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Take 5: What makes a good business model?

Oleks Osiyevskyy, an assistant professor of entrepreneurship and innovation in the D’Amore-McKim School of Business at Northeastern University, discussed the ins and outs of business model innovation on Wednesday afternoon in the Raytheon Amphitheater. His lecture marked the latest installment in the Minds over Mat­ters: NUterm Fac­ulty Speaker Series, which fea­tures weekly pre­sen­ta­tions from top fac­ulty scholars who dis­cuss their research and examine timely topics of global importance.

Here are five things we learned from his lecture:

Money, money, money

A good business model is a mechanism for making money. “Your innovation is nothing until you find a way to monetize it,” said Osiyevskyy, whose research expertise lies in analyzing and designing innovative business models. “Unless you commercialize your invention you won’t earn money nor will you change the world.”

The power of the Internet

Academics and entrepreneurs seldom spoke of the “business model” until the 1990s, according to Google Books Ngram Viewer, which charts the frequencies of words and short phrases found in printed sources dating back to 1800. But its use began rising steadily in 2000, thanks in large part to the growing popularity of the Internet. “The driver is the Internet,” Osiyevskyy said. “It opens up new markets; allows major innovations in value propositions, such as ‘freemium’ models; and facilitates the emergence of scalable and global business models.”

Disruptive innovations

The residential real estate brokerage industry is a prime example of the power of the disruptive business model. Redfin, a Seattle-based company, targets clients that think traditional commission fees are too high and charges just a 1.5 percent listing fee. Opendoor, the San Francisco-based startup, allows people to sell their home in 30 seconds online, after giving their address and some basic information. “The beauty of business model innovations is that they can take place even in the mundane industry of real estate brokerage,” Osiyevskyy said. “With time,” he added, “disruptive business models can gain momentum and become as good as the traditional offers.”

Blueprints

The aspiring entrepreneur need not fret, for there are several generic business models that he can call to mind to stimulate idea creation. One of them is the discounted business model, which is used by Southwest Airlines and Walmart. These companies, Osiyevskyy said, “switch from a low-volume, high-price strategy to a high-volume, low-price strategy.” Another is the aforementioned ‘freemium’ business model, which is used by LinkedIn and charges only for proprietary features, functionality, and virtual goods. “Only a small percentage of free users turn paid customers,” Osiyevskyy said, “and this model can only work with low marginal costs for serving additional users.”

A good crisis isn’t hard to find

Established companies facing threats from disruptive innovators do feel compelled to innovate, but only in cases in which two particular preconditions have been satisfied. Their CEOs, Osiyevskyy said, must have communicated a clear plan for the firm’s future plus must think they have enough time to introduce changes to their methods, ideas, or products before the new competition puts them out of business. “The CEO must project a feeling of where the company is going,” he explained. “Otherwise, the employees will want to wait and do more analysis instead of acting.” He added: “At the end of the day, only companies with a clear path to profitability will survive.”

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