Business Models … How Larry Page and Sergey Brin’s initial “BackRub” concept evolved into Google, and now Alphabet
May 15, 2021
Back in 1998, in a paper entitled “The Anatomy of a Large-Scale Hypertextual Web Search Engine,” Google founders Larry Page and Sergey Brin presented their prototype (initially calling it BackRub), with full text and hyperlink database of at least 24 million pages.
In a paragraph on the opportunity to drive advertising revenues, they explained: “We expect that advertising funded search engines will be inherently biased towards the advertisers and away from the needs of the consumers.”
While their assumption would last for a couple of years, by 2004, at the time of Google’s IPO, they wrote: “Advertising is our principal source of revenue, and the ads we provide are relevant and useful rather than intrusive and annoying.”
Advertising is still the primary source of Google’s revenues, and the most effective and scalable revenue machine of the digital era.
Google’s business model has evolved over time, an architecture for its commercial success. Page and Brin initially assumed that advertising-based search engines would never become a great consumer product. Yet, by testing and adapting over time, they have found their sweet spot.
Business models are your living platform for business evolution, and revolution. Business models keep moving as customers change, competitors challenge, and companies grow. Indeed they lie at the heart of innovation.
Business model innovation is the architectural secret behind many of the most innovative start-ups of the last decade.
Way back in 1959, Xerox created breakthrough copying machines, but they were too expensive for many companies to buy. Their advance was not the machine, but the way people paid for it – leasing the product, then paying per copy for its use, with the price descending over time.
Gillette similarly innovated their business model, selling low-priced razors to fit regular high-priced blades. 50 years later Nespresso adopted the same model.
How can you reach new audiences, changing the payment model, adding new services, using your assets in different ways, maybe licensing the manufacturing to partners, or sales to franchisees?
Business model innovation reconfigures the architecture of your business, transforms your proposition, and can massively boost your performance. Technology companies in particular, from Airbnb to Boeing, Coursera to Deliveroo, have thrived by thinking beyond the product, and fundamentally reinventing the way in which they do business.
Innovating the whole business
In Ten Types of Innovation Larry Keeley defines the most important types of innovation found across any business. Many organisations don’t just innovate in one area, but combine many of the types together.
- Profit Model: How you make money (eg Fortnite)
- Network: How you connect with others to create value (eg Huawei)
- Structure: How to organise and align your talent and assets (eg Netflix)
- Process: How you use signature or superior methods to do your work (eg Inditex)
- Product: How you develop distinguishing features and functionality (eg Corning)
- Product System: How you create complementary products and services (eg Apple)
- Service: How you support and amplify the value of your offerings (eg Zappos)
- Channel: How you deliver your offerings to customers and users (eg 3DHubs)
- Brand: How you represent your offerings and business (eg Burberry)
- Customer Experience: How you foster compelling interactions (eg Peloton)
Which ones matter most? Keeley analysed the innovation activities of over 1000 large companies over a 10-year period. He found, perhaps not surprisingly, that almost 90% of all time and resource went into product innovation. However, when he evaluated the business impact, measured by economic value, he found that the innovations that made the most difference were network, then profit model, then customer engagement.
We waste too much time and resource focused on product innovations that deliver solutions that are largely incremental, quickly copied and offer little financial return. We spend far too little on what makes a difference, innovating how the business works.
Defining the business model
Business models explain how organisations work – how they create value for customers, and in doing so, how they create value for all other stakeholders. They can map the current business, or explore options for the future.
The approach originates from mapping “value networks” in the 1990s, understanding the systems across business and its partners through which value (both financial and non-financial) is created and exchanged – by who, how and for whom. I remember working with Pugh Roberts to create a multi-million dollar dynamic model for Mastercard which showed varying any one driver – such as interest rates, or branding – affected everything else. And thereby being able to test new ideas and optimise the model.
Business models represent the dynamic system through which a business creates and captures value, and how this can be changed or optimised. They are a configuration of the building blocks of business, and their creative reconfiguration can be a significant innovation.
Business models became fundamental to business strategy, driven by them, but also driving their content. Hambrick and Fredrickson’s Strategy Diamond is all about aligning the organisation, achieving an economic logic between strategic choices. They help to align the business, matching the right strategies for outside and inside, using the proposition as the fulcrum, and profitability as the measure of success.
Business models can often appear very mechanical, lacking emotion and easy to imitate. In 2001 Patrick Staehler, seeking to explain the new breed of digital businesses, created a business model “map” driven by the value proposition, enabled by the value architecture, creating economic value and sustained by cultural values. The last point here is most interesting, in that it captured the distinctive personality of a business, its leadership styles and ways of doing business. This is much harder to copy, and also sustains the other aspects.
Innovating the business model
New business models are the most effective way to transform organisations, to innovate the whole way in which the business works. Inspired by a new generation of businesses – Airbnb to Uber, Dollar Shave Club to Netflix – we see dramatically new business models in every market, particularly drive by collaborative ecosystems, data engines, network effects, and new payment models.
Airbnb makes money by helping you to make money out of your spare room, connecting host and guest, then taking a small fee from each. Nespresso makes great coffee, selling discounted machines, and then getting you to sign up to an everlasting and incredibly profitable direct revenue steam of coffee pods.
What if your business started leasing rather than selling, became part of the sharing economy? What if you facilitated an exchange between buyers and sellers and took a cut? How about moving to a subscription model, or a freemium model, or a referral model, or an advertising model?
We used to just think that a business simply made things, and sold them. Now it is much more complicated. Or rather, there are many more innovative ways to achieve success. Some have been around for ever, like franchising and licensing, luxury or discounter, family or not-for-profit, barter or and pay per use models, whilst others have been enabled through digital platforms.
There is an infinite number of potential business models which you could creatively develop, however some of the most common formats, applicable to almost every type of business, include:
- Advertising-based models: services are free to users, whilst advertisers pay to engage with the audience attracted, eg Google, Facebook
- Razor-and-blades models: the facilitating item, like a razor, is sold cheaply, then accessories, like blades, at a premium, eg HP, Nespresso
- Added-value models: the facilitating item, like an iPad, is sold at a premium, then accessories, like apps, sold cheaply, eg Apple
- One-for-one models: the company donates a product to a charity, or person in need, for every product sold, eg Toms, Warby Parker
- Cashflow models: high volumes are generated at low margins, payments received quickly from customers, paid slowly to suppliers, eg Amazon, Dell
- Platform-based models: brings buyers and suppliers together, typically charging both of them to connect and transact, eg Airbnb, Uber
- Subscription-based models: charging a regular, eg monthy, fee for unlimited use of a product or service eg Netflix, Zipcar
- Freemium models: these encourage trial or a basic level of usage free, but charge for additional or premium options, eg Spotify, Fortnight
- Direct to consumer models: products which in the past would have been sold through intermediaries, are sold direct, eg Allbirds, Casper
Alex Osterwalder’s Business Model Canvas emerged as the most common template on which to map a business model. He popularised the approach so much so that his supersized canvas now features in workshops throughout the world, always with an array of multi coloured sticky notes as teams debate the best combination of solutions for each box. Whilst the canvas lacks the sophistication of value driver analysis and dynamic modelling, it is about testing hypothesise in each aspect, and how they could work together, and that respect works as a thinking model.
Business models have become a practical tool for rethinking the whole business, seeing the connections and then innovating the business. In fact they offer a great platform to facilitate new strategy and innovation thinking. That’s why I’ve created the Business Innovation Program, which combines design thinking, new business models and strategic implementation – a great way to engage your team, to think about new ways to grow, and to create the future, practically.
More from the blog