The Half-Life of Business Models

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As our CEO, Natalie Foley, described in a recent video post, a business model captures the exchange of value between your organization and a customer who purchases your product or service to meet their previously unmet need. We believe that there is tremendous value in taking to market a business model that has been de-risked through testing for a customer need, validating potential solutions, and experimenting in-market. In a world where information has an increasingly short shelf life, one thing that even successful businesses with optimized business models need to consider is the idea of business model half-life. Just as a radioactive element has a half-life - a certain amount of time for it to lose half its energy - so too do business models. However, unlike radioactive elements, business model half-lives are shortening due to the increased rates at which information is being captured, analyzed, and applied.

When the pace of change was generally slower, and tools for information collection and analysis were less advanced, it was possible to run a business profitably for decades without considering business model adaptations. Take Walmart, for example, which focused for a long time on optimizing a business model established to create, deliver, and capture value through brick and mortar venues. For decades, Walmart has used its resources to scale this model and use it better than competitors. While this strategy fed growth for more than 40 years, Walmart’s recent flurry of costly acquisitions of e-commerce brands, like Jet.com, and logistics capacity, like Parcel, illustrate its realization that it needs to reinvigorate its business model to catch up to Amazon.com’s digital and logistics supremacy. In contrast to Walmart, whose core business model worked without disruption for decades, consider a company like Netflix.

Netflix was launched in 1998, operating with a business model built to capture the value created by renting DVDs by mail. In less than a decade, the company’s leaders realized the value of content streaming, and shifted operations to exploit the opportunity, which required a new business model. Further bolstering Netflix’s model is its ability to capture and use its users’ preferences and feedback. These types of adept pivots are increasingly necessary as the half-lives of business models and the information they’re based on continue to decrease.

When is the last time you considered your business model’s half-life? If you are currently working on bringing a model into focus or are interested in experimenting with new business models, what challenges are you experiencing? Drop me a line at adethomas@peerinsight.com.