Purple Rein – Revolutionizing Revenue Models To Thrive Towards Blue Oceans

We are happy to introduce Mike Schavemaker, Innovation Transformation Lead and senior innovation consultant at Royal Philips, and member of the FINDER Advisory Board, on the FINDER blog! Mike guides the fellows with his academic and industry experience. Together with Barbara Voelkl, he shares his opinions, exciting developments and future revolutions in the world of business models in a blog series, so stay tuned.

Disclaimer:
The content of the FINDER blog is not an expression of Royal Philips, nor created on behalf of Royal Philips. The content is created and contributed by private persons.

Last year, on March 28th, Amazon announced to move into health care space. The company, founded in Seattle on the concept of delivering books at the most convenient way possible, now a tech-giant that delivers anything from overstock toys to data lakes through AWS makes it way to an arguably complete new venture space: health care. Why does Amazon think moving into health care space is the next place to be? Amazon is renowned to move into red ocean industries where traditional suppliers and supply chain rein such as publishing (with acquiring a.o. the Washington Post), catalog sales and ubiquitous data center applications and turn them into blue oceans. And leading the pack.

Amazon does this profoundly by understanding a fundamental question in business: who owns the customer. It enters spaces where providers of goods and services conveniently sell in a status-quo market. Where these same incumbent providers do not question any more how to bring additional value through combinations of innovations to capture the attention of the customer and retaining them; at least not in a paranoid sense. Rather they tend to relish themselves the comfort of their existing business models and only incrementally improve the propositions that they bring to market.

Navigate Uncharted Waters – Streamline Your Business Model

We argue that the simplest way to uncover industry leaders – or industry revolutionaries – are to find those companies who push their revenue models whilst fully aligning their value chain, from innovation, operations to sales, in their obsessed sense to stay close to their customers, or even fully align their customers’ interest with their own. The revolution therefore starts by focusing on the bottom right of the business model canvas and understand how to move your ship and your crew in line with this next purpose. For traditional product oriented companies, this means to move from a capital expenditure model to an OPEX-delivery model in the first place.

Essentially this means that as a product company your start to develop capabilities to address the needs of your customer according to their life cycle – and let them pay accordingly across this life cycle. Typically as a service, not as a mere product sell. In ‘product-sell country’, market share is your ultima. This accounts for hardware products, for ‘productized’ software where you buy a license per release. Appreciation by the customer presents itself by a transaction; thereafter product companies typically direct the attention to the next interested party.

In ‘solutions country’, wallet-share is your ultima. Wallet-share resembles how relevant you are as a company in the eyes of the customer. If your customer only brings 3% of their income to you, then you are not likely to be invited to the proverbial birthday party. If you manage to your customer to bring 30% of their income to you, then you are certainly invited to your customer’s birthday party: in fact, the party wouldn’t be complete without your presence. In a business sense, relevancy is connected linearly with the dollar-amount running from your customer to you. It is connected to your ability to address your customer’s preparation, planning, design and implementation of a solution, and being able to sustain the solution operationally for your customer and to enrich the solution optimally to your customer’s needs. The other currency acting as a proxy for relevancy is time: how well you are able to address their imminent need and invest time to persistently and longitudinally in making their lives easier, achieve their goals more effectively and raise the bar from satisfaction to delight. Taking your customer by the hand across these steps in the life cycle means that you can now shift from product based CAPEX-sell, to the game-play of providing a solution.

Get Your Customer On Board – Leverage The Relationship

The first stepping stone of providing a solution is to extend a product or license sell with a performance based revenue model. Particularly business-to-business oriented firms have extended their portfolio of offering to this model in the nineties. Nowadays any self-respecting product company in B2B-space has a service organization to support their ‘productized’ maintenance services, even if they deliver components to a solution. In this context, the firm commits itself to ensure business continuity and resilience for their customer base and leverages their contracts to substantiate the commitment.

The contract itself becomes the embodiment of how thick, or how thin the umbilical cordis between the firm and the customer is. And how simple it is to do business; as simple it is to deepen out the relationship. In performance based revenue models, the needle still hinges towards ‘transaction’ rather than ‘relation’.

Firms who push the needle further away from transaction, will typically start to develop usage-based revenue models. Moving towards this model will yet require, or actually demand the firm to understand how their product is consumed in the hands of the customers. Ensuring to provide richer functionality and solutions to answer for the customer’s ever evolving needs. Data becomes the inevitable carrier to understand how/when/who/what/where/how the customer’s needs continuously evolve. Addressing a richer set of offerings requires on the one hand a clear contract, on the other hand data mapping translated in integrated lifetime-serving offerings, being enabled by a digital platform that accommodates an ecosystem of solution and channel partners. The prior unlocks a leading position, the latter unlocks to sustain that leadership position. Not the other way around. Leadership, defined in its nature not by means of market share in a total addressable market; the traditional line of thinking. Contrary, leadership, defined by remaining relevant in terms of the wallet-share you manage to address at your customer, complemented by your natural role to orchestrate the connections and probabilities in your ecosystems.

Just look at players as Salesforce.com and Microsoft. By first building a comprehensive portfolio of products that captures (and captivates) the value of the customer, they then stretch their portfolio to additional adjacent applications – which on their term are offered in a partnership program. The composite of this approach allows these industry leaders to create a fine network of application partners, whilst retaining the central orchestrating role around addressing the life cycle their customers. Cisco referred to this as Customer Advocacy, Microsoft perfected the approach by introducing the practice of Customer Success Management, a concept that takes relationship to a next level.

Orchestrate Your Customer’s Reality – Build Up Joint Relations

In history, the strongest relationships are based on trust and a sense of co-investment. An investment in time, an investment in money – or both. This brings us to the ultimate revenue model, being the outcome-based class. Providing services that allow a win, or a loss to your customer – and yourself – if you fail to address the need correctly, if you do not reach the opted result. This type of risk sharing requires your company’s capabilities to fully plug-in in your customer’s reality. This is not for the faint-hearted, especially for those companies that have full focus on establishing shareholder value. Company risk is often associated with volatility. Volatility requires a premium. Another reason why this revenue model is not often seen in any industry, is simply that economic or even political context is not ready yet. For instance, in the case of healthcare space, solution providers who try to offer these solutions to hospitals often face that the economic reimbursement model does not entice the hospital to opt-in: the investment costs would arguable be lower, however this defeats the purpose of the hospital trying to sustain their allocated annual budget to run their facilities. However, in the United States, the health care reimbursement is much more liberal.

What if you could, simply spoken, put your organization’s capabilities to use that you have garnered whilst developing yourself towards an outcome based service provider. Can you turn red oceans to blue, or even to purple on a global basis? This is arguable exactly what happens with Amazon Health. Amazon takes its organizational capabilities to use to provide improved health care services to its employees. What stops them to make the full hospital equipment floor completely digital, reading out vital signs first on assets to weave in the hospitals as outcome based partners, then elevate their partnership with these same hospitals to create meaningful outcome based treatment based on clinical vital signs. Who owns the customer? Making hospital operations fully digital and fully life cycle immersed is just one step to turn the red ocean a little bit more purple. Just apply this simple thought experiment: offering incumbent field service staff an extra raise and tools to be more effective in handling operations would create a massive shift in the existing U.S. healthcare service landscape. Healthcare provided as a financial service by a new entry tech leader: to any actor in the value chain.

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