What's the best business model ever?
Business is more than a barren wasteland of metrics
Business is often viewed as a dry landscape of numbers and graphs, calculating capitalists and unyielding financial pressures. But wait! Behind balance sheets and P&L statements you will find remarkable and creative products going back through time whose success rode upon the way they were marketed and sold. You too can use these same approaches.
The different ways you can run a business and take a product to market are called Business Models. Derived from the pressures of making more than you spend, like diamonds from coal, they can teach us a thing or two about how our own business might be more profitable.
Let’s take a look at the best business models ever and also look ahead at what new ones may be just around the corner.
Printer Cartridges and Razor Blades
Two things motivated me to dig into business models this week. The first was futzing around with the HP color printer we inherited in our new house. The prior owner used refillable ink cartridges because buying replacement ones from HP are silly expensive. One broke, which then busted the printer head so of course I had to try and fix it, which included buying some new printer cartridges and now I’m getting bored by this story, but the point is the printer & cartridge business model which has been massively successful for HP has its origins 120 years ago with the advent of the disposable razor blade created by a man named King Camp Gillette and this is the longest sentence I've ever written and I promise the rest will be much shorter.
The razor & blade business model is genius - give people a deal on a good-looking razor, throw in a few blades to get them hooked and then charge a premium for replacement blades. Gillette invented disposable razor blades at the beginning of the 20th century. He became a rich by unlocking a clean shave outside the barber shop and the terrifying straight razor. The Gillette company was acquired by consumer giant Proctor and Gamble about 100 years later (2005) and there's $57 billion dollars of genius you can put in the bank.
You can’t patent a business model
While Gillette got multiple patents to protect his high profit-margin re-usable carbon steel blades, tons of other companies then and now adopted his business model.
Here are a few loving it today:
Printers. HP printers are cheap (razor) and they make their money on the ink cartridges (blades). The profit margin of HPs printing business is correspondingly way higher than say their PC business.
Video games. Microsoft Xbox, Sony PS5, Nintendo Switch - the consoles are relatively inexpensive but the games are not.
Coffee machines. Keurig and Nespresso - gotta getta lotta pods.
Electric Toothbrushes. Philips and Oral-B - my new Philips is nice enough to flash an annoying LED when it's time to replace the head.
While these examples are all big companies, a small business can use the same strategy - create a core offering for your customers at a low entry point and provide complementary product(s) for continued productive use.
Nail the basics
Whether you make a thing to sell or resell a thing or provide a service you gotta get more money out than you put in. You can then increase how much you get:
Run a tight ship and reduce your costs; increase your revenue on the same sales.
Build a better mouse trap or reputation or brand so you can charge a premium for your product versus the competition.
Sell just a few units a month but sell them for a lot - high margin/low sales model. For a luxury or specialty items, folks with disposable income will happily pay a premium and even if the market is inherently smaller you establish your niche and your profits.
Sell a ton of units a month but sell them for less - low margin/high sales model. For commodity items, small margins win although you may need to undercut your competitors pricing to sell enough units.
The last two deserve an example as they are the most fundamental of all business models:
Say it costs you $5 to make a thing and you sell if for $10 - that's a 50% markup. Sell 100 things and $500 goes in your pocket.
But if you sell it for $6 or 20% markup you need to sell 5X or 500 units make the same $500.
Both models can be incredibly successful - it just depends on the best match for your business. The classic Mac versus PC battle was high margin/low(er) unit sales versus low margin/high unit sales - both were successes.
Bring on the force multipliers
Business models build on top of these fundamentals and they can multiply your profits. To keep digging for the best business model ever I checked industries with the highest profit margins. Profit margin is how much you make in profit (revenue - costs) divided by revenue. Profit margin is the percentage of what you make that goes into your pocket - the higher the better.
#1 - Financial services. At first that surprised me but think about it and yeah … makes sense. Banks have been around longer than razors. There are lots of ways to make money in financial services but top of the list with over 30% profit margins is Regional Banking. For comparison, the average profit margin of a restaurant is 4%.
This is a diabolically clever business model:
Mr. Monopoly aka Rich Uncle Pennybags promises to keep your money a lot safer than under your mattress and not only that, his bank will pay you (interest) for your deposit.
Now here I come wanting to expand my small business, so I go to Uncle Pennybags bank for a loan and in exchange I pay his bank interest.
Uncle Pennybags funds my loan from your savings account! The difference between the deposit rate and the lending rate is where the magic happens - it's called the spread and it's typically around 2%.
That means for example you’re collecting 1% interest on your savings account while I'm paying 3% for my loan. Scale that out … that 2% spread the bank collects creates their amazing 30% profit margin.
Here's another clue for the best business model ever - what's the most valuable company in the world? Apple you say? Apple invented the App Store! Very clever. A store for Apps - no one had imagined such a thing when Apple launched their App Store in 2008 with 500 apps. Today … 2.24 million apps that earn developers over $150 Billion and Apple - well they take 30% - there's a reason that Apple logo has a big bite taken out of it.
Here are a few more top business models:
Advertising - ok this one shouldn't surprise you - see Google, Facebook, TikTok. If it's a free service on the internet they make money - and lots of it - by showing you ads.
Franchise - surprised me but not super useful here as the Franchisor (think McDonalds corporate) is making the moolah not the individual Franchisee.
Freemium - start using for free and then upsell when a user needs more than the basic version provides. In tech, commonly combined with:
Subscription - older than Razor/Razorblade, not older than Banks. Re-invented and going strong powering 21st century companies like Netflix, Amazon, Microsoft - and basically any app you have on your phone.
Membership - close cousin to Subscription and applicable to many small businesses.
The best is yet to come
So we’ve seen creative business models thrive and adapt across centuries:
Banking- 1st century BC (!) - Ancient Greece through the Roman Empire
Advertising - 15th century - English books
Subscriptions - 17th century - French Encyclopedias
Razorblades - 19th century - 1903 by King Camp Gillette
Platform (App store) - 20th century - Apple1
It’s now the 21st century and we’re due for something new. That’s the second thing that got me thinking about business models (after above said hi-jinks with the HP printer).
OpenAI had its first developer event a few weeks ago and they announced a ton of new stuff, creating quite a frenzy. So much that their CEO Sam Altman announced a pause on signups because they couldn’t keep up with demand. Typically, that’s not good for any business model but in this case, it builds on the hype.
Here’s the most interesting announcement: Introducing GPTs
I’ll save you a click if the acronym GPT doesn’t mean anything to you - basically this allows anyone to create a custom agent that knows everything about a particular set of information and it will learn from and retain the context of your conversations with it🤯 OpenAI has created a new marketplace (the GPT Store) for these new intelligent agents. Will we need apps anymore?
You can go a lot of places with this. 20 years ago, my then CVP at Microsoft coined a term called CEBP or Communications Enabled Business Processes. It was the advent of the first chat bots integrated with business systems. Such a powerful idea and OpenAI GPT’s 10X it. This will for sure create new business models and disrupt old ones.2 Although it’s a skoosh more complicated than his reusable razor I bet if King Camp Gillette were around, he’d be excited about it too!
I know it’s technically the 21st century but I’m trying to make a point here …
It’ll be interesting to see if OpenAI retains its lead in AI - being first in a new industry or business model is no guarantee of future success.