Revenue Model Innovation: How to Generate Sales in a World of Free

My Silicon Valley clients are always asking me, "How do I make money when my customers expect things for free." My experience has found that there are many techniques beyond the overused notion of freemium, yet I was never able to access this all in one place. Until now.

Saul Berman has brought this vast knowledge together in his well-organized and accessible new book, Not for Free: Revenue Strategies for a New World (HBS Press). Saul brings a wealth of experience to the topic as he is also IBM's Lead Partner for Strategy and Innovation in their Global Services Group. I had the opportunity to catch up with Saul to discuss his perspectives:

Adrian Ott: What is revenue model innovation? How does it differ from other types of business model innovation?

Saul Berman: The short answer is that revenue model innovation is a type of business model innovation. In my work at IBM I founded the Global CEO Survey, a biennial study of more than 1000 business leaders across sectors. The information coming from that and related research has unveiled three main approaches to business model innovation: First, there's industry innovation, which happens when a company takes a set of skills or resources and leverages them to expand into a parallel industry. Virgin's move from retail into financial services and travel is an example. Alternatively, a company may redefine the value chain, as Netflix did when it launched mail order DVD rental.

Second there's enterprise innovation, which happens when a firm rethinks the traditional boundaries of companies in its sector, like Zara did when it decided to keep control of its entire supply chain, from design to delivery.

Revenue model innovation, the focus of my book, is about applying new and different approaches to making money from the same product or service, rooted in a deep understanding of customer behavior and where customers' perceive value. Revenue model innovation is in many ways simpler than the other two categories because you're dealing with new uses for existing assets. Specifically, you're asked to explore a how an existing product or service can generate new revenue from a different customer with different pricing, different packaging (bundling or unbundling the value) or with a different payer (often through advertising or sponsorship).

What is the relationship between revenue model innovation and customer behavioral segmentation?

Segmentation is a pre-requisite for successful revenue innovation—it's simply not possible to identify new pricing strategies, new payers or new packaging options without first understanding the different ways that customers use and interact with your product (as well as the options they wish they had that they don't). You have to have deep insight into where and how customers perceive value based on how they behave, not just what they say they want. You've go to know what they do.

We both agree that behavioral segmentation is very important to understanding and addressing today's consumer (my own work on customer time-ographics is based on behavioral segmentation). How do you see that behavioral segmentation differs from traditional segmentation approaches?

Traditional segmentation has historically relied on geography or broad demographic traits to segment customers. Traditional segmentation approaches aren't very exact and they're largely just guesses at actual behavior-they take an identifiable characteristic and match it with a likely behavior. When we still lived in a world where consumers went to the local music store for new releases and to the local grocery for milk-and had very limited choices of stores and products-then geography was a good predictor of likely purchase behavior. But we don't live in that world anymore. As a result, those old segmentations are at best irrelevant, and at worst misleading. They can't tell you what is coming.

Behavioral segmentation involves looking directly to the customer to see how they are using the product, on what platforms or through what channels, when, what other things are going on at the same time, what other things might they be doing, how are they paying for it, and on and on. There is no formula here-each industry, and really each company, will need to identify the behaviors relevant to them that best reveal when consumers are well-served with an existing revenue model and when they would be open to new ways of doing things.

What is payer innovation?

Payer innovations are about earning revenue from a payer other than the end user of a product. The most familiar alternative payer is traditional advertising, but the digital era has encouraged some innovative new interpretations of some age-old approaches: product placement, sponsorships, social media, and private label services.

Is payer innovation really an alternative for non-media companies?

Increasingly, yes. Companies outside of media have recognized the value they can deliver by aggregating like segments together and delivering a product for free that would have otherwise cost the consumer.

Blyk is one excellent example. Blyk started in the UK as a mobile phone provider. At a time when mobile advertising represented less than one % of total UK ad revenues, Blyk launched an ad-supported telecommunications model that threw away the standard revenue models in mobile. Blyk's goal for its first 12 months was to acquire 100,000 users, but it had that many in six months, and reached a user base of 200,000 by April 2009.

Who in a large organization should be responsible for revenue innovation?

All the business unit managers need to be collectively responsible if they want to optimize the revenue per customer. I really mean that! And this is going to be a major shift for a lot of companies, since so many of them are organized either by channel or by product. When you talk to your bank, for example, you are dealing with a product-orientation-you talk to a different set of people when you have questions about a transaction on your credit card than you do when the transaction is on your debit card.

These silos are the legacy of a time when businesses knew only the bare minimum about their customers and when delivery limitations made it very difficult to act on any particular customer insights they did get. We are in the midst right now of a cross-industry shift toward an audience-centric model. There are a number of well-documented technology trends driving this shift, including ubiquitous, low cost bandwidth and processing power, rapid technology change, an exponential growth in data collection and information, and increased customer expectations for products customized to their wants and behaviors. The bottom line is that it's not only possible for companies to know a lot more about customer behaviors and to develop targeted products or delivery approaches, but they have to. Applying the same old revenue models won't work anymore. Companies are going to have to develop distinct revenue strategies targeted to particular groups. To make that happen, revenue strategy needs to span across products and channels.

Over time, either business units will need to be re-aligned by very specific, not mass-market, consumer segments, or there needs to be tight coordination and oversight across the units.

I find that large companies struggle with introducing and managing multiple business models. How can large corporations become more agile with business model innovation approaches like revenue innovation? What gaps still exist?

It's a big task and there are a lot of gaps in most companies today. Agility is both the challenge and the necessity as markets and customer segments continue to fragment. To achieve it, firms need to do a number of things to improve their ability to move quickly in ways that make sense and add value. Some necessary capabilities will be to modularize the business, create variable cost structures, be quicker to make decisions, organize more around the customer, leverage data about the customer to understand consumption patterns and trends, and collaborate regularly with an ecosystem of partners that can help give a better view of customers and markets.

Most of all they must be prepared to take risks with their existing business models, and deal with increased fragmentation of the customer behaviors which will require parallel revenue models. The challenge is to integrate and simplify the experience for the consumer or lose value to others in the value chain.

An Actionable Approach

Not for Free is a must read resource of revenue model strategies for people who need actionable advice. This is not a business book that waxes on and on about an issue and then leaves the reader hanging with "Okay that was interesting, so what do I do now?" It is great for the seasoned executive who needs a quick compendium of revenue model innovation options, as well as the new entrepreneur who wants practical advice on how to make money when customers expect free services.

Library Journal says Adrian Ott is, "revolutionizing marketing by adding the concept of time." She is the award-winning author of The 24-Hour Customer:New Rules for Winning in a Time-Starved, Always-Connected Economy which was named a Best Business Book 2010 by Library Journal and by Small Business Trends. She is also CEO of Exponential Edge Inc. and a frequent keynote speaker. Follow Adrian on Twitter at @ExponentialEdge.

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