Sunday, February 1, 2015

Paper: "What Are the Most Profitable Business Models?"

This "Do Some Business Models Perform Better than Others? A Study of the 1000 Largest US Firms" is a cool paper [pdf]. Although it doesn't really answer the question, they came up with a two dimensional classification of different business model types which I think is useful.

What rights are being sold? The four Basic Business Model Archetypes
The heart of any business is what it sells. And perhaps the most fundamental aspect of what a business sells is what kind of legal rights they are selling. The first, and most obvious, kind of right a business can sell is the right of ownership of an asset. Customers who buy the right of ownership of an asset have the continuing right to use the asset in (almost) any way they want including selling, destroying, or disposing of it.

The second obvious kind of right a business can sell is the right to use an asset, such as a car or a hotel room. Customers buy the right to use the asset in certain ways for a certain period of time, but the owner of the asset retains ownership and can restrict the ways a customers use the asset. And, at the end of the time period, all rights revert to the owner.

In addition to these two obvious kinds of rights, there is one other less obvious—but important—kind of right a business can sell. This is the right to be matched with potential buyers or sellers of something. A real estate broker, for instance, sells the right to be matched with potential buyers or sellers of real estate.

[E]ach of these different kinds of rights corresponds to a different basic business model. The figure also reflects one further distinction we found useful. For companies that sell ownership of an asset, we distinguish between those that significantly transform the asset they are selling and those that don’t. This allows us to distinguish between companies that make what they sell (like manufacturers) and those that sell things other companies have made (like retailers).

A Creator buys raw materials or components from suppliers and then transforms or assembles them to create a product sold to buyers. This is the predominant business model in all manufacturing industries. A key distinction between Creators and Distributors (the next model) is that Creators design the products they sell. We classify a company as a Creator, even if it outsources all the physical manufacturing of its product, as long as it does substantial design of the product.

A Distributor buys a product and resells essentially the same product to someone else. The Distributor may provide additional value by, for example, transporting or repackaging the product, or by providing customer service. This business model is ubiquitous in wholesale and retail trade.

A Landlord sells the right to use, but not own, an asset for a specified period of time. Using the word “landlord” in a more general sense than its ordinary English meaning, we define this basic business model to include not only physical landlords who provide temporary use of physical assets (like houses, airline seats and hotel rooms), but also lenders who provide temporary use of financial assets (like money), and contractors and consultants who provide services produced by temporary use of human assets. This business model highlights a deep similarity among superficially different kinds of business: All these businesses—in very different industries—sell the right to make temporary use of their assets.

A Broker facilitates sales by matching potential buyers and sellers. Unlike a Distributor, a Broker does not take ownership of the product being sold. Instead, the Broker receives a fee (or commission) from the buyer, the seller, or both. This business model is common in real estate brokerage, stock brokerage, and insurance brokerage.

What assets are involved? The 16 detailed Business Model Archetypes
The other key distinction we use to classify business models is the type of asset involved in the rights that are being sold. We consider four types of assets: physical, financial, intangible, and human.

Physical assets include durable items (such as houses, computers, and machine tools) as well as nondurable items (such as food, clothing, and paper).

Financial assets include cash and other assets like stocks, bonds, and insurance policies that give their owners rights to potential future cash flows.

Intangible assets include legally protected intellectual property (such as patents, copyrights, trademarks, and trade secrets), as well as other intangible assets like knowledge, goodwill, and brand image.

Human assets include people’s time and effort. Of course, people are not “assets” in an accounting sense and cannot be bought and sold but their time (and knowledge) can be “rented out” for a fee.

[E]ach of the Basic Business Model Archetypes can be used (at least in principle) with each of these different types of assets.

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