TRANSITIONAL
BUSINESS
MODELS
THE BUSINESS
MODEL ANALYST
1
SUPER GUIDE:
TRANSITIONAL
BUSINESS
MODELS
BY DANIEL PEREIRA
2
© THE BUSINESS MODEL ANALYST
The Business Model Analyst is a website dedicated to
analyzing business model types, patterns, and innovation
using the business model canvas as its primary tool. The site
o ers a wide variety of free and premium content, including
digital products such as PDF tools, presentations,
spreadsheets, ebooks & guides, and much more. Check it out
here.
Daniel Pereira
The Business Model Analyst
Ottawa, ON, Canada
businessmodelanalyst.com
3
ff
TABLE OF CONTENTS
Introduction 1
What is a Transitional Business Model? 2
Characteristics of transitional business models 3
Company Cases 5
Tesla 5
Net ix 9
Facebook 12
Uber 15
Amazon 17
Industry Case: Software 21
How to implement 24
Conclusion 28
References 29
About the Author 30
4
fl
INTRODUCTION
Transitional business models are simply put business models
that have temporary formats. They start one way but their
companies’ management knows it will end up another way.
They can be phased in order to make the start process easier
and create a more solid foundation for their main goal.
Many of the leading brands nowadays, such as Net ix, Apple,
or Tesla, have passed through transitional strategies in order
to adapt to their audience demands, before it is too late for
changes.
This dynamic will persist for long yet, following technology
improvements and business innovation, since transitional
models provide pro table opportunities, in accordance with
behavior, regulations, and technology evolutions.
But, don’t get mistaken: implementing transitional business
models doesn’t involve predicting the future, but simply being
exible and open to welcome the changes the market
unfolds. Let’s check it out.
.
1
fl
fi
fl
WHAT IS A TRANSITIONAL BUSINESS
MODEL?
A transitional business model is a kind of phase the
companies implement in order to enter a new market or niche
(usually not big or scalable at rst), to test traction, and to
check if the idea is sustainable - and pro table.
This way, the business can secure capital while checking the
venture, for market validation. According to the rst results,
the company can consolidate, iterate or abandon the idea,
avoiding great losses. That’s why the transitional business
model is usually short-term, looking for maturation.
2
fi
fi
fi
CHARACTERISTICS OF TRANSITIONAL
BUSINESS MODELS
1. Transitional business models are designed according to
the customer
Since transitional business models are kind of a response to
market demands, they are built in accordance with what is
best for the audience.
So, these businesses are easier to be employed and adapted
by new entrants. For traditional players, on the other hand,
that might be a challenge, as they need to change
perspective and some already established status quo.
2. Transitional business models contest (and violate)
regulations
Usually, in order to achieve the level of change and
innovation the new business model demands, it will violate
some current constraints, facing local regulators all over the
world.
That’s what happened to Uber, for example. The new
company could not t into any transportation system and
process around the globe. In order to transform personal
transportation, the company challenged laws and courts - but
that was the only way it could get established, due to its
innovative characteristic.
3
fi
3. Transitional business models reinforce brand before the
market
Sometimes the brand’s name is so strong that it can create a
demand for a product or service before the market or
audience asks for that.
A good example of that is Amazon's drones. Amazon is still
experimenting with drone delivery services, but we already
associate the service to the brand - even before drone
applicability proliferates.
4. Transitional business models are easily adaptable
Nevertheless, the most important feature of a transitional
business model is the fact that it exists to adapt to customer
demands. It is a strategy to predict what the market wishes,
before it actually knows the wish.
As said above, of course, no one can guess the future,
indeed. But some general idea - not details - can be
anticipated, by observing behavior changes and technology
innovations.
It is even fair to say that all businesses are transitional,
somewhen, somehow. Any company must concentrate on
optimizing the production, predicting desires, avoiding risks,
discovering potentials and advantages. And that can only be
done by experimentation.
4
COMPANY CASES
TESLA
Tesla, Inc. was founded in 2003, originally as Tesla Motors -
since the company initially produced only automobiles.
Fourteen years later, the name would change to incorporate
supply lifestyle products.
Tesla's rst car was launched in 2008 - the Tesla Roadster. It
was a high-performance electric sports car, targeting a public
with high purchasing power. Thus, instead of launching a
cheaper rst car, to gain in quantity, the Roadster was,
indeed, a luxury article.
Musk, the company's CEO, explained that with all the
technology they intended to put in the car, it would be
5
fi
fi
impossible for it to reach the market at a low price. For this
very reason, they chose to launch a more compelling product.
However, in the following years, with the revenue from the
sales of the high-priced cars, Tesla invested heavily in
marketing, research, and development, prioritizing studies in
safe, autopilot, green energy, and charging cars.
This way, the company would be able to produce and
commercialize a more a ordable electric car, achieving
economies of scale, in order to reach the middle class.
6
ff
Nowadays, Tesla has three main revenue streams:
1. Automotive: there are three main products. Model 3, for
mass adoption, a mid-sized sedan with an accessible
price for mass-market. Model Y, a compact sport utility
vehicle (“SUV”) for up to seven adults. And Model S/Model
X, full-sized sedans with more advanced features.
2. Automotive leasing: Tesla o ers nancial services, such
as loans and nancing. For some of the funding programs,
they o er a resale value guarantee clamp. This protects
against possible losses when a customer wants to resell
the vehicle.
3. Energy generation and storage: part of Tesla's mission is
“to accelerate the advent of sustainable transport”. To that
end, the company sells transmission systems and
components to other manufacturers. It also introduced a
line of household batteries, which serve as energy
storage systems. To increase participation in the
residential segment Tesla merged with SolarCity (a
photovoltaic panel company that also has Elon Musk as a
partner).
7
ff
fi
ff
fi
Currently, in order to meet its marketing strategy, Tesla uses
direct sales - unlike other car manufacturers that sell through
a franchise model. The brand has created an international
network of stores to display its cars (mainly in prominent
urban centers worldwide) and it also sells directly via e-
commerce.
The objective is to gain an advantage in the speed of product
development, create a better customer shopping experience
and increase its margins. The results have put Tesla among
the most valuable car manufacturers in the world.
You can read more about it in Tesla Master Plan and Master
Plan Part Deux written by Elon Musk.
8
NETFLIX
Net ix is nowadays the largest streaming provider of
entertainment content on the planet. Subscribers to the
platform have a huge catalog of lms, series, documentaries,
and television shows at their disposal, to be watched anytime
and through any device connected to the internet.
But Net ix did not start directly with this business model. On
the contrary, its rst business model, back in 1998, was based
on a DVD rental system by mail to the entire United States.
Its initial business was based on sending physical copies of
lms, shows, video games, and other media through the
American standard mailing system, in a pay-for-use model.
And, the next year, it changed to a subscription model.
9
fi
fl
fl
fi
fi
Over the following decade, Net ix watched the DVD rental
market begin to decline and had to adapt its business model.
Then, it stopped sending physical copies and made a catalog
of titles available online, to be consumed by the public, at any
time, in their home.
Currently, Net ix’s business model is scalable and
subscription-based. It is a streaming platform, which o ers
10
fl
fl
ff
on-demand video. The brand makes money with three plans,
in xed fees, which vary by country.
By transforming its business model, Net ix has also
transformed the way people consume video entertainment.
Today the streaming service is a strong reality that has even
attracted several competitors, with names such as Amazon
Prime.
To keep its competitive advantage over its competitors,
Net ix started to create its own lm productions, called
Net ix Originals.
Nevertheless, Net ix remains the absolute leader in the
segment, with over 180 million subscribers worldwide.
11
fi
fl
fl
fl
fi
fl
FACEBOOK
With over 15 years in the market, Facebook now has more
than 2bi users all over the world. It keeps also growing due to
the acquisitions the company has been taking, of brands –
and competitors – as Instagram and WhatsApp.
But when Mark Zuckerberg, the founder, created Facebook,
he couldn’t imagine the potential of the company he had in its
hands (it wasn’t even a company, back in the early days).
Zuckerberg was a psychology student, at Harvard University,
and also a programmer.
Before Facebook, he had developed some social-networking
websites for fellow students, such as Facemash, where
students could rate the others’ attractiveness. “The
Facebook” - that was the rst name of this social network -
was launched in 2004.
In just the rst 24 hours, more than 1,200 students from
Harvard would sign up. And, in the rst month, half of the
Harvard population was part of the network. After that, the
12
fi
fi
fi
fad started to spread: rst over other Boston universities, then
the Ivy League, and so all American universities.
One year later, in 2005, the social network would be named
only “Facebook”, and began to gather pro les from
universities outside the USA. In 2006, anyone with an e-mail
could be part of the network. The rest is history.
According to Zuckerberg, as he was developing Facebook,
he wouldn’t have the ambition to build a worldwide
13
fi
fi
enterprise. Unlike that, he would only realize that one “could
nd almost anything on the internet—music, books,
information—except the thing that matters most: people”.
Nowadays, the greatest revenue stream of Facebook is the
targeted advertisement, due to the bene t that the platform
o ers, of allowing advertisers to reach their target audience,
through information the network collects from its users.
To keep growing its ads revenue Facebook started to expand
its reach by acquiring new social networks.
14
fi
ff
fi
UBER
Uber is a technological platform that has revolutionized urban
transportation. The app connects drivers to users who need a
ride, using a smartphone as a tool.
Currently, with kind of a decade of existence, Uber operates
in more than 900 cities worldwide and has a valuation of
more than $ 70 billion.
15
According to Dara Khosrowshahi, CEO of Uber, “Uber
accounts for less than 1% of all miles driven globally.”
However, the company’s vision is much wider than simply
attracting new users. Uber’s ultimate vision is to become a
top urban mobility platform, changing from just a car-sharing
system to a greater company, able to make the user get from
A to B in the most a ordable, dependable, and convenient
way.
That’s precisely why Uber started with cars and is already
operating with bikes, boats, and even helicopters. The end
goal is to allow people to live without a personal car, thus
reducing congestion and the need for parking spaces, and so
providing a higher quality urban life.
16
ff
AMAZON
Back in 1994, Je Bezos chose the name Amazon for an
online company he was going to build. Then, he made
research that showed the best product to start this venture
was book sales. So, Amazon began as an online bookstore,
selling items from its own inventory only.
But books were simply a logical choice because they were a
kind of safe bet for a still-emerging market: the internet. For
Bezos, since the beginning, Amazon has been a technology
company, aiming to simplify online transactions - not a simple
bookseller on the web.
Despite all the criticism and skepticism, the company faced at
rst, after the rst year of operation, one million customers
had already signed in to the Amazon site.
Bezos’ strategy proved to work out, and the e-commerce
platform soon began to sell much more than only books,
starting with music and video in 1998, followed by electronics,
software, games, toys, and household items the next year.
17
fi
fi
ff
Not long after that, Amazon became a marketplace, opening
its platform to external vendors. This move boosted the
amount of available products and its image as the “everything
store”.
Also, to con rm that Amazon was, indeed, a technology
company, in 2002, it launched AWS (Amazon Web Services),
by o ering data about internet tra c and other statistics.
18
ff
fi
ffi
Currently, the platform provides its Elastic Compute Cloud
and data storage over the internet.
In short, Amazon went from a bookstore to an “everything
store” and then to an e-commerce giant. For the buyer, it is
comfortable to know that Amazon will always bring a
reasonable and competitive price in all elds and products.
And for sellers, it’s convenient to be sure they can easily
display their products on the website and make sales overall
continents on Earth.
Nowadays, there are some di erent operations this big
corporate umbrella:
• Amazon Marketplace: the company's rst revenue stream,
• Amazon.com: accounts for more than 50% of the income.
Basically, Amazon asks for a fee from its sellers to promote
and advertise their products.
• Amazon Prime: it is Amazon's subscription business
model and has been vital to the brand's growth. In
exchange for a monthly fee, subscribers have access to
the platform's video and music streaming catalog, free
19
ff
fi
fi
two-day shipping, unlimited photo storage, etc. Prime
currently has more than 150 million members.
• Amazon Web Services: its low-cost complete IT structure
platform, whose services are contracted by companies,
organizations, and institutions around the world.
• Amazon Kindle: it is Amazon's e-reading service. Users
can buy, browse and download books, magazines, and
newspapers, available at Kindle Store. Amazon doesn’t
make much money from Kindle itself, but by attracting
tra c to the Prime membership plan. Besides, the platform
allows independent authors to publish their info-products
and e-books, charging something between 30-70% of
royalty fees from the sales.
• Amazon Patents: the company has more than 1,000
patents, several of which are licensed by other companies.
• Amazon Advertising: Amazon Ad platform o ers
sponsored ads and video. It is a very e cient marketing
channel, since the audience that accesses the platform is
already there with the intention of buying.
20
ffi
ffi
ff
INDUSTRY CASE: SOFTWARE
When we thought of software industries, a few years ago, we
thought about companies that used to sell their solutions as
individual products: you would buy a CD or download the
program online in exchange for one only payment. When the
time comes to update or upgrade the software, you would
need to buy a whole new version of it.
However, over the last decade, the software-as-a-service
industry has grown exponentially, especially linked to the
power of cloud computing. Today, the SaaS business model
takes up a fair share of B2B tech o erings.
SaaS is when software is made available to customers on a
subscription basis. Thus, the software is cloud-based,
centrally hosted and maintained, and only licensed to
customers, for as long as they maintain their subscription.
21
ff
In this way, all responsibility for the software rests with the
company - server, security, maintenance, database, etc. - and
the user does not need to worry about installations and
updates, for example. In general, it can access the system via
a web browser, mobile app, or downloadable desktop
software.
On the other side, the company maintains recurring revenue,
as long as its customers keep using the software. And they
can o er the same large-scale service on the market.
It is fair to say that most SaaS companies have been SaaS-
native. But there are thousands of brands that have started
out as traditional vendors and had to change to SaaS, in
order to satisfy the current software buyers.
To minimize the impacts, software companies in transition
must establish a strategy for the shift and organize the whole
business model transformation (not simply a revenue model
change). Unlike what some people may imagine, this
transition will usually take long, as to consider customer
needs and market situations.
22
ff
Some companies are opting to no longer sell perpetual
licenses. But there are others that o er SaaS and perpetual
licenses at the same time. This usually happens when the
brand already has an engaged audience satis ed with the
regular transactions.
For the companies that choose to make the full transition, it is
crucial to analyze the whole business model alteration, from
sales and marketing to operational requirements and
nances.
However, the advantages of SaaS companies are basically
two:
1) if your product is essential to your client's business or
lifestyle, they will more likely remain loyal. And it is precisely
this loyalty that makes SaaS a pro table business model, and
2) as they remain loyal, they provide recurring payment. In
practice, your customers are just “renting” your software. So,
if they want to continue using, they will have to keep paying.
The company has a recurring revenue that, once it exceeds
the amount invested, turns into pro t.
On the other hand, the greatest challenge for SaaS
businesses is that to put your product on the market, you
need a heavy initial investment (research, development,
programming, design, security, storage, resources, etc.). And
you will have this investment returned in small installments
and divided among several customers. It is di erent from
when selling "whole" software, in one go.
The truth is, what was once a trend is now the reality. The
market will end up asking for this transition, from the whole
software industry, sooner or later. It is time to de ne strategy
and compete in this SaaS-driven environment.
23
fi
fi
fi
ff
ff
fi
fi
HOW TO IMPLEMENT
As mentioned above, virtually every business will face a
business model transition at some point. The shift can be
challenging, but there are some guidelines you may follow in
order to optimize the process:
Start with a smaller customer segment
Most of the case studies in this guide have started targetting
smaller segments and eventually grew its target audience to
bigger markets.
You may call this the minimum viable segment. It will de ntely
makes things less complicated at the beggining. It’s easier to
understand your customers, its easier to adjust your product/
service, it allows you prepare the base to scale later on.
Facebook started targeting harvard student universities, Tesla
started targeting the ultra-rich, Amazon focused on selling
books, etc.
Mix and balance old and new teams
When you go into the transition, it is essential for your
company to merge the team you already have, with all their
know-how and experience, with some new members, who
will bring the knowledge over the innovative processes and
technology.
Usually, it is not a good idea to change the whole team, just
hiring new sta to substitute the people that had worked with
you along the way. But it is important to bring some fresh
ideas, especially from experts in the area you are aiming to
incorporate into the business.
24
ff
fi
So, take good care to balance both teams and their roles in
the operations. The strongest your team is, the bigger the
chances of success.
Allow re-invention
Still regarding teams, sometimes, when you make the shift,
you nd out that new positions and new functions might be
created inside the company. You don’t always have to bring
these talents from outside.
Many times, people that have been with you for a long may
be able to develop the abilities and skills you need for the
transition. It is imperative, in this case, that you encourage
and validate these fellows’ re-invention.
They can acquire knowledge and educate themselves about
the new challenge. They are more likely to get motivated and
feel embraced by the company, adding value to the venture.
On the other hand, sometimes, there are some employees
that will see the new ideas, processes, and even products as
threats. In some cases, they may sabotage the transitions or
become a toxic in uence for their peers. If these people
demonstrate they won’t be able (or even willing) to adapt,
unfortunately, you have no other choice but to take them out
of the way.
Communicate the team
First of all, change is scary. People get more comfortable
when they know that their feelings are shared and that they
are aware of fears and risks. That’s why it is important, to be
honest about the whole situation and keep the employees
informed about everything from the beginning.
25
fi
fl
In order to do that, it is necessary that you answer all the
basic questions your team will come up with. Anticipate
yourself, by responding:
• Why is this transition important?
Why doesn’t the old model work anymore?
• What has changed in the world and in the market that
requires this kind of transformation?
• What are the implications and consequences for
customers, employees, suppliers, and any other people
involved in the operation?
• Why and how will this shift make our company stronger
and more competitive?
And don’t forget: you, as a leader, will have to persevere, by
repeating the whys, hows, and whats, as many times as
needed, in order to ensure a sound and successful transition.
Never forget the customer
It is pretty common that, since you are focusing on
implementing the new business model inside the company,
you “forget” to show the changes to your customers, and
bring them closer to the shift.
But that can be dangerous to your business, as the
customers may not understand what is going on. Sometimes,
they think that you simply changed the product and, so, the
value proposition you used to o er is now di erent. In other
cases, the audience feels you lost touch with them.
Anyhow, as your business will always depend on your
customer’s approval, it is essential you bring them together
with you, communicating, explaining, making them
understand and feel welcome, being part of the whole
transition process.
26
ff
ff
Work on communicating the bene ts they can expect from
that. This clear communication can even become an
opportunity to improve your reputation among your audience.
Take your time
The business model transition does not have to be taken in a
hurry. You don’t have to rush to exchange the products and
services, hold the production, substitute suppliers and hire as
many talents as possible. That is not going to work out.
The transition may be a huge process and that requires time
and planning. So, bring your sta on board and, with their
help and experience, plan carefully all the steps the transition
will have to take. Tray to predict the threats. Calculate the
investments. Evaluate suppliers.
Ultimately try to “put on paper” everything you and your team
can anticipate before you start to practice what you have
de ned together.
Moreover, business model transitions can be di cult if your
company relies on a revenue stream that is going to phase
out. Even if the revenue stream that will replace it is more
pro table or successful, because, until it gains traction, it can
be tricky for cash ow in the short term.
A gradual change, on the other hand, can give the business
the time it needs to learn new processes, face challenges,
and correct mistakes.
27
fi
fi
fl
ff
fi
ffi
CONCLUSION
Every business will eventually transition its business model
through time. But the very successful businesses know how
their business models will start and what they wish to
become over time, planning even the in-between phases of
it. This is a fundamental piece of the strategy map of worlds
segment leaders.
28
REFERENCES
The following references were consulted to create this Super
Guide:
• https://hbr.org/2016/03/does-your-business-model-look-to-
the-future-or-just-defend-the-present
• https://fourweekmba.com/transitional-business-models/
• https://smallbusiness.chron.com/implement-business-
model-transition-79925.html
• https://www.chargify.com/blog/6-companies-that-
succeeded-by-changing-their-business-model/
• https://www2.deloitte.com/us/en/insights/topics/strategy/
as-a-service-business-model- exible-consumption.html
29
fl
ABOUT THE AUTHOR
Daniel Pereira is a Brazilian-Canadian entrepreneur that has
been designing and analyzing business models for over 15
years. You can read more about his journey as a Business
Model Analyst here.
E-mail Daniel if you have any questions at:
[email protected]You can connect with Daniel at Linkedin:
https://www.linkedin.com/in/dpereirabr/
30
THE BUSINESS
MODEL ANALYST
31
