Business Model Innovation

This is an argument for studying and understanding how different markets make money and solve problems.

Gift certificates must be one of the easiest money making opportunities for retail stores. You trade real dollars for dollars that will be spent at a later time. In the insurance industry, this money is called float and is a source of additional revenues. For gift cards, not only do you have float, but there is also some likelihood that people lose or don't spend their gift cards before they expire. There have been several times when I just plain forgot to go to Best Buy with my $100 gift card until after it was expired. Best Buy makes tens of millions from unused gift cards. Business schools call this "breakage."

Being a curious cat, I looked at other places for business model innovation. I found three fascinating online companies that borrow business models from other industries to develop new sources of competitive advantage and significant revenue opportunities: BountyJobs, PatientsLikeMe, and uProdigy.

BountyJobs
This startup creates an online interface between recruiters and HR Departments. Recruiting results in large dollar transactions, with fees that could amount to tens of thousands of dollars for placing executive positions. BountyJobs uses the internet to access and manage more applicants and also leverage the concept of float. When HR departments choose to hire an applicant, BountyJobs holds the bounty for several months before paying recruiters to affirm the performance of the employee. They have access to:

$5,000 held per bounty x 2 bounties per day x 90 days holding period = about $900,000 float.

With access to this type of free working capital, they have opportunities to create substantial streams of additional revenue.

PatientsLikeMe
This healthcare startup tries to solve the problem of information asymmetry among patients suffering from similar diseases, which goes one level beyond traditional support groups and online communities. With active and developed communities, they have opportunities to aggregate and sell anonymized information to third parties. Additionally, they are uniquely poised as a new channel for the traditionally expensive and time consuming process of clinical trial recruitment.

uProdigy
This startup is creates an online marketplace for tutoring. Most other online and offline businesses use a cost per hour pricing model. Instead, uProdigy has implemented an "all you can eat" monthly subscription. Why?

There are several different elements that they are using to their favor. The most obvious element is the 3x to 10x labor arbitrage between the cost of local tutors ($20-40/hr for college students) and the wages of masters and PhD students. Also, the people that pay for the service are different from the end users. Parents can pay a low monthly fee thinking that their children will use the service all the time, but in reality, only a small fraction of students will fully utilize uProdigy's resources. There are a lot of moving parts, but these three elements combine to create a unique and compelling value proposition to parents.

By incorporating models from other industries, these startups substantially differentiate themselves from the incumbents in their markets. This is one effective way to slay giants in mature markets, and a great reason to stay abreast of the inner workings of seemingly unrelated markets.