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

[Johannes Ernst < >]

On Dec 13, 2013, at 15:25, T.Rob 
<
 >
 wrote:

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

My categorization is painted with extremely broad strokes. It's written from 
the CEO perspective trying to answer "what's the heart and soul of my 
business" which goes to the values that the business incorporates in 
everything it does.

The details are obviously more nuanced once you get into particular products 
and how they are sold, and there's an almost infinite variety of those models.

> For example, I can see where Big Pharma fits neatly into #2.

Yes. The idea is for a Big Pharma company is to come up with something that 
sells well, and make sure only you can sell it. A critical resource under 
your exclusive control.

>  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.

These are just the tactics you employ. If there is a patent system, you use 
it. If there isn't, you do exclusionary distribution or hire away all the 
qualified people to compete with you or ... Whatever tools you have at your 
disposal, given that your overall model is #2)

(If your model were #1, you'd do something else, like best customer service, 
or easiest to use, or ... If #3, you get the government to declare you the 
only approved drug because others aren't "safe", or ...)

> But where do rebates fit into the 3 models?  Revenue is generated when
> customers entitled to a rebate fail to get it.

I'm not sure that falls into my categorization at all. From my point of view, 
rebates are just a tactic you employ for price discrimination. (Rich people 
don't bother with rebates. Poor people do. So richer people pay more than 
poorer people.) All three models might employ it tactically. It doesn't go to 
the heart and soul of what your company is all about.

[...]

> 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.

McDonalds, in my categorization, is a #1 company. Once I have gone there, 
there is nothing that makes me go back (no switching costs), and almost 
anybody can compete with them at any time. (no regulatory impact other than 
food safety etc.)

Some companies are more "honest" and "just the facts are they are" than 
others, but I don't feel that's a business model issue at all.

> * 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.

Healthcare, for me, in the US (and many other countries) is a #3 "regulatory 
capture" model. None of those kinds of practices would survive the free 
market for longer than an instant.

> 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.

I agree.

> 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.

I would think that the honest / not-so-honest distinction is perhaps an 
orthogonal classification. It occurs in all three.

>  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.

I have no such experience, as I never buy microwave or any other kinds of 
dinners like that, but I love this quote :-)

> 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.

This is an interesting observation.

You are probably right about the market as a whole: "honesty doesn't sell as 
well". And most VCs these days are not even willing to consider a market that 
doesn't eventually include "everyone".

But what about subset of the market? Like those people who voluntarily give 
20%+ tips in restaurants when they like the service? Those people do exist ...

>  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.
>