[projectvrm] Biz Models > 3 (was: The free customer and the three base business models ...)

["T.Rob" < >]

Either you missed a couple of business models or I'm interpreting yours too
narrowly.

For example, I can see where Big Pharma fits neatly into #2.  First you
patent a drug.  Then you make it more effective or less dangerous.  Except
you don't release the new version until the existing patent nears
expiration.  True, lots of people suffer and die between the time the new
version could be available and when it actually hits the market, but that
would drastically reduce profits.  The critical resource being exploited is
the patent granting exclusive right of manufacture.

But where do rebates fit into the 3 models?  Revenue is generated when
customers entitled to a rebate fail to get it.  This is called "breakage" in
the industry and the requirements are designed to maximize breakage.  Of
course, the retail customer isn't the rebate processor's customer.  The
retail vendor is the customer.  So, what exactly is being sold to them?  The
business model is that the rebate processor buys the receivables at a
discount and assumes the liability involved with cheating customers.  The
main difference between this and outright fraud is that because it is
seemingly random nobody feels they were targeted personally and victims are
less likely to retaliate.  The real value here though is that the
reputational risk is transferred from the vendor to the rebate processor.
Sony's brand isn't tarnished too badly if nobody gets that rebate on the 50"
flat screen.  The rebate processor might be but their brand is disposable.
Essentially, it's money laundering.  

What is the critical resource?  Brand anonymity?  The disposability of the
corporation?  It can't be the regulatory capture business model.  Perhaps
it's the "regulatory shelter" business model.



There's another business model that doesn't fit nicely into your trichotomy
- the creation of perceived value.  This is where you divert your money from
a competitor or spend new money, not because you like the actual product,
but rather because you like the ideal product being pitched so much that you
don't care that the actual product doesn't resemble it.  Examples abound:

* Nobody at an actual McDonalds *ever* loved to see you smile.  They would
have to acknowledge you as a human being to do so and that ain't happening
any time soon.  However, in the ads, it's a very friendly and human company.

* Dogs absolutely know it's not bacon.  They can smell a cancer too small
for imaging and in the center of your body.  They aren't being fooled by a
cocktail of industrial chemicals applied to rendered waste product.  But the
treat is formed and painted like bacon so if they didn't do that for Rover's
benefit then look to your left, look to your right and who's left?  Guess
what - YOU are the sucker here.  You could buy actual bacon for $0.50/oz or
spend $0.75/oz on rendered waste marinated in industrial chemical cocktail.
They are getting a 50% premium on the stuff they used to have to pay to
dispose of!  And if you still don't think all the value here is perceived,
consider the advice that "table food is bad for rover" as you munch on your
organic vegies and free rang, no-hormones meat.

* Look at the box photo on any frozen processed food, especially frozen
dinners.  Now look at what's inside.  The "serving suggestion" is to not buy
that product and make it from scratch like they did for the photo shoot.

* Any product featuring an attractive model in the ad. An actual girl was
used as the template, then an artist adjusted her curves, smoothed her
complexion, lengthened her legs, reshaped her eyes, lips and nose, inflated
her chest then slimmed all her limbs.  The reason you won't get the girl
draped over the hood of that sports car has nothing to do with you two being
in completely different social universes.  It is because she doesn't exist.

* In medical delivery, the business model is an accountability shield.  Two
prescriptions that cost less than the co-pay when I'm insured cost more than
$500 when the pharmacy thinks I'm self-pay.  The insurance company is
supposed to spread risk over a pool of insureds but has instead pushed the
risk completely out of their pool and onto those who do not participate.
Not only does the self-pay patient pay more than 50 times the negotiated
cost of the insurance company, but they become indentured servants whose
lifetime productivity is sequestered by the healthcare industry.

 
There is nothing about the actual experience of using these products that
comes close to the anticipated experience.  Yet selling the dream of a
fulfilling customer experience has been very successful.  Unlike rebates in
which the object was to insulate the valuable brand from the disconnect
between perceived and actual value, this business model exploits the
disconnect between fantasy and reality to directly attach intangible value
to the brand.  In the previous example, the rebate processor intervened
between the brand and the customer.  Here the ad agency is invisible and it
really is the brand selling directly to the customer.  Both sell deceit but
one concentrates and transfers risk while the other concentrates and
transfers good will.

I'm thinking if this fits into the trichotomy at all it is #1 Compete on the
merits, with negligible switching costs for the customer.  In this case the
"merit" is that the fantasy of the product resonates with the customer
better than the next competitor's fantasy, and sufficiently to overcome the
backlash due to the delta between fantasy and reality.


So I think a 4th business model is perhaps to externalize as much cost
and/or risk as possible.  With rebates the model is to externalize the risk
of deliberately cheating customers. With perceived value the business model
is to get the consumer to respond as if they were experiencing the product
presented in the ad.  In this case, it is the product itself that has been
externalized.  The physical instantiation of the product is a cheaply made
conduit through which the fantasy is delivered.  The manufacturing cost
represents the least possible functionality necessary to suspend recognition
of the fantasy/reality delta so that we do not reject the fantasy.  

It seems your 3 models are based on an honest entrepreneur whereas
corporations and many people by their nature behave immorally.  It would be
easy to dismiss these dishonest business models in our discussion except for
one thing - they are the DOMINANT business models of the day.  Every single
one of the examples you gave, the top vendors all engage in these dishonest
practices.  Not only that, but these are their *primary* interaction with
customers.  If you printed the actual photo of that TV dinner on the box, it
would not sell.  Therefore, the bulk of the profits of that product are made
off the fantasy and the actual product is merely a delivery vehicle.  Nobody
buys the picture of the TV dinner without the food.  What is less obvious is
that the quality of the food doesn't matter much.  You don't make less money
cutting the quality until eating the food begins to become indistinguishable
from eating the box.  The margins differ across the industries you cite but
the fantasy accounts for at least significant, and probably the majority, of
profit across the board.  The things you've cited are merely how the fantasy
is fine-tuned, not the primary profit drivers.

One of the reasons' I personally can't get a VC excited about VRM is that I
want to close the delta between fantasy and reality but doing so drastically
cuts margins.  Can you imagine if a Web 2.0 company actually provided the
customer service they tell you they do?  Or if the taco you bought had as
much meat and ingredients as the photo of the taco they show you?  Or if
your cable provider wasn't franchised?  They would all cease to exist as we
know them.  But these are among the benefits we expect out of a better
relationship with vendors.  On our side we want more influence, less cost,
and more function.  We only get that by reducing the fantasy/reality delta.
VCs live in the vendor ecosystem and to the extent VRM deflates the profits
of perceived value it cannibalizes that system.  Crowd funding lives in the
consumer ecosystem and doesn't care if the product disrupts an existing
business.  In fact, they kind of celebrate it.

What we need is a system that generates perceived value of consumers as
perceived by vendors.  That doesn't deflate the perceived value on the
vendor side and it creates massive new wealth of perceived value on the
consumer side.  What's not to like?  As of today, my vendors all think I'm
single, 18-34 years old and living off of a massive trust fund filled with
disposable income.

-- T.Rob




> -----Original Message-----
> From: Johannes Ernst 
> [mailto:
 ]
> Sent: Friday, December 13, 2013 14:59 PM
> To: ProjectVRM list
> Subject: [projectvrm] The free customer and the three base business
> models ...
> 
> Doc's talking about the "free customer" got me thinking.
> 
> There are only three base business models I can think of:
> 
> 1. Compete on the merits, with negligible switching costs for the
> customer 2. Acquire and exploit a critical resource 3. Regulatory
> capture.
> 
> (For detail, I just blogged about it here:
> http://upon2020.com/blog/2013/12/there-are-only-three-base-business-
> models/ )
> 
> It seems to me that only the first of these models is compatible with the
> idea of a "free customer".
> 
> If I am right, this means that all of our business models are severely
> constrained if we pay more than lip service to VRM and related things. I
> don't mean "constrained" in a negative sense, but certain business models
> would have to be rejected out of hand for new companies. And existing
> companies will never "do VRM" unless they buy wholesale into my model #1.
> 
> Thoughts?
> 
> Cheers,
> 
> 
> 
> Johannes.