Alex Osterwalder, Author, Entrepreneur, And Co-Creator Of The Business Model Canvas
Alex Osterwalder is primarily known for developing the Business Model Canvas, a template that helps startups develop and document new or existing business models.
In this interview, Osterwalder shares his best insights into the world of business models—ideas that are especially applicable now as entrepreneurs try to launch businesses during Covid-19. He explains why products, technology, and price alone aren’t enough to keep your company competitive. Osterwalder also breaks down the innovative models that Apple, Netflix, and Nintendo have used to become industry leaders (and why even these behemoths aren’t safe from disruption).
We also get a sneak peek into Osterwalder’s latest book called “The Invincible Company.” Not only does it contain an entire library of business models for companies of all sizes, but it also provides guidance on how startups can continuously reinvent themselves to stay ahead of the curve.
If there’s any other content you’d like to see that would be valuable to you during this time, please don’t hesitate to reach out at [email protected]
- How Osterwalder came to study business models in graduate school
- Insight into Osterwalder’s latest book, “The Invincible Company”
- Why companies can’t compete on products, technology, and price alone (and why your business model can provide the ultimate competitive edge)
- The scalability of business models
- Why companies need to transcend industry boundaries
- The reason why Osterwalder urges entrepreneurs to test before they build
- How Apple, Netflix, and Nintendo are prime case studies of innovative business models in action—but why even they’re not safe from disruption
- Osterwalder’s stance on the “magic bullet” when it comes to business models (hint: there isn’t one)
Full Transcript of Podcast with Alex Osterwalder
Nathan: The first question I ask everyone that comes on is how did you get your job?
Alex: I don’t know if I have a job, I have a hobby that I really like doing. I started working on business models when I was still at university, did my doctoral dissertation on that. Then I just went on in this space, wrote a book and just always followed my passion. I was always interested in businesses, how do you create businesses? I wouldn’t even call it a job. It’s just I’m doing what I’m passionate about.
Nathan: Yeah, I love it. How’d you get into business models? What exactly piqued your interest there?
Alex: When I finished my studies in management information systems, I had a professor … who’s now a long term friend and co-author, and he was looking for a doctoral student to work on the topic of business models that was in the year 2000. The idea was that if we can model business models, then we can make a software, like a drawing table, a computer aided design software for business people, like architects have or engineers have, that was the origin, and that’s how the whole thing started.
I started in academia, but was always interested in practise and real companies. Then, I started applying this in the real world pretty much later on.
Nathan: Yeah, I see. A lot of people that are in our audience, they might be just about to start a business, or they’re looking to launch a business, or they’ve been doing it for a few years? That’s the majority of our audience. They’re still fine tuning their model. I’m really excited to talk to you about your new book, The Invincible Company. What is the premise of the book and what compelled you to write it?
Alex: When we start a new book, the first question we always ask is, does the world need another business book? There’s so many out there, and there’s so many business books written. We really push ourselves to see, does it really make sense? There are two topics, I think, for this particular audience, and what we really wanted to bring to the table is better business model thinking.
I think competing on products, technology, and price alone is a battle you can only lose. You might… Yes, you have to come up with great products, yes, you might want to come up with new technologies, but the real competitive advantage is now in a better business model. We created… Part of the book is an entire library of business model patterns that help people compete on better business models, not just product price and technology. That’s a big part of the book, that’s the one that probably is most interesting for this audience.
Then there’s another part of the book, which is more for companies that are established, could be small or large. You can start anywhere around, 10, 30 people. How do you constantly reinvent yourself? How do you stay fresh? Because once you have a business, you’re always at risk of disruption. You can never fall asleep at the wheel, and you really have to reinvent yourself because it’s harder than ever before, to stay ahead, to stay in the game. You need a great business model, but you also need to reinvent your business model all the time.
Depending on your journey, this book offers you different things. The reason we actually wrote this book is because we’ve seen some unsolved jobs in the market that people just really weren’t really good at. Today, I still think most companies, they compete on products and technology, and that’s not good enough because you can’t stay ahead. Then the other aspect is very few companies are good at reinventing themselves.
Nathan: Interesting. I’ve always come from the school of thought that if you’re in a market and you have the best possible product, generally, that takes care of a lot of your traction. What’s your take there?
Alex: I think that’s how you might have been able to compete 10, 20 years ago. I would say today, everybody expects great products. Nobody’s buying crappy products anymore, because you compare them on the internet. You can’t survive with a mediocre product. Everybody’s trying to compete with the very best products.
Now, what really allows you to stay ahead is if you embed that great product in a superior business model… I’ll give you an old example, but an interesting one, the iPod. Everybody saw Steve Jobs coming up with this new technology, and a new device. When he pulled it out of his pocket at the launch, he said, “Well, it’s the first time we can put thousand songs in a pocket.” Everybody saw product innovation and the technology innovation.
What most people don’t know is that was actually a business model innovation, there was a very clear strategy that Steve Jobs had in mind in Apple, which was to get everybody to put thousand songs onto the iPod, into the iTunes software, so it would become very hard to switch. Because once you have your entire music library on a device in the software, guess what it’s hard to switch.
That would lock customers in and they would come back to Apple for the next device they would buy it. That’s a business model strategy. This is called… We call them gravity creators. They lock in customers. That is the superior aspect that they built around a technology innovation, around a great product. It’s not that they didn’t have a great product, but this strategy was not just a product strategy. They had to change a lot in the business model to even make that possible. They had to work with record companies, et cetera.
In particular, first time founders, they don’t see those business small aspects. All they focus on is product. That usually is the recipe nowadays for very short lived success. You might be able to flip your company to a larger competitor that will acquire you, that’s not bad, that’s a strategy, but to outlive others, to out compete the others, for that, you really need a superior business model.
Great product for me is just a ticket to actually join the ride, but actually to stay on the ride and stay ahead of others. You need to weigh more, and I think it’s just not good enough anymore. That used to be okay 10, 20 years ago.
Nathan: Yeah, interesting. When you talk about a superior business model and the companies that you’re referring to, you’re talking about category kings that last for a very, very long time, that is a business of true worth significance, truly sustainable over many decades, just for context.
Alex: Well, if you get there, that’s obviously what we call an invincible company, and not that many companies get there, I think because many of them, A, don’t understand business models and B, they don’t reinvent themselves. There are companies that had a great business model, but they didn’t reinvent themselves. But to illustrate this a bit more take GoPro. GoPro has great products and a great brand, but nothing in the business model protected them from competitors. There’s nothing, there’s no patents, there’s no switching costs, there’s nothing.
Guess what? They got into trouble because they grew very quickly, they became very big, but then it was very hard to stay ahead, because you’re just competing on product, price and brand, and that for me, that’s just not enough anymore. If you know how to do this, it doesn’t mean you need to become super large, but you can be company makes 10, 20, 50, $100 million in revenues and you can still be an invincible company at that size. Not everything needs to be large. I don’t believe in scale at any price, it’s just around superior business models.
Think of the business model of one. If you’re a comedian and let’s say you have a stand up show, maybe even on YouTube or whatever, probably very popular now, they constantly reinvent themselves. They put 20% of their time of the show goes into new material. They might bomb with that material, but that’s okay, because they have 80% proven material. Even in the business model of one, the idea of reinventing yourself is extremely important. If you can build a superior business model around even the product of one, that’s great, you can sustain.
It’s not just about large companies, it’s about companies of all size. It’s the mindset that counts. Reinventing yourself all the time, competing on superior business models. The last one I didn’t mention is transcending industry boundaries. I think companies that see themselves in one industry, “Oh, I’m in gaming, oh, I’m in news. I’m in pharmaceuticals. I’m in banking.” That’s disappearing more and more, because most successful players these days, they transcend industry boundaries.
Just ask yourself Apple, what industry are they in? Entertainment, hardware is how they make money? But it’s really across. Thinking about industries, it doesn’t make sense anymore, it’s about really, what arena are you playing in, and how can you build a great business model in that arena? That goes for business model of one, that goes for small and medium sized company, that goes for a large player, just different scales, but it’s the same thing. It’s the same attitude, the same tools, the same thinking.
Nathan: Interesting. Bringing it back for people that are listening and watching, and perhaps they’re in a stage right now where they’re looking for a market to enter, looking for a product to start with, what should people be doing? Because this thought process is very, kind of long term, right?
Alex: I think the challenge of a lot of entrepreneurs, in particular early stage or young entrepreneurs, young means first time, not necessarily young in age, is they overvalue the idea, the vision, and you just should get started. To use Blank’s words, as he said, get out of the building and start testing.
Ideas are free, ideas are everywhere, opportunities are everywhere. The hard thing is to turn ideas into a value proposition that customers care about, and a business model that can profitably scale. It’s all about shaping your idea quickly. I suggest you use tools for that. It’s great products. Again, not enough. You can fail and go bankrupt with a wonderful product, but you can’t make enough money for it, it cost more than you’re in revenue. Then test it and adapt it all the time.
That attitude is super important. Again, this field has been evolving very quickly. Just by listening to a couple of podcasts, nothing against podcasts. Listening to a couple of podcasts, going to a couple of workshops is just not good enough anymore. This is now a real profession. Steve Blank, and Eric Reese and our team at Strategyzer, we really push the boundaries today to saying, “I’m testing a little bit.” That’s not good enough anymore. You really need to get serious about this. This is like a real job.
The analogy would be, the web in the early stages, everybody could make a web page. Now, you get a laugh if you say, “I’m making webpages.” Really? Now it’s about 20 different jobs at UX design, different types of coders, and all different kinds of things. That’s where we’re moving towards in entrepreneurship and innovation. We’re getting very sophisticated, we can measure the reduction of risk and uncertainty.
Now, that doesn’t mean you need to start simple. You just go out and start testing. But you need to inform yourself, how is testing done today? What are the best practises? How does this work? How do you measure if I’m actually making progress from idea to business? There are a couple of books out there that can help you with that.
Nathan: I see. When it comes to business models, just go out there before you even worry about that and just start testing and try and validate your product first, and then once you’ve got market fit-
Alex: No, no, no. The reason I’m pushing back is this misconception in the Lean Startup movement, where the process is called build, measure, learn. Guess what most people do in particular engineers when they hear, build, measure, learn? When you go and build something, forget the build for a second, it’s about testing your idea. Often… Let’s take it step by step. First thing you want to ask yourself is, when you have an idea, you shape the business model, you need to do this from the beginning to shape it. It could be wrong, doesn’t matter, but just give it a shape. Customer segments you’re targeting-
Nathan: Business model canvas.
Alex: All of that. But very quickly, just spend an hour or two, that’s it. Then you need to ask yourself, this is the fundamental thing you need to do first, what needs to be true for this idea to work? What are the underlying assumptions, the hypothesis?
You first ask yourself, what are the biggest hypothesis? Do customers have this problem? Are customers willing to pay X amount of money? What are the costs? Can I produce at this particular cost? Come up with all of the assumptions, all of them underlying your business idea, your business model. Then you prioritise. That’s extremely important, you prioritise. It’s usually not a product assumption that is number one, it’s often a desirability assumption. Do people have this particular job? It could also be a viability assumption, are they willing to pay for this thing?
You can test that without building anything. Never start with the product. It’s actually very wrong, because if the product is what you have in mind, your customers maybe don’t care. The supply chain maybe doesn’t work. Ask yourself, what are the most fundamental assumptions? Prioritise those, and then you ask yourself, what’s the experiment I need to design? I can do customer discovery interviews. Oh, I could do this thing called card sort where I understand the most important pains of my customers, where I can understand what are they willing to pay for most?
I can do Google ads to test customer interest. Building usually comes a lot later. Really, I’m pushing back on this because it’s one of the biggest mistakes that people think they need to build something to test. No, they don’t. The book we launched before actually, last fall was called Testing Business Ideas. David Bland was the lead author.
The big point we tried to make there is, you don’t need to build something, there’s a whole library of experiments that you can do first, that are a lot cheaper, a lot faster, before you build anything. Then the main thing there is just don’t fall in love with your idea, don’t try to build something which you think is a great idea, test, test, test. It’s almost push yourself to almost prove yourself wrong.
If you can’t find enough evidence that you’re wrong, you’re probably right. That’s the attitude you need to gather as much evidence as you can. Building is not always required. Actually, it comes up often much later. You can start with product brochures, that doesn’t mean building anything, you just make a PDF with the performance of your product. In B2B, you could do that, medical devices you can do that, that’s a much better approach than building anything.
Speed of testing and learning, that’s the essential thing you want to really focus on first. There is a moment where you need to build, but that’s usually not at the beginning.
Nathan: Yeah, interesting. Talk to me around how do you know when you’ve got that traction, or like you said, you’ve proved yourself wrong? What holds your hypothesis true?
Alex: I think when people start with this and probably that’s still a bit of… At the early stages of a profession, people think there’s this lightning moment where the path will open up and you see candles left and right of that path. That never happens. Entrepreneurship is this mix between art and science. The art part is that you try to recognise the patterns, you try to see, you try to get a feel for it, and you test your vision constantly.
The science part is that you test but unfortunately, it’s not just science, just like it’s not just art. It’s not the creative genius, and it’s not just the scientist. You’re always in between. You have to make bold bets based on, or some people call this taking a leap. Based on the evidence and how it shows up. But here’s the thing, you actually need to run probably 20 to 30 experiments to start seeing those patterns. That people think, I’m going to build something, I’m going to test the market, adapt a little bit and then I got it. No way, you need to run 20 to 30 different types of experiments to really understand your customer deeply, to really understand if you’re able to create value for your customers, to really understand the price points. That is the profession of testing today.
When you run 20 to 30 tests, you start to see the patterns. But it doesn’t come from one experiment, it comes from 20 to 30. Then you start to see the patterns, you start to see the conflicting data, the contradicting data, and then you do another experiment to go down one path or another. The biggest thing, obviously, is that it’s not a straightforward path. It’s like you dive deep, you come up for air, you dive deep, you come up for air until you start being able to put the puzzle pieces together.
If you ever did a big puzzle, it seems unsolvable at the beginning, but there’s never this clear thing coming up, there’s always a struggle. But all of a sudden, it’s wow, I’m getting there. I didn’t know how this happened. It’s the same kind of mystery when you put together a huge puzzle. There is no clear path. There is no clear moment where everything falls in place. It’s a constant struggle, but all of a sudden you actually get there.
Nathan: I see. This is like product development 101. But what about sales? Let’s just say you put up a landing page, you’ve got A, idea, you put up a landing page, you run ads to it. You get a really low cost per click from the ad, and then the opt-in is, you’re paying $1 a lead, and it’s just super cheap, and there must be interest. Then you have 10 different landing pages. And you can see which one hits a nerve. Then like-
Alex: I think the problem is, and this is what we’ve seen in practise a lot is people don’t really… Actually, the art part is more there than the science part. When you are in deep natural sciences, which we’re not talking about here, we’re talking about social sciences. You actually know which variable that you’re looking at. Often, people would put up a landing page with 20,000 things on there, and then they go and test with Google ads that have five different things in the ad in terms of value proposition, pricing, et cetera. You don’t actually know what’s working.
Let’s think of the other way around, if you made your assumptions very clear, and you say, “Okay, for this idea to work, I need the customer to have this particular problem.” Then the only question is, what experiment will help me validate if customers have this problem or not? Once you know they have the problem, okay, now I can go to the next thing. Now, I can start to do Google ads, because I know they have the problem, at least those people maybe that I talked to, now you are starting to ask yourself, is this on a larger scale? Is the wording of my Google ad right? But you’ve already proven that they have the problem.
You need to isolate some of the variables, which we call hypothesis, because you can’t test 10,000 things at the same time. That’s why you rarely should start… Yes, I think it’s product management 101, but we see everybody screwing it up. They would come up with this product, they would put the product prototype in front of customers and ask, “Would you buy this?”
Everything is wrong about that. Number one, you just frame the conversation around your idea. Very few customers are going to say, “Look, that thing sucks. I really don’t care.” They’re going to be friendly, and say, “Yeah, you know… ” But they won’t tell you what is the fundamental job they’re really struggling with?
First thing is, you forget your prototype, and you start to understand, with the right testing methodologies, what are they struggling with most? Number one, you find evidence for that. You do one at a time. You can almost call it lazy, but I think it’s not laziness, it’s just people don’t know better yet. They would put this whole product in front of people.
When I say whole product, what’s the problem? There’s 10,000 variables in that product. Their shape, their colour, their features, maybe their pricing? When they say no, you don’t know what they’re saying no to. Maybe they were just pissed off about the colour. Maybe it was the features. Maybe they like the feature there that could have been huge potential.
It’s in the details. I think product management, to a certain extent is still in the early stages when it comes to really doing these things right. The challenge is, first and foremost, very few product managers and entrepreneurs or innovators, I don’t see them first asking what needs to be true for my idea to work. I don’t see them prioritising hypothesis.
Sorry for sounding a little bit like a teacher, but it’s to a certain extent, on the one hand of frustration but on the other hand, I’m asking myself, what do I need to do better to get the product managers and innovators and entrepreneurs to understand this better? We write books, we do online courses, et cetera, because we want to elevate the profession.
I think slowly, slowly, we’re getting there. Things change radically over five, 10 years. Steve Blank has done a lot, we’re trying to do a lot and we only write new books when we think there’s a need for that. That’s why we wrote Testing Business Ideas, that’s why we wrote The Invincible Company. But there is a little bit of frustration there, because it’s a bit… People present things as a science, but they’re not rigorous enough. But then others are too rigorous, and that’s not good either. We were talking business here, not natural sciences. There’s this fine line between being really good at it and being an amateur.
Nathan: No, this was great. It’s cool to hear you just tell it straight, because I think there’s always this aversion to testing, and there’s this fun part of coming up with an idea and the creation side and the speaking to costumer side and the testing. That doesn’t seem as fun as idealising something.
Alex: It’s hard work. Let’s put that first. If you look at early stage venture capital, only one out of 250 ideas is an outlier, is a breakthrough, unicorn if you want. Most ideas fail, six out of 10. Six out of 10, they don’t even return once they get early stage venture capital, they don’t even return capital, which means 60% of the people listening to your podcast now, they’re working on something nobody wants or a business model that doesn’t work. That’s okay, because you actually get better at this over time.
You do it again and again and again. If you are, if you have the stamina, that’s why a lot of people drop out, they do it once, “I’m not made for this.” Well, yes, you’re probably not, because those who really are good at this, they’ve done it several times, and they actually like the suffering to a certain extent. You need to be crazy to be an innovator, entrepreneur, and you need really persistence and grit that very few others have.
The fun part is the easy part, and that’s usually… There’s this term onetrepreneur, people who they stick with the easy parts and say, “If I just had the money, I’d launched it. Money is never the problem. I’m not trying to make fun of people, it’s just that we need to understand this is hard, and it’s hard work. The few who make it big, and we see on the cover of a magazine, you don’t see the backstory, they went through a lot of hell. They went through suffering, and we need to tell that story because it’s hard.
Nathan: I agree.
Alex: But I think once you start to get it, it actually becomes fun, but it never gets easy. It’s always hard work. Just because you did it once, doesn’t mean you’re easily going to be able to do it twice, it remains hard work. The good news is, you do it five times, you’re not going to make the stupid mistakes the fifth time around. That’s why you want to join a startup first when you’re young to watch. Maybe, statistics actually show that most successful entrepreneurs are after 40. I like that, because I’m 46. But it’s true, the reason is that experience does matter. Not an experience in execution, and management but experience in a domain matter, experience in doing this as an entrepreneur, testing, this doesn’t come easy.
It’s really, really hard work. Good news is it’s starting to be a profession, we have the tools, you can learn it. Some are better than others, but even if you’re not great at it, you can actually learn it. But the biggest characteristic, I think of entrepreneurs and innovators, is they’re okay with being humiliated day and night until they get it right.
The biggest thing that an entrepreneur can do is get up again and again, and again, you just get punched in the guts all the time. It’s hard. The ideation part, the idea part that’s easy, raising money even that’s the easy part. Not saying it’s easy, but it’s easier than actually figuring out what do customers care about, and how can I create a business model around that, that scales and is protected?
Nathan: Yeah. Let’s talk about the business model piece, because it can get complicated. You can put a lot of bells and whistles. I’ve actually fallen victim to that where you’ve got so many different ways to service a particular subset of market that you lose focus. What’s your take there?
Alex: It’s great what you’re just saying is that’s a big, big risk. You always want to keep it simple and ask yourself, is that a… Depending if you want to scale or not, is that a business more than I can scale, or am I trying to make something too particular for five different markets? You have to question your business model all the time. The limits of it, the strengths of it, the weaknesses of it, and you fix it all the time. One example I like, really like is Netflix because everybody knows it now, but when they started out, they didn’t immediately work on streaming. We tend to forget that.
But when they started out, they had the vision of streaming in mind. But they started first with DVD delivery by mail, because they knew the infrastructure wasn’t strong enough. They had this vision of where they wanted to go, but the steps they performed to get there were very different from their destination. What’s usually pretty good as if you have a strong vision of where you want to be in five, 10 20 years, and you adapt the steps all the time, but you don’t lose sight of the longer term vision, you just adapt the business model to get there, and you focus on what can really work.
You need to cut out the fat all the time of your idea because it’s easy to actually get stuck with five different things. Usually, when a company has five to 10 different revenue streams, it’s because they haven’t found the one revenue stream that can scale. You can get stuck in doing too many things. I’ve been a victim of… I love creating stuff. Guess what, I create stuff all the time, but then focusing on that scalable part, and leaving everything on the side, that’s a very strong skill that not everybody has, which part of what I’m seeing could really scale? Then leave everything else away. That’s hard, that’s not that easy, and that requires experience as well.
Nathan: That’s interesting that you say around the five to 10 revenue streams. You believe if you’re an early stage startup, let’s just say you’re making sub in the range of 10 to 50 million per year annual revenue. If you’ve got 10 to 15 revenue streams, like one let’s just say advertising, another, magazines, another, digital courses, another, affiliates.
If you had like 10 to 15, you would say that you haven’t found the one scalable model?
Alex: Look, it’s always a choice. If you’re comfortable with that, that’s fine, but the challenge is the more different moving pieces you have in a business model, the more you’re distracted, because then you need people who are good at advertising in your team. You just mentioned magazines, you need another group of people who are good at that.
What we’re trying to do at Strategyzer goes in that direction. We have several different pillars of our business model, but we’re a relatively small team. We’re doing several things. That’s pulling us in different directions. But it’s a deliberate choice, because we believe those pillars; online training, software, coaching, all of those are needed in the longer term. That’s a choice. As long as it’s a deliberate choice, that’s okay. But if you have five different revenue streams, and you don’t think one could really allow you to focus, and those five, 10 things don’t really fit together, then you’re probably not on the right track yet.
But again, it’s a question of choice. If you’re comfortable with having… Some people like that, they like the diversity, and they don’t care about scaling or so, that’s fine, it’s always a choice. But you need to make informed choices when it comes to the design of your business model. I think many people are getting really good at product choices, feature choices, et cetera, but they’re not as good at business model choices, that is still a field where I think a lot of people can improve. But again, as long as it’s an informed choice, there’s no right or wrong business model. There’s no right size. It’s just you need to find something that works for you, as an individual, if you’re a founder, as a company when you’re moving in a direction, as long as it’s a deliberate choice, you’re fine.
I think that’s important and you need to get to that as a founder. Some people, they say, “I want to scale.” But they’re not doing everything necessary to actually get to a scalable business model. Schizophrenic, that’s not very good. Others, they want a tranquil life. They want to relax and so, but they’re working on a crazy scalable business model, where you need to put 16 hours every day, and that doesn’t work either.
Again, there’s not one that’s right, and one that’s wrong, just try to align the business model you’re focusing on and your objectives as an individual founding team or company.
Nathan: No, that makes sense. I guess, the reason I ask that question is just from my own personal experience with our company. From my experience, one way to scale is to bolt on other products. If you have a customer base, a customer base that you were servicing, and if you find other ways to service that customer base, you can rapidly increase revenue.
Alex: Sure. Think of the retail market stores or supermarkets, that was the initial idea that you’re just saying. They just started adding categories, et cetera, or food companies, they start to add categories. That’s okay, but that’s one business model. You’re actually not… More products doesn’t mean you have more than one business model, if you’re just making reselling-
Nathan: Many revenue streams, though?
Alex: No, it’s the same revenue stream, you’re making something and you’re selling it. A different revenue stream for me is when it comes from a different customer segment, and it’s different in nature. One is transactional sales, one is a subscription, one is negotiated based on sides or whatever, those are different revenue streams-
Nathan: Different selling cycle as well.
Alex: If you’re just buying and selling or making and selling, it’s the same revenue stream. The whole idea is a business model is not about the number of products, it’s how you create, deliver and capture value. If you create value the same way, if you deliver value the same way, if you capture value the same way, you have one business model.
Take Amazon with eCommerce and Amazon Web Services, that’s two fundamentally different business models with fundamentally different revenue streams. Now, what’s interesting there is also a fundamental synergy between the two, which is the backbone, the infrastructure, so it can make sense, but it’s a deliberate choice. I tell you, the stock market hated them at the beginning because they said, “You’re crazy, you’re branching out into B2B, it’s not your business, you’re in eCommerce.” They said, “No, no, we’re actually in growth.”
They started to build a hugely profitable business in a completely different industry. Again, industry analysis doesn’t make sense because it’s the same basis with two very different business models, but synergy between the two.” You need to, as a founder understand, are you in the same business model? Are you starting to diversify your business model? Another way to understand it, is do I require different resources and activities?
If you’re building software and selling software, that’s one type of resource and activity. If you’re starting now, online courses, all of a sudden, oops, you just added a completely new activity, which is content creation, and probably you’re creating a new resource, which is online courses. Now, if that’s a deliberate choice, it’s fine, but you need to be aware, and I think for founders that are starting out, at the beginning, having five business models you’re exploring is usually dangerous, because you’re going to die with all five-
Nathan: Because I talk to that focus, right?
Alex: It’s all about focus. That’s back to the basics, all about focus. But think again, as long as it’s a deliberate choice, if you think you can build two business models at once, that’s okay, but that’s tough. You just need to be very aware that’s tougher. Usually, that doesn’t really work, so back to focus, build one then build a second one or think Netflix. Have one five, 10 year vision in mind while you’re building your first one and you’re always testing the second one. That’s a very good strategy as well.
Nathan: Yeah, bullets versus cannonballs, right?
Alex: Cannonballs, that’s very wasteful, let’s put it that way, and you run out of cannonballs very quickly.
Nathan: I love Jim Collins’ work as well. Awesome. Let’s talk about, to you, what is the ultimate business model? Is it two sided marketplace? Is it B2B SaaS?
Alex: Because I’m rubbing my eyes if it does, everybody wants the magic bullet. I’ll say, the magic bullet is there is no ideal and superior business model per se. What you need to build is this ability to design the right business model for the right opportunity at the right time. That is a skill, because if you just copy everybody else in, let’s say the SaaS business model, there is no SaaS business model per se, because they’re all different. Now, do they have similar characteristics? Yeah, they all have similar infrastructure, they all sell subscription. But guess what, somebody started that, and it was a disruption of the licencing model.
You could disrupt this SaaS business model as it is known today and come up with a completely different one. There are actually some people that at SAP, this is not the company’s opinion, but they say, some of the leading thinkers there, they say subscriptions are the wrong thing for software, because it should be pay per use. Just like we have, maybe at Amazon Web Services.
You could today come up with a better business model. I think customers would actually be happy with pay per use, maybe, I don’t know. Maybe it’s for some industries. There is no one single business model. What you need to build is the skill to find the right one. To do that, just like… is if you’re going to ask, what’s the one right software for enterprise resource planning? There is no one right software. There will always be renewal, there will always be change because the problems change, et cetera. We need to develop this ability to come up with new business models. That’s the key skill.
Are there some that perform better? That’s why we came up with business model patterns. You were pointing in the right direction, for sure. Where you said platform model. Absolutely, it’s harder to disrupt platforms models. That’s the business model patterns. Is that the truth? No, because you can see platform models that start to add products back into it, or service business models that go back to sales or sales business models that go to service.
I just want to fight against this idea of a one true business model, but there are some that have better designs in certain instances. Let me give you an example. That was all very abstract., iPod again, let’s go back to the early one. The iPod created switching costs and locked customers in because, they put thousand songs onto the iPod. Well guess what disrupted them, Spotify. Even a great business model at one moment can get disrupted.
Now, then you’re forced to reinvent yourself. Think of it more like patterns in software or patterns in architecture or patterns in design. Some patterns make more sense in one situation or another. But there will always be reinvention, there will always be new ways of doing things in software, in architecture, et cetera. I think that inspiration, rather than searching for the best business model, just figure out based on your experimentation, what could keep me ahead of others, but don’t focus on competition, focus on business model patterns and customer jobs, pains and gains. That was a lot of rambling, but because I feel very strongly about there is no right business model. What I do feel strongly about is their patterns, like the ones you mentioned, that can help differentiate for a certain amount of time.
But if everybody does that, you’re probably going to get disrupted and have to come up with something else, right?
Nathan: Look, the reason I asked that question is because, I guess I can be a little bit selfish and ask from my own experiences, at our company, Founder, we’ve got an incredible community and I think of our community and our brand that we can serve as founders and entrepreneurs in many ways. We could create a two-sided mentorship marketplace. We already have some magazines, we already have online courses. I’d like more recurring revenue because I want some more sustainability and predictability.
It’s like, okay, what can we do there? Then I think, okay, well, then, I want to get into SaaS one day too. It’s just like all these different things. I’m like, it’s fun to play with all these different models, and then that’s where I said from past experience, we just did too many things, and it was crazy, and then I stripped it all back, and then I’m always thinking… I was just curious to get your take, because from my experience, when it comes to the ultimate business model, I personally believe it’s got to be A, some sort of value delivered to a customer where there is strong lock-in and it causes serious pain. If you took that away with some sort of recurring revenue, in any way, shape, or form. I just think that that is from my experience where it’s at.
Alex: I’d put that definitely as one pattern, that makes a lot of sense. But there will always be industries where you can’t do that, or where doesn’t make sense. The way I like to look at it is, think of these different patterns. That’s why we created a pattern library, and then depending on the market situation you’re facing, you come up with a new technology or you’re in this particular space, Founders. Ask yourself, what does the market say, and what are the assets you already have?
Make a business model canvas, assess your strengths and weaknesses and start from there. Then can you design switching costs into that? Yeah, it could be, but maybe you can’t, or maybe you can in the next five years, but you can keep that in mind in 10 years. I like having those options in mind all the time to build a stronger and stronger business model.
Take away the weight of what’s the best business model and just try to improve every day. Every day you try to improve your business model a little bit, knowing what are the risks of some business models? When switching costs are low, the risk is your customers are going to leave, okay? You know that. You work around that and you just keep it in mind.
I like this path of just always, try to get better every day. As long as you do that, as long as you have the philosophy, the philosophy, focus on customers while everybody else is focusing on competitors, it’ll be just fine. Customer focus plus business model focus usually is the best recipe. It doesn’t matter what others are doing, just look at what you have, start from there, assess how you can build on top.
We have this business model library also that we call shift patterns. Take the business model that you have, and improve that one. It can be from niche to mass, it can be from mass to niche, mass market to niche. My favourite one is still and this is to show you that there is no one direction, think of a business model that went from high tech to low tech and disrupted an entire industry with inferior technology, what comes to mind?
Nathan: Got no idea, sorry.
Alex: Maybe you even played with it, Nintendo Wii. Have you ever played with a Nintendo Wii?
Alex: Guess what, when they launched the Nintendo Wii, it was an inferior technological platform. What did they do right? They had a different value proposition and a different business model. They targeted casual gamers with fun products, motion control. Motion control was an off the shelf technology. What does that mean? They could slash their technology costs enormously. They created more value for an underserved market with less costs. Guess what that means? That means an insanely profitable business model while everybody else was competing on subsidising their platforms, they actually disrupted the market by making money from each console they sold.
There is no one direction. Nobody thinks of inferior technology as superior business model. That’s exactly what Nintendo did with the Wii. Nintendo turns out, they have a mixed kind of history of playing high tech and playing low tech. They always navigate between the two. Usually when they go to low tech is when they run out of money to do high tech. But they’ve disrupted markets with inferior technology, but superior value propositions and business models.
That’s why I don’t like dogma, because I think it usually leads you into the direction that everybody is going. I like this whole idea of use the creativity to design better business models at a certain moment in time. Take a business model from one industry, bring it into yours, that’s creativity. Then with testing, you figure out if that could work, because what looks great on paper, oh, great, switching costs, makes sense. But nobody’s coming and they actually rebel against your switching costs. Well, it’s not going to work, so you have to adapt it. I really believe in this idea of art and science and not this dogma of going into one direction only.
Nathan: You make a really good point on switching costs. I was talking to one of my friends and he’s really strong on the B2B sales standpoint, but he’s product could sell well on the B2C space, but it’s not his strength, so he just continues to double down because-
Alex: That’s great.
Nathan: To understand going business to consumer is totally different, and it’s very, very difficult-
Alex: That’s exactly the point of focus. Could you diversify and go to another market? For sure. But again, B2C requires different marketing skills, et cetera. You’re actually diversifying the business model, not just the customer segments. That’s what usually you painfully learn, you’d never do it a second time. But then at one point, it might be a very smart choice to say, “I’m going from B2C, take Amazon, into B2B with Amazon Web Services. Again, that’s a large player, but the same thing can happen at a very small scale.
But as long as it’s informed choices, deliberate, informed choices, you know what you’re getting into, you can manage it. I think many people get into these things without knowing what they’re getting into, “New market, new revenues, B2C. Great.” Well, think it through to somebody who’s done it. The best thing is always to talk to five to 10 people who’ve already done it, who’ve made all the mistakes, then you make your informed decision, I’m going to go into this knowing what everybody else screwed up. But then you at least know that it’s going to be hard.
I think again, it’s informed choices, and then the testing will tell you if it’s possible or not. Again, that’s the art part of having that vision in what direction you go, and then the science part is doing it with manageable risk.
Nathan: I love that. Speaking to people is golden. Also, listening to podcasts where the founders talk about how they’ve grown. If you’re looking to enter into a space or something like that, a lot of the time founders will tell you that.
Alex: That’s great. I like the analogy with medicine. Imagine if you’re a heart surgeon, just listen to podcasts of other heart surgeons, you’d freak out, right? Now, do surgeons actually have communities where they share their practises? For sure. But what we’re missing I think in particular startup and entrepreneurial space is what surgeons go through until they become a surgeon, and that is hardcore schooling where they go and they really learn the profession, they snippet around on dead bodies before they become surgeons.
That’s usually, in any kind of applied profession, that’s what you have. You have it in finance and accounting, et cetera, that’s the part I think we’re still missing a little bit. It’s a too much… I’m not saying it’s a bad thing, I think you need that as well, it’s too much based on anecdotes. These accelerators, they bring in a lot of other founders who tell the stories, stories are not enough. Again, imagine you’re a heart surgeon coming in with hearing a lot of stories, you’d freak out. We need both. We need the community practise, we need to share what others have done, but you really need to learn the tools and the anatomy and the physiology, that will make a huge difference.
That’s what we’re trying to do. We’re more on the plumbing side of strategy and innovation, we try to provide the tools that give you the anatomy and physiology of the business. That’s very important. Then podcasts and communities of practise. Like yourself, you have one, EO, enterprise organisation with 14,000 founders around the world, that is absolutely essential. But that does not replace the tools and processes and the rigour that should come with it as well. We have it in management, but we don’t necessarily have the same rigour in entrepreneurship. It’s coming. It’s changing. It’s changing actually very fast.
Nathan: I agree. Look, we have to work towards wrapping up. Look, this has been a great conversation. I really, really enjoy the idea of building a sustainable business model for the long term or building a company that lasts the test of time. How can you build a company that can survive and thrive without you? I’m always thinking. I really like the idea of drawing inspiration from other companies, their business model in different industries to you. Look, where can people find out more about your latest book and your work?
Alex: Just go to strategyzer.com and look at The Invincible Company. The reason why I’m pointing you to the website, is you can get 100 pages for free. We’ve always had this freemium model, where you can get a quarter of the book for free, you can get the tools, or you can just Google, The Invincible Company and you’ll get that. I believe, as you said, there’s no one thing that’s right. Even for the sustainable business models, if you’re a founder who likes building and flipping, building and selling, that’s okay as well, but it’s a choice.
You need to know if you’re a founder who wants to build for the long term, you want to create, almost like a legacy something that sustains, or you want to build to sell it, maybe for the money, but maybe just for the fun of starting something and then getting rid of it as fast as you can. I know founders who do that. For me, the big thing is always, there is no one way to do things. You need to figure out the right way that works for you as an entrepreneur, as a business person.
That’s why listening to podcasts like yours, reading books is a great way to actually figure those things out. But there’s no one truth. Everybody needs to find their own path. I think that’s really, really important. Sounds kind of trivial and cheesy, but I don’t think enough people spend time on asking themselves, what do you really want? What do you really want? Then design your life around that.
By the way, a friend of mine, Ayse Birsel wrote a book called Design the Life You Love. I think that should be a prerequisite for founders before they start.
Nathan: Yeah, I agree. Love it. Well, look, I’ll let you go, Alex. Thank you so much for your time. This is a fantastic conversation and interview. We can wrap there.
Alex: Thanks for having me. Good luck with that future work and good luck to all the entrepreneurs out there.
Nathan: Thank you so much.
Nathan: Hey guys, I hope you enjoyed this interview. As you might already know, our mission at Foundr is to help tens of millions of people every single week with our content either start or grow their business, which is exactly why we’re partnering with world class founders such as Daymond John Alexa von Tobel, Gretta van Riel, and so many more to teach crucial skills such as negotiation, finance, eCommerce, and so much more.
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Key Resources From Our Interview With Alex Osterwalder
- Visit Osterwalder’s website to access 100 pages of “The Invincible Company” for free