How the web revolutionised business models

2010

There was a time when critics viewed Amazon with scepticism. They would point to the firm's failure to make money. However, what they completely missed was the financial significance of Amazon's business model.

Amazon's book-selling method boasted convenience, speed and pricing advantages over traditional marketing conventions. Founder-CEO Jeff Bezos was convinced the gap between Amazon's costs and revenues would be gradually closed as the marketing proposition of delivering higher value at a lower price won an increasing number of converts.

For quite a while, as the online business models gathered strength, I would warn businesspeople that they faced the most deadly of enemies. The old, time-honoured marketing choice offered three propositions:

1) A premium price yielding bigger profits at higher costs than the competition;

2) Me-too prices exploiting greater efficiencies on the supply side;

3) At the bottom, a cut-price platform that relies on inferior production and supply for its viability, but which is inherently weak.

'Best', 'same' and 'worse' were the keywords here. However, business listeners now had to learn a new word - that most powerful of words: FREE.

Internet users in the new world soon discovered that their needs in many markets could be met at zero cost. In this way, the new suppliers could quickly build customer acceptance based entirely on the relative success of a literally priceless marketing platform.

The first Big Bang was delivered by Netscape, an unknown start-up at the time. But while non-paying users enjoyed the browser innovators' services for free, the company never found the answer to the problem of Priceless Profit, except in what can be called an extreme solution: AOL bought Netscape for $4.2 billion in 1999. Then Microsoft defeated the pioneers by bundling its own browser with other 'FREE' necessities, pulling the rug from beneath Netscape's feet.

That was easy, but expensive, even for Bill Gates, whose strengths lay more in the basics of business than in high technology. But those business strengths were, and still are, fundamental. However, the wealthiest man in the world stayed that way by fully recognising the force of the simple process that created his riches.

The same difficulty confronts every Midas; the success of the new idea inevitably attracts competitors, some new in every aspect, others established in other market sectors.

But history shows clearly that all good things come to an end, unless you can identify, exploit and lead the next stage of change in the market. The negative question is clear: what changes to the business model are needed to sustain the company and serve its markets?

The positive question is much more difficult: how can we build a new company that will be devoted to the new markets and the opportunities they hold?

There are risks in the new flood of devices - Apple's tablet computer has attracted much criticism from those who are not very clear where the market lies. But let's remember they way Apple's Steve Jobs has changed 'The World As We Know It' so radically already - not least with the ubiquitous iPhone.

So surely Jobs can be forgiven the odd false start. While that might sound mildly patronising and somewhat careless, remember - the world is no longer how we knew it.

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About The Author

Robert Heller
Robert Heller

Robert Heller, who died aged 80 in August 2012, was Britain's most renowned and best-selling author on business management. Author of more than 50 books, he was the founding editor of Management Today and the Global Future Forum. About his latest title, The Fusion Manager, Sir John Harvey-Jones wrote: "The future lies with the thinking manager, and the thinking manager must read this book".