release detailed financial Paid SkypeOut calls
Users pay only for calling landlines and data including information on profitability. We account for less
mobile phones through a premium service called may soon know more as eBay has announced than
10 percent of total
SkypeOut, which offers very low rates. In fact, plans to list Skype through an initial public
usage
users are charged only slightly more than the offering (IPO).
termination costs that Skype itself incurs for
calls routed through wholesale carriers such as
iBasis and Level 3, which handle the company’s
free a s a business M o d e l
Skype versus
Telco
5+ years old K KA V CR C
400 million+ users P software devel-
opment and no P S
automated mass
100 billion+ free network mainte-
nance
customization 99
patterns
maximu roughly similar without the
2008 revenues of outsourcing
m
K voice offer
CH limitations of a
network
U.S. $550 million R software
no distribution 100%
Skype disrupted the telecommunications inf r ast r uct ur e low cost
chan- nels
industry and helped drive voice communica-
tion costs close to zero. Telecom operators
initially didn’t understand why Skype would
offer calls for free and didn’t take the
company seriously. What’s more, only a tiny
C R
90% free usage
fraction
of the traditional carriers’ customers used
$ cost structure of a software company
$ 10% paying
Freemium Upside
100 Down
REG
A
patterns
patterns
digital eventually becomes price of zero is many times
free.” higher than the demand you
—— Chris Anderson
Editor-in-Chief, Wired Magazine
get at a very low price.”
—— Kartik
“We can no longer stand by Hosanagar
Assistant Professor, Wharton
and watch others walk off
with our work under “Google’s not a real
misguided legal theories.” company. It’s a house of
—— Dean Singleton cards.”
Chairman, Associated Press
—— Steve Ballmer
CEO, Microsoft
free a s a business M o d e l
Freem ium
Patter
102 KP VP C C
R S
KA
patterns
K C
R H
The platform is the most
important asset in the
freemium pattern,
because it allows free
basic services to be C R
offered at low marginal $ $
cost.
patterns
offers additional benefits. rate
specifies how many
users
defect/respectively join
the user base.
customer acquisition
costs
total expenses a company
incurs to acquire new
users.
Hook
104
Bait & Hook of Free Mobile
Phones
patterns
patterns
The form of the bait & hook pattern known as
the razor and blades model derives from the KP mar ket in
VP C C
way the first disposable razors were sold. In
1904 King C. Gillette, who commercialized the
KA g r&d
razor handle
R built-in
"l ock-in" S
logistics
first disposable razor blade system, decided to
manufact ur er s
sell razor handles at a steep discount or even cust omer s
customers
give them away with other products in order to
retailers
K C
blades
create demand for his disposable blades. Today
R brand
pat ent H r et ail
Gillette is still the preeminent brand in shaving
products. The key to this model is the close link s
106
Hook
Bait &
Pattern
free a s a business M o d e l
This pattern is customers are attracted
characterized
by a tight link or “lock- by
the instant gratification of
in”
between the initial a cheap or free initial The initial one-time pur- 107
Cheap or free “bait” product and the follow-up product or service. chase generates little or
lures customers—and is products or services.
no
revenue, but is made up
closely linked to a
patterns
for
through repeat follow-up
(disposable) follow-up
purchases of high-
item or service.
margin products or
services.
KP KA VP C C
Focuses on delivery R S
of follow-up
products or
services.
KR CH
patterns
How to Thrive in the New
Innovation Landscape.
happen from the “outside-in” by exploit- ing Chesbrough, Henry.
external ideas within the firm, or from the 2006.
“inside-out” by providing external parties with 2 • “The Era of Open
Innovation.” MIT Sloan
ideas or assets lying idle within the firm. Management Review.
Chesbrough, Henry.
Nº 3, 2003.
[ ex·am·ples ]
P&G,
GlaxoSmithKilne,
Innocentive
o pe n business M o d e l s
Other
marke
firm's
11 t
0
Our
NEW
paTTerns
market
Interna
Technology
l Our
marke
CURRENT
t
Externa
Technolog
y
Open innovation and open business models are two shows that products, technologies, knowledge, and and commercialization processes. The table opposite
terms coined by Henry Chesbrough. They refer to open- intellectual property lying idle inside a company can be illustrates how companies increasingly rely on outside
ing up a company’s research process to outside parties. monetized by making them available to outside sources of technology to strengthen their business
Chesbrough argues that in a world characterized by parties through licensing, joint ventures, or spin-offs. models. “Inside-out” innovation occurs when orga-
distributed knowledge, organizations can create more Ches- brough distinguishes between "outside-in" nizations license or sell their intellectual property or
value and better exploit their own research by innovation and “inside-out” innovation. “Outside-in” technologies, particularly unused assets. In this
integrating outside knowledge, intellectual property, innovation occurs when an organization brings section we describe the business model patterns of
and products into their innovation processes. In external ideas, technology, or intellectual property into firms that practice open innovation.
addition, Chesbrough its development
o p en business M o d e l s
PRINCIPLES OF INNOVATION
Closed
Open 11
The smart people in our field work for We need to work with smart people
us.
1
both inside and outside our company.
paTTerns
To profit from research and development External R&D can create significant
(R&D), we must discover it, develop it, value; internal R&D is needed to claim
and ship it ourselves. some por- tion of that value.
If we create the most or the best ideas If we make the best use of internal
in the industry, we will win. and external ideas, we will win.
Connect &
112 Develop Outside-In
patterns
op en business M o d e l s
s Patent Pools
113
Inside-Out
patterns
The inside-out approach to open innova-
tion ordinarily focuses on monetizing unused acquisition
internal assets, primarily patents and technol- retention
Connector:
114 Innocentive
Innocentiv
e
patterns
patterns
so you better go find them, to establish a large
connect to them, and build number of strategic
upon what they can do.” partnering
—— Henry relationships. It has
Chesbrough Executive Director, Center for
Open Innovation Haas School of Business, UC embraced open innovation
Berkeley
“Long known for a and works aggressively
preference to do everything with strate-
in-house, we began to seek gic partners to co-create
out innovation from any significant new market
and all sources, inside, and product
outside the company.” opportunities.”
—— A.G. Lafley —— Helmut
Chairman & CEO, P&G Traitler
Head of Innovation Partnerships,
Nestlé
o p en business M o d e l s
Outside-In
Pattern
116
patterns
K K VP C C
external organizations,
sometimes from
P A R S
completely different
Building on external
industries, may
knowl- edge requires
be able to offer valuable
dedicated that
activities
insights, knowledge,
connect
external entities with
patents, or ready-made
inter- nal business
products to internal KR C
processes and R&D
R&D groups. H
groups.
Taking advantage of
outside innovation
C
requires specific
resources to build
gateways
to external
$
networks.
Inside-Out
are unusable internally—
for strategic or
operational reasons—may
be of high value to
Pattern
organizations in other
industries. Organizations with 117
substantial internal R&D
operations typically possess
patterns
CS much unutilized knowledge,
CR
VP technology, and intellectual
KA
property. Due to sharp
focus on core businesses,
some
of these otherwise
valuable intellectual
assets sit idle. Such
CH businesses are good
KR candidates for an "inside-
out" open business model.
R$
By enabling others to
exploit unused internal
ideas,
a company adds “easy”
additional revenue
streams.
Patterns
Overvie
oVerVieW
w
Models Tail
118
contex An integrated model combines The Value Proposition targets only the
t infrastructure management, product most profitable clients.
(befor innovation, and Customer Relationships
e) under one roof.
patterns
challenge Costs are too high. Targeting less profitable segments with
Several conflicting organizational cultures specific Value Propositions is too costly.
are combined in a single entity, resulting
in undesirable trade-offs.
solutio The business is unbundled into three The new or additional Value Proposition
n separate but complementary models dealing targets a large number of historically less
(after with profitable, niche Customer Segments—which
) • Infrastructure management in aggregate are profitable.
• Product innovation
• Customer relationships
patterns
Enterprise fails to acquire potential new cus- The high price dissuades customers. R&D is costly and/or productivity is falling.
tomers who are interested in gaining access
to a company’s existing customer base (e.g.
game developers who want to reach console
users)
A Value Proposition “giving access” to a Several Value Propositions are offered to Internal R&D Resources and Activities
com- pany’s existing Customer Segment is different Customer Segments with are leveraged by utilizing outside
added (e.g. a game console manufacturer different Revenue Streams, one of them partners.
provides software developers with access being free- of-charge (or very low cost). Internal R&D results are transformed into
to its users) a Value Proposition and offered to
interested Customer Segments.
An intermediary operating a platform between Non-paying Customer Segments are Acquiring R&D from external sources can
two or more Customer Segments adds subsidized by paying customers in order to be less expensive, resulting in faster time-
Revenue Streams to the initial model. attract the maximum number of users. to-market. Unexploited innovations have
the potential to bring in more revenue
when sold outside.