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Startups: It’s Not Your Tech – It’s Your Business Model

Uber is an interesting story of how the startup world is evolving. Beyond the controversy it is creating with its aggressiveness (which I want to examine in another piece), the real lesson here is that what creates the disrupt is not the tech, it’s the business model.

When Uber started gaining visibility in the press, I thought the innovation was the creation of a virtual personal transport dispatch service. The tech behind being able to hail a driver and pay for your ride via smartphone, while impressive, is not revolutionary – it is merely evolutionary. It takes money and effort to build out their system, but not billions of dollars of VC money. So why is it attracting so much investor attention?

Disruptive as it is to the taxi industry, Uber’s real valuation engine is its “surge pricing” business model.

Adapting prices to changes in supply is something that some industries are good at. Take gasoline distribution. The price of gas goes up and down mainly based on the fluctuation of the cost of its inputs. When a barrel of sweet crude goes up, the price of gasoline goes up within hours.

Uber has been able to deploy a pricing model which responds almost instantaneously to demand, instead of supply. And, more importantly, they succeeded in gaining consumer acceptance (okay, grudgingly) of this pricing method.

Business model innovation is the key behind many of the tech moneymakers. Look at Apple and its App Store, which takes 30% of the top of a very fat distribution channel. The App Store revolutionized the utility of the smartphone and especially its economics, relegating the wireless carriers, who were previously the big winners in that market, to a distant second place. And the way Apple integrated its business model, and the success it has had with it, has not been equalled by any other company in that industry.

All too often, the startup entrepreneurs I meet, think that working on a business model means generating spreadsheets full of financial projections, a task they relish as much as a root canal. It’s a chore they will put up with in order to land a seed investment and go back to working on their tech.

I love Steve Blank’s definition of a business model: how you create value, deliver value and harvest value (he says “capture value”). You are not just building a gadget or an app, you are building a business. Innovative technology without a correspondingly innovative and disruptive business model, means your great idea is just going to gather dust on your shelf.

Your “hockey stick” projections need to be backed by bold thinking about your business model and your pricing strategy. If you dream about launching “the next big thing”, spend at least as much creativity exploring how you will deliver and harvest value as you do in creating it.

For more information

The article which inspired this post:
“In Praise Of Efficient Price Gouging” by James Surowiecki in MIT Technology Review

Image Credit: Adam Fagen via Flickr
Used under Creative Commons licence


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