Business model iterations. Crucial points for gradual business model design

Ambition is what drives many of the entrepreneurs and researchers I work with in creating new business models. And ambition creates the right kind of energy to start shifting boundaries in the thinking of possibilities. Yet ambition is also what can create problems with business model innovation, particularly in overestimating idea potential overlooking the need for critical testing, over-hypothesizing business model mechanics, and last but not least underestimating the long run and grit that is needed to pitch up a business model in the wild. I recently did some research on an interesting case that shows just how complex it is to achieve a promising business model, and how modesty in approach, and incremental improvement paved the way to a highly robust business model for a platform in the medical sector.

I had to advise a consortium of organizations on the joint development of an app for (pre) diabetic people. The first thing I do in these kind of cases is to look for a compelling precursor, and that was an app named Glooko. Digging into the history of how this app developed, I found 4 very powerful lessons to learn for entrepreneurs facing the business model challenge. These lessons regard points I usually see going wrong because people take to their business model designs overzealously.

The Glooko iPhone app

1. The parsimony of the initial value proposition
All diabetics are requested to keep a logbook of their blood sugar levels, caloric intake, and exercise. Glooko started off with just that, the simple hypothesis that its users would find more value in keeping their logs on a smartphone (launching initially on the iPhone) instead of on paper. They started with something simple, which could be validated and expanded on, rather than starting with a feature-laden product for a too wide a range of customers that would swamp learning and iterative development.

At the time there were a couple of competing logbook apps on the app store, but they all required manual input. So, the innovation with which Glooko launched in 2010 was a glucose meter synchronisation cable that could read data from blood glucose meters, making registry more easy and accurate. The app was free, like the other apps, but the cable cost 40 dollars. Glooko thus bypassed the most common innovation myth that you need to create something completely new and unexpected to build an invincible product. Rather they built something users were already familiar with, and solved a major problem at launch that they could immediately start generating revenue with.

2. Gradual refinement and expansion of features
Based on the initial value proposition, Glooko started building additional functionalities. The first was becoming more sharp about its metrics and analytics by making the glucose synchronization cable connectable to a wider range of commonly used glucose meters. This turned the app into a prime data aggregator through synchronization over various metering devices. Also they linked to actual supermarket and restaurant food product databases, to feed into the app’s caloric consumption input registry. This way the app could provide more accurate data input and readings overall.

When Glooko achieved FDA approval on the cable in 2012, they were allowed to provide data analytics and graphing, so that patients now could better monitor and plan their regimes, and share their data with their clinician. Launching the app on the Android platform at that time also expanded the reach. And currently they are taking things even further into predictive analytics. The beauty is that everything expands based on gradual learning, rather than cluttering the learning process with too many learning objectives at once.

3. Taking time to create a platform community
Before FDA approval, users could share only their data with clinicians via email or PDF’s. Even though this wasn’t ideal, it was the first step towards creating a platform. After FDA approval, Glooko enabled clinicians to access their patient’s data through a web app that used analytics. Patients and doctors could now have a better conversation on the patient’s health status and progress.

But this was apparently only the beginning of the social mechanics that this app could achieve. Currently, Glooko is exploring the possibilities for predictive analytics in partnership with a renowned diabetics research organisation, to help insurance agencies and hospitals estimate the local prevalence of diabetics. This helps these customers to better optimise their service and staffing capacities, based on the needs locally, and could be the big revenue stream that will turn Glooko into a profit making machine. This development of social functionality is very much in line with the excellent advice that was recently posted by Andrew Chen on building platforms. The irony is that you don’t build a platform by starting with building a platform!

4. The lean approach to customer acquisition
Currently Glooko has 20 people on board, with only a couple in the sales force. I think there are two factors that can keep their sales force this lean. For one I found Glooko myself by using Google, prompted by a notion that “there must be an app for that”. That’s all it took. Secondly, I suspect that they can ride a wave of clinician referrals to real in new hospital accounts and insurers. What also helps here is the recent partnership with the diabetics research organization to bolster credibility on the analytics of the value proposition. However this may turn out in the future, it is an incredible feat that they have come so far with minimal acquisition activities. It will be interesting to see how far they can take it.

The Glooko case is a very rich learning case on business model innovation. I will use it often when trying to explain about the business model innovation process, and syncing everybody’s expectations on what will be required to search for and develop a new business model. If you’re interested to use this case yourself, I’ve included it in a presentation below, visualising the business model iterations. I’m keen to have any further thoughts and reflections!


The Starbucks bottled Frappuccino business model

In the early 1990’s, as Starbucks started taking off as a company, Howard Schulz (CEO) was looking out for new opportunities to leverage the brand. One of the options which the company pursued was to enter the (supermarket) retail segment. The idea was to bring cold dairy-based ready to drink coffee to the shelves. The potential for bringing the Starbucks experience to the retail shelves was great, yet this terrain without espresso machines and baristas was also unfamiliar to the company. Starbucks needed to develop an entirely new business model for entry, and forge a key partnership to do so. In this post I will sketch out this business model, and its partnership using my recently published Partnership Proposition Canvas (v0.4).

The business model
After a period of trial and error with cold coffee drinks in the then dawning market for such products, Starbucks made a fit with a bottled version of their infamous Frappuccino. This product proved to be a hit in the Starbucks outlets in the summertime. From 1995 onwards Frappuccino would immediately be available in every home and office with a fridge.

Starbucks Frappuccino business model

The Frappuccino business model

Although it would seem straightforward for Starbucks to manifest itself in this market with its own production line and channels to customers, it realized it didn’t have what it took to pull it off. Starbucks had no capabilities to develop and mass-produce bottled or canned dairy-based coffee drinks, nor to distribute them through the supermarket retail channel. The company knew it needed a partner.

The PepsiCo partnership
In order to launch its Frappuccino product, Starbucks sealed a partnership with PepsiCo (then known as Pepsi Cola) a year earlier in 1994. This partnership was of tremendous value for Starbucks’ new venture. PepsiCo had solid experience in product development, and an extensive sales and distribution network in the retail segment. Also, PepsiCo had access to a dairy bottling plant network through its partnership with Dairy Farmers of America (DFA).

In return, Starbucks could offer PepsiCo a first foothold in the growing non-carbonated soft drinks market, with its brand, and experience in processing quality coffee. Using the Partnership Proposition Canvas (v0.4) the construction of the partnership between Starbucks and PepsiCo can be visualized

The Partnership Proposition Canvas (CC+ license) for the Starbucks PepsiCo partnership.

When overlooking all the pieces of this partnership, it’s interesting to see that Starbucks could potentially have made do with arms-length relations for processing, marketing and sales, as well as distribution. That is job work. It could have been contracted out under an exclusive agreement.

The critical factor determining the close nature of the partnership appears to be that of product development (marked in blue above). Starbucks has the knowledge on coffee, but PepsiCo has better capabilities for developing canned and bottled beverages. Such dependency in product development creates a notoriously vague and sensitive situation in the exchange between companies. Intellectual property boundaries are highly uncertain.

The logical outcome of the tension in the partnership was thus to create 50/50 joint venture between Starbucks and PepsiCo, which was named the North American Coffee Partnership (NACP). Under this construction both companies would be assured that each would profit from the fruits of their product innovations.

The North American Coffee Partnership business model
So it appears that we’re not dealing with a Starbucks exclusive business model with a PepsiCo partnership, but with a whole new company, with its own business model. The NACP is a dedicated company for developing and marketing ready to drink Starbucks-branded coffee.

To make things more complicated, both Starbucks and PepsiCo function as key partners in the NACP business model (below). Starbucks provides a license to its brand. PepsiCo has a more extensive partner contribution. It covers production, advertising, distribution, sales. This last role is significant as PepsiCo takes physical ownership of the product. In effect, NACP only has PepsiCo as paying customer. DFA has the role of processing the product.

The North American Coffee Partnership business model

Since its founding, NACP is continuously developing its portfolio, launching new products like the DoubleShot, and Starbucks coffee beans. Through the PepsiCo network, the joint venture is also expanding to new markets, teaming up for instance with European dairy giant Arla, in the same way as DFA in the United States. Currently the joint venture accounts for about 60% of a global billion dollar growing market for ready to drink coffee; an impressive feat for two companies that started off exploring new terrain.

Key take-aways:

  1. When an existing company designs a new business model to add to its portfolio, it usually enters a whole new market and value network. Partnerships can be used to accelerate and improve on execution
  2. A joint venture is a very tricky type of partnership. Actually, it isn’t even a partnership. A joint venture is an organizational form for a stand-alone business model
  3. The Partnership Proposition Canvas can be used to figure out what value your options for partnering hold, and at what point it starts making sense to share equity with your partner